On October 26, 2010, the Ohio Supreme Court upheld the Board of Tax Appeals’ (“BTA”) denial of the exemption of a dialysis clinic, owned and operated by Dialysis Clinic, Inc. (“DCI”), a 501(c)(3) tax-exempt, nonprofit corporation, from property tax.  On appeal, BTA stated that DCI could not qualify for property tax exemption because it does not meet Ohio’s definition of a “charitable institution” under the relevant statute for three primary reasons.

First, DCI’s charity care policy stated that the “policy is not a charity of or gift to patients. DCI retains all rights to refuse to admit and treat a patient who has no ability to pay.”  ¶11.  Under Ohio common law, a health care institution is considered charitable where it provides services “on a nonprofit basis to those in need, without regard to race, creed, or ability to pay.” ¶30.   However, DCI presented evidence that it does not in fact turn patients away for inability to pay, and that the policy was a result of Medicare regulations requiring that entities not charge less than the Medicare rate for services.

In response, the Court found that the existence of such a policy, regardless of past actions, was sufficient to find that DCI failed to meet the nondiscrimination requirement.  Further, the Court stated that “even if Medicare regulations constrain DCI so that it cannot act as a charity according to Ohio’s legal requirements, DCI is still barred from obtaining a charitable-use tax exemption.” ¶35.  It seems that compliance with Medicare regulations is not a concern of the state of Ohio in determining who receives a tax exemption.

Second, DCI argued that half of its excess revenues were donated for kidney research, while the other half were used for DCI’s own operations.  The Court disagreed with DCI and found that DCI could not meet the definition of charitable institution vicariously by donating to other charitable organizations.  See OCLC Online Computer Library Ctr. Inc. v. Kinney.  The entity must itself provide charitable services to be a charitable institution.

Finally, BTA argued that DCI did not provide a sufficient amount of unreimbursed care to be considered a charitable institution.  The Court disagreed with this finding, stating that no particular threshold of unreimbursed care is required to be a charitable institution.  The Court pointed out that “[b]ecause of the existence of Medicare and Medicaid, which reimburse providers for the provision of dialysis services to the indigent, few patients actually receive free care that is wholly unreimbursed.” ¶40.

The finding of the Court that a certain level of unreimbursed care is not required will likely come as a relief to many nonprofit health care entities in Ohio.  With the implementation of health care reform, there will eventually be far fewer individuals without some form of coverage, so that any required level of unreimbursed care will be harder and harder to meet.

An important takeaway from this case may be for all providers who are seeking to become or remain tax-exempt to review all written policies to make sure (i) they are compliant with the requirements of the relevant state’s laws, and (ii) that the provider operates in a way that matches the written policies.