The Salt Lake County attorney's office and several citizens' advocacy groups want to know why Intermountain Health Care hospitals - entities that don't pay property taxes - appear to have a reserve fund of at least $383 million.
IHC officials say the hospitals don't.William H. Nelson, IHC senior vice president, said that at the end of 1989, Intermountain Health Care Inc. had financial reserves - money generated from borrowed money and profits - of $207 million. The $383 million figure, he said, is an entirely separate issue.
It's an issue that the county attorney's office wants clarified.
"We'd like the reserve funds explained. What are they going to use them for?" asked Karl L. Hendrickson, assistant Salt Lake County attorney. "It had better be for something consistent with their charitable mission as far as I am concerned because that's what the tax-exemption question is all about."
A 1989 financial statement submitted by IHC as part of an application for industrial revenue bonds shows that at the end of 1988, IHC Hospitals Inc. - one of Intermountain Health Care Inc.'s many subsidiaries - had a $383,301,000 fund balance "retained for general purposes." (About $10 million of that amount is listed as "restricted.")
The statement was compiled by Ernst & Whinney. IHC and other Utah hospitals were applying to Salt Lake City for a tax-free bond to purchase hospital equipment.
IHC officials say the report was misinterpreted at a recent hearing of the Utah State Tax Commission, and that people don't understand the corporation's "basic" accounting methods.
Nelson said fund balances "don't at all reflect cash reserves."
If IHC were a for-profit corporation, the fund balances would be called stockholders' equity and retained earnings. These balances are, in fact, made up of earnings and contributions "over the life of IHC," Nelson said. They basically show what the corporation is worth.
Its worth has obviously been increasing. A 1984 audit by the same accounting firm shows the corporation had $226.5 million in the fund balance. At the end of 1988, this fund was $383.3 million - an increase of 69 percent in four years.
The 1988 audit also showed IHC Hospitals Inc.'s revenues exceeded its costs by at least $30 million each year from 1986 through 1988. That is lower than the 1984 audit, which revealed revenues exceeded expenses by $44 million that year.
Nelson said that at the end of 1989, IHC Inc. had cash reserves of $207 million that will be spent for a variety of purposes.
"Reserves are generated only to meet the current and future needs of our facilities and service," he said. "Our reserves are adequate for our needs. In an emergency our reserves would keep us operating for only 100 days."
IHC officials will no doubt be expected to discuss the corporation's financial statements when the health-care conglomerate comes before the county seeking to maintain the tax-exempt status of its facilities.
"We have never taken the position that to qualify for property tax exemption that a hospital had to be self-liquidating," Hendrickson said. "But we also assume that you don't just accumulate large sums of money. We assume that when you receive contributions or you obtain revenues that they go to further your charitable mission. And they don't go to form mutual insurance companies, and they don't go into advertising that is more oriented to increasing IHC's market share than it is to inform those who need medical care of its availability."
The long-standing tradition of automatically granting non-profit hospitals a tax exemption by classifying them as charitable organizations ended in 1985 with a ruling by the Utah Supreme Court, which outlined general principles governing charitability.
But the way county governments interpreted the criteria set by the court led to some 30 appeals on 1986 and 1987 tax assessments now pending before the Utah State Tax Commission.
The Tax Commission recently established specific guidelines that counties can use to determine whether hospitals are charitable organizations that deserve tax-exempt status.
When the guidelines are finalized, the Tax Commission will send all appeals to the counties to be reviewed in accordance to those guidelines.
Salt Lake County has repeatedly questioned how IHC distinguishes itself from for-profit hospitals. That is not likely to change this year.
"We are obviously going to ask them all sorts of questions, plus I think inevitably we are going to have to ask them about Primary Children's Medical Center," Hendrickson said.
For several months, the Utah attorney general's office has been investigating whether agreements between the University of Utah Medical Center and IHC's Primary Children's Medical Center may be violating antitrust laws.
The investigation focuses on several activities, including the pediatric care units of both hospitals, plus the U.'s department of pediatrics and its newborn intensive care unit.
Of particular concern to the attorney general's office and health-care officials is the reduction in pediatric patients treated at the U. since Primary Children's moved to the U. campus this year. The decreased census prompted the U. Hospital Sept. 1 to increase its patient rates by 5 percent to offset losses.
"If IHC is saying that its goal is to reduce the burden on government, and yet they are raising prices over at the University Hospital because of the arrangement with Primary, how has IHC reduced the burden on government?" Hendrickson asked.
Explanation of reserves
Intermountain Health Care Inc. explains its $207 million in 1989 financial reserves this way:
- Working capital used for day-to-day payment of IHC's bills until payment for services come in: $27 million.
- Building and equipment fund: $37 million. (IHC's annual average capital expenditures are approximately $60 million.)
- Insurance funds: $35 million in reserve for claims against IHC hospitals and $20 million to back up IHC's health plans for a total of $55 million.
- Contingency fund for long-term building and equipment contingencies and "to keep us operating during any natural, political or economic crisis": $49 million.
- Foundation fund to fund charitable health care: $17 million
- Funds for other activities, such as reserves