San Francisco's largest hospital may be liable for more than $4 million in back taxes after a preliminary investigation by the city assessor-recorder's office found that the not-for-profit facility may not have been legally entitled to three years of tax breaks it received.
According to the probe, which relied on federal tax records, California Pacific Medical Center posted profit margins of 10.45% to 17% in 2001, 2002 and 2003 -- years in which the 783-bed, three-campus teaching hospital was exempted from paying property taxes. By state law, not-for-profit businesses can claim a property-tax exemption only if their revenues do not exceed expenses by more than 10%.
California Pacific, an affiliate of Sacramento-based Sutter Health, was given 30 days to respond to the findings. "The burden of proof is now on them to show that they do qualify for the tax breaks they've been given," said San Francisco Assessor and Recorder Phil Ting, who was sworn into office last month. "We've asked them to furnish documents to help us substantiate that."
Ting said he planned to scrutinize the property-tax status of other hospitals and large not-for-profits but would not specify which ones were in line for review.
The announcement comes as California Pacific is working to boost its level of charity care after being slammed for skimping on funding for indigent patients. According to an annual report released by the San Francisco Department of Public Health in December 2004, California Pacific received nearly $54 million in tax breaks in 2003, yet provided only $2.4 million, or just 0.4% of its annual revenue, in charity care -- the lowest amount of all seven hospitals evaluated by the department.
Sutter also was recently added to a growing list of not-for-profit hospitals facing congressional scrutiny of their business practices (May 30, p. 8). In June, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) asked Sutter to provide information of such things as its tax exemptions, charity care, billing practices, executive compensation and for-profit affiliations.
California Pacific spokeswoman Victoria Steiner said the hospital's legal and accounting departments were reviewing Ting's findings. She added that all of the hospital's income is reinvested in equipment, facilities, programs and community services. "People tend to misuse the word profit for income," Steiner said. "We do have income, but at the end of the day, it all goes back into the system to provide better care for patients."
Indeed, Sutter's operating revenue fell 17% to $320 million in 2004, largely because of increased spending on hospital construction, technology and charity care. But the 27-hospital system still posted an operating margin of 5% -- well above the industry average -- which Sutter officials say is needed to fund $5.7 billion in seismic-safety retrofitting and expansion projects over the next 10 years. Sutter spent $155 million on charity care last year, up 42% from $109 million in 2003.
Even Ting says a deeper look at California Pacific's expenditures could prove that the tax breaks in question were ultimately justified. Under the state's tax code, net income over 10% that is put toward such things as grants and charity care doesn't count toward the property tax-exemption threshold.
Still, news of the investigation was met with cheers from some of Sutter's harshest critics, including the Service Employees International Union, which held a news conference July 27 to applaud Ting's efforts. The SEIU is locked in a bitter, long-standing contract dispute with Sutter.
"In every meaningful way, except for their advertising slogan, Sutter is a for-profit corporation," said Sal Rosselli, president of SEIU United Healthcare Workers-West. "Rather than using their millions of dollars in tax breaks to benefit uninsured patients and the general public, they've built a massive corporate empire that is price-gouging consumers so that it can reap enormous profits."
Rosselli cited the California Public Employees' Retirement System, which dropped California Pacific and 12 other Sutter hospitals from its HMO network last year after determining that some of the system's facilities were charging 60% to 80% more than the statewide average (May 24, 2004, p. 14).
California Pacific fell under Sutter's umbrella in 1996, when Sutter acquired four-hospital California Healthcare System. The hospital is currently considering merging with beleaguered St. Luke's Hospital, San Francisco, which Sutter acquired amid much controversy in 2001. St. Luke's lost $21 million last year, while California Pacific posted net income of $113 million in 2003, the latest year for which data were available.