Questions Raised Over Tax Breaks for Private Hospital

By CARLOS V. LOZANO

March 22, 1996 12 AM PT

TIMES STAFF WRITER

Casting itself in the role of fiscal watchdog, Community Memorial Hospital has waged its campaign battle against a proposed $56-million county outpatient center while spending more than $1.3 million under the auspices of Taxpayers for Quality Health Care.

But Community Memorial’s campaign to defeat its rival’s plans has raised questions on how the nonprofit, tax-exempt private hospital manages its own budget.

And one of the critics of Community Memorial’s heavy spending, former county Supervisor Madge Schaefer, has made a new appeal to state officials to revoke the hospital’s tax breaks.

“They have been shameless in the way they have spent tax-free dollars,” Schaefer said. “The public should be gravely disappointed in looking at these figures.”

Schaefer, a member of a group that supports the county project, said the nonprofit hospital has spent five times more on its political campaign than it spent on charity work in 1994, the most recent year in which hospital statistics are available.

“They would have more credibility in the community if their record of caring for the poor was to the same degree as its political expenditure,” she said.

Schaefer said she sent a letter to the state Board of Equalization this week requesting that Community Memorial’s property tax exemption be revoked. She is pursuing similar complaints with the state attorney general and Internal Revenue Service.

Besides not paying state or federal income tax, the hospital receives $1.2 million in local property tax exemptions annually, according to property assessment records. The hospital does pay taxes on purchases, business licenses and utilities.

Community Memorial representatives defended the hospital’s campaign expenditures, saying the hospital is well within its legal rights to sponsor Measure X. The hospital is urging voters to vote no, which would derail the county hospital project. A yes vote on the countywide referendum would approve the financing plan for the outpatient clinic.

“They have a right to participate in measures that affect their future and their ability to deliver health care efficiently,” said John McDermott, an attorney for Community Memorial. “That’s what this is all about.”

As for the amount of money invested in the Measure X campaign, McDermott said the hospital believes the county project would be used to compete for its private pay patients and has no choice but to defend itself.

“There is an awful lot at stake here,” McDermott said. “We’re talking about survival.”

Pierre Durand, director of the county’s Health Care Agency, said the county has no intention of competing with private hospitals. He said the new outpatient center is needed to replace several dilapidated clinics, the hospital’s kitchen and laboratory and other facilities.

McDermott said while Community Memorial is required to provide some charity work in return for its tax-exempt status, the state and federal government have never defined a specific amount it is required to offer.

“Hard guidelines don’t exist,” he said. “But everything we do is to serve the community. We exist to serve the community.”

A spokesman for the Internal Revenue Service office in Los Angeles confirmed McDermott’s interpretation of the law.

“There is a community benefit test that a hospital must pass to be recognized as a tax-exempt organization,” Keith Kimball said. “It requires that the hospital provide services to a broad cross-section of the community, including people who can’t pay.”

But there is “no set percentage” for the amount of charity care a nonprofit hospital must provide, he said.

State and federal officials also said a nonprofit hospital is legally entitled to spend money on a nonpartisan political campaign--as long as it does not include contributions to an individual candidate.

Community Memorial’s $1.3-million campaign is believed by county election officials to be the most money ever spent on a local campaign in Ventura County. This does not include money spent since Feb. 10, the cutoff date for the filing of the hospital’s most recent campaign statements.

It also does not include what the hospital has spent on an ongoing lawsuit it filed nearly two years ago to block the county outpatient project and to stop the public hospital from accepting private pay patients.

Community Memorial officials have declined to say how much the hospital has spent on the case. According to 1994 federal tax exempt forms, the hospital paid $445,184 that year to the Los Angeles law firm of Cadwalader, Wickerson & Taft, which is handling the lawsuit against Ventura County. This compares with $119,537 the hospital paid to another firm in 1993 for legal services.

But McDermott, who works for the Cadwalader firm, said the hospital’s 1994 legal fees were for a variety of services and not just the lawsuit against the county.

Nevertheless, state records and tax exempt forms filed with the Internal Revenue Service offer a glimpse of how the hospital spends its money and how it benefits from its tax-exempt status.

For instance, Community Memorial, which had gross revenues of $118 million in 1994, spent a total of $211,367 that year on indigent care, according to reports filed with the Office of Statewide Health Planning and Development. This compares with the $128,326 spent the year before by the hospital.

