Citing everything from Medicare to earthquakes, the nation's two largest for-profit hospital chains have adopted a corporate strategy of fighting for lower property tax bills to better their bottom lines.
Columbia/HCA Healthcare Corp. and Tenet Healthcare Corp. are using a small army of outside consultants and lawyers to convince local tax assessors that many of their hospitals are overvalued and should pay less in property taxes.
It's a quiet campaign, as neither chain has announced a policy on reviewing and fighting property tax assessments.
It's a strategy with risks and rewards. Arguing that their assets are worth less could influence their share prices and the price their hospitals could bring at sale. But reducing costs adds to profitability.
"To the extent that companies can limit their cash outlays, that's good," said one Wall Street analyst, who asked not to be quoted by name. "It might sound bad, but this is all part of management's trying to create value for shareholders. Property taxes are not a huge cost item, but companies have been known to relocate to take advantage of lower tax rates."
Another contradictory element to the strategy is that it undercuts a key sales pitch when an investor-owned chain wants to buy a not-for-profit hospital: For-profits pay real estate taxes.
In fact, most for-profits cite the taxes they pay as community benefits, much like charity care.
"It's quite unfortunate," said Patrick Riccards, executive director of the Coalition to Protect Community Not-For-Profit Hospitals, a Washington-based organization. "What you have, especially after a conversion, is a for-profit purchaser saying how much it will do for the tax base. It's almost a shell game they play with the local community."
Seeking equity. But Columbia and Tenet executives defend their actions, saying the strategy is neither contradictory nor controversial.
"We want to pay our fair share of taxes, and only our fair share," said Jeff Prescott, Columbia spokesman. "It's our fiduciary responsibility to employ resources that can do a valid comparison for us. If it's something that saves the company money, then that money can be directed to patient care and other areas."
Columbia owns and operates 207 hospitals and paid $182 million in nonincome taxes in 1998, which includes property and sales taxes, according to the company's annual 10K filing with the Securities and Exchange Commission.
To help the Nashville-based chain lower that tab, it has retained Complex Property Advisors Corp., a Grapevine, Texas-based consulting firm that specializes in persuading county assessors, boards of adjustment and even judges to lower assessments of its client hospitals.
Among the firm's standard arguments, which are tailored to the individual hospital in each tax appeal, CPAC claims a hospital's value can be lowered by a number of factors, including low occupancy, less-than-expected Medicare reimbursement, and fixed managed-care contracts. CPAC is often successful (See chart below).
CPAC founder and President William "Trey" Beazley III began to experiment with unorthodox approaches to valuating hospitals a decade ago. He created a database to help him understand how hospital facilities are used and how those uses could make an argument for lower property taxes.
Fueled by his early successes in winning assessment reductions for Columbia and others, Beazley formed CPAC as a private company in 1997 with several associates. The firm is dedicated to real estate and tax consulting for investor-owned healthcare properties, recognizing the lucrative nature of the work and the potential number of overassessed hospitals.
Beazley said CPAC's database now includes information on 500 hospitals. Since CPAC's inception, the firm claims it has won $50 million in property tax reductions for its clients.
Neither Columbia nor Tenet has an ownership stake in CPAC, and CPAC does not have an office at either chain's headquarters.
Big business. Columbia's Prescott said the company uses CPAC for roughly half of its hospital property evaluations. Beazley has done work for Columbia since at least 1993, Prescott said.
Eleven other firms, including CPAC rival CBIZ Property Tax Solutions in Dallas, handle most of Columbia's remaining cases. Prescott said Columbia uses other firms when CPAC has a conflict of interest or is unable to take on the project.
"Sometimes we ask (CPAC) for a quick perusal, and that's fine. Sometimes we ask them to go a little bit further," Prescott said. Fewer than 1% of Columbia's property appraisals end up in administrative court proceedings, he said.
Columbia pays CPAC flat fees for its services, not a percentage of the savings, he said. He added that he didn't know how much the company spends on trying to get its tax bills lowered.
Tenet, meanwhile, has hired CPAC as part of a team of consultants assessing a 1995 California law that requires all hospitals in the state to meet new seismic standards by 2008. CPAC is to find out how the law could be used to lower the property tax assessments of the 41 hospitals the Santa Barbara, Calif.-based chain owns in the state.
The California Association of Hospitals and Health Systems has estimated that retrofitting or rebuilding hospitals to meet the standards will cost as much as $24 billion. Many hospitals will spend more on nonstructural repairs, like plumbing and electrical systems, than they will on structural repairs, according to the association.
Not-for-profits may tap into government aid to rebuild their facilities, but for-profits are not eligible for the grants.
While Beazley said Tenet asked him not to discuss details of its efforts on the seismic issue in California, Tenet spokesman Brandon Edwards confirmed CPAC is working on two-campus Encino-Tarzana Regional Medical Center, which the company co-owns with Columbia. The Encino campus has 138 beds, and the Tarzana campus has 232 beds.