But in both instances those figures can be misleading, according to the same report.

“County indigent, in the case of Community Memorial Hospital, might not be true charity care,” the report states. “It may indicate patients who were referred to Community Memorial by Ventura County Medical Center for services which the county then paid Community Memorial to render.”

Neither hospital could say for certain how much the county reimbursed Community Memorial for services in 1994 or 1993.

Still, McDermott defended the hospital’s record of charity care. He said the county medical center, situated two blocks away, traditionally takes care of indigent and uninsured patients because it is required by law to do so.

Also, McDermott said, Community Memorial is prohibited from hiring doctors and therefore cannot dictate where they send their patients. The county, on the other hand, can and does employ physicians, he said.

“You’ve got the county running around bashing Community Memorial for not providing charity care when we have no control over where our patients come from,” he said. “The only [indigent patients] we see are the ones that come through our emergency room.”

The $211,367 that Community Memorial spent on charity care in 1994 compares with $45,416 spent the same year by Santa Paula Memorial Hospital, $110,827 by St. John’s Pleasant Valley Hospital, $1.1 million by St. Johns Regional Medical Center, and $5.4 million by Ventura County Medical Center. Simi Valley Hospital reported no charity care in 1994. All of these hospitals are nonprofit.

Alicia Gonzalez, a spokeswoman for Simi Valley Hospital, said the hospital did provide “large amounts of indigent care in 1994. But why it’s not on the statewide report is unknown. We will find out.”

In addition to charity care, Community Memorial does provide other community service work in return for its tax-exempt status. In 1994 forms filed with the IRS, the hospital listed the following community service work it underwrites as part of its tax-exempt requirements:

* Operation of the hospital gift shop, $88,947.

* Seniors health program, $52,508.

* Nutrition, first aid and health and fitness programs, $36,834.

* Distribution of emergency care cards, $6,500.

* Free blood-pressure testing, $4,875.

Again, McDermott said the hospital believes it is providing a reasonable amount of community service.

“It’s a question of economic circumstances,” he said. “Nobody can make you do more than you can afford.”

Yet the same year that the hospital listed gift shop operations as community service, it transferred $1.3 million to its parent company, Caduceus Medical Management Inc., according to federal records.

Caduceus, a nonprofit corporation, then turned around and invested the money in three for-profit businesses that it owns.

One loan of $491,385 was made to Ventura-based California Heart Institute Inc., which according to federal records was organized to provide management and administrative services to doctors in private practice.

Two other loans totaling $906,300 were made to the operator and owner of a skilled nursing facility and a residential retirement home in Ventura.

In all three cases, the loans “were determined to be uncollectable and were written off the hospital’s books,” according to federal records.

McDermott said the hospital was simply following its mission of plowing money back into community health care with its investments.

“Nobody is trying to hide anything,” he said. “They’re in the business of providing health care to the community and these are community owned assets.”

The hospital’s 1994 tax exempt form also listed the compensation of Community Memorial’s top five administrators. Heading the list was Michael Bakst, the hospital’s executive director, with compensation of $175,000 and an expense account of $34,500. Carol Dimse, vice president in charge of patient care, was next, with $111,101 in compensation and a $12,307 expense account.

Dimse is the mother of Laura Dahlgren, a registered nurse at Community Memorial who is coordinating the Measure X campaign for the hospital.

McDermott said Bakst’s compensation is reasonable. In comparison, Durand, the director of the county’s Health Care Agency, which includes the public hospital, received a compensation of $142,000 last year.

Meanwhile, state officials said nonprofit hospitals are coming under more scrutiny. They said a new law requires nonprofits to file community obligation reports with the office of Statewide Health Planning and Development, beginning in October 1997.

The reports are intended to show that the hospitals are meeting their community benefit obligations, said Elsa Murphy, an official with the agency overseeing the program. She said the new law was prompted by challenges to nonprofit hospitals and their tax-exempt status.

“The thing we want to look at is how a hospital is identifying community needs and how it is trying to address those needs,” Murphy said.

Once the reports are collected and reviewed, Murphy said her agency will decide whether to make recommendations to the Legislature on possible changes in the law regarding nonprofits.

“The big question is, ‘How do you measure the performance of a not for profit?’ ” she said. “Hopefully, we are beginning to address those issues.”