Edwards said hospitals that don't meet the new standards are worth less and should pay less in property taxes. That's why the company is seeking a lower property tax bill for Encino-Tarzana.
"Everyone knows the law will require some major upgrades, and there will be some significant impact on property taxes," Edwards said.
He said he hadn't heard of CPAC before Tenet hired the firm for the Encino-Tarzana case. That case is in the final stages of negotiation with Los Angeles County over the assessed value of the property, he said.
The Los Angeles County assessor's office, however, said Tenet had not filed an appeal of the property tax assessment for Encino-Tarzana.
Tenet operates 131 hospitals nationwide. A search of SEC filings and the company's Internet site did not uncover the amount of property taxes Tenet pays each year. Tenet spokesman Edwards did not return repeated calls seeking such information.
The filings did show that the value of Tenet's buildings and land nationwide totaled more than $5 billion in 1998 (See chart below). Columbia pegged the value of its buildings and land at more than $7.6 billion that year.
Special expertise. CPAC's Beazley said his firm brings an expertise to the table that county assessors generally don't possess.
"An assessor has to value 200 office buildings, 500 homes, 400 apartment buildings and so on," he said. "The county may have one for-profit hospital, and the county just doesn't have the resources to properly value it. They don't have time to understand assessing for-profit hospitals, because they're in the mass-appraisal business."
In fact, some appraisers tell Columbia that they are glad the company hired professionals like CPAC, Prescott contends.
"On occasion, appraisers get angry and disagree (with our assessments) . . . but more appraisers are happy than not," he said.
Ken Upchurch, a Nashville-based consultant who often works with CPAC, agreed that local tax assessors "don't know what's going on in healthcare facilities."
"It's an educational process for us to go in and talk with them about functional and external obsolescence," said Upchurch, director of facility planning services with the Centre for Health Care Planning, a facility and operations consulting firm.
Tim Wilmath, director of commercial valuations in Hillsborough County, Fla., said that "educational" was only one word he would use to describe his recent encounter with CPAC.
Wilmath had reassessed four for-profit hospitals in the county in 1998, including two Tampa-area Columbia hospitals, and increased Columbia's annual tax bill by $12.3 million, or 59%. Columbia enlisted CPAC to negotiate with Wilmath (Dec. 7, 1998, p. 56).
Wilmath said CPAC's analysis was little more than "smoke and mirrors," and the consultants tried to wow his staff with "fancy math."
"(CPAC consultants) use tricks that you won't find in any appraisal manual," he said. "They have an extensive knowledge of appraisal theory, but unbeknown to many appraisers, they don't use proper techniques. I'd say 90% of the reductions they get are unwarranted, but that doesn't matter to Columbia or Tenet."
For example, in CPAC's analysis of Columbia's 255-bed Brandon (Fla.) Regional Hospital and 112-bed South Bay Hospital in Sun City Center, Fla., the firm excluded revenue that the hospitals' outpatient centers brought in, Wilmath said.
"(CPAC) said the outpatient side has nothing to do with the value (of the hospital)," Wilmath said. "They only look at inpatient, which is not where the hospital is really making money. We said you have to look at both."
In fact, retail prices for outpatient hospital care have risen faster than prices for prescription drugs in nine of the past 10 years (Jan. 31, p. 2). Hospitals are also seeing an increased demand for outpatient services, with a 5.3% jump in outpatient visits last year. Ambulatory-care services account for up to 30% of total hospital revenue.
Beazley said there is nothing suspect about excluding outpatient revenue from CPAC's analyses, and cited professional standards for appraisers that support his methods.
"You have to understand that you are valuing real estate for property tax purposes, and not the business enterprise," Beazley said. "If I was a lawyer with a tax practice earning $1 million, and then I changed to malpractice law and made $3 million, does that make my office space worth more?"
The Hillsborough County Value Adjustment Board agreed with Wilmath. Columbia ultimately did not challenge that decision and paid the higher bill.
That was a rare loss for CPAC.
Most recently, the firm helped Columbia's 121-bed Reston (Va.) Hospital win a property tax refund of nearly $690,000 for the five tax years from 1991 to 1996 (Aug. 16, 1999, p. 6).
Executives at Columbia were pleased with the result. "It was only after reading the court's decision that I became fully cognizant of the completeness of our victory," wrote Jim Childress, assistant vice president of taxes for Columbia, in an Oct. 22, 1999, letter to CPAC's Beazley.
The victory last year in Reston capped a string of successful challenges of assessments on several Columbia hospitals in Virginia. Thanks to CPAC's formula, Columbia won a total of at least $1.4 million in tax refunds in that state alone last year.
Officials of Fairfax County, Va., where Reston Hospital is located, declined to comment on their defeat.
The county has filed an appeal with the Virginia Supreme Court, and the court has not yet decided whether to hear the case.
"The reason (CPAC) is so successful elsewhere is not because of their insight," Hillsborough County's Wilmath said. "It's because the local assessors don't have the knowledge to tackle difficult properties like hospitals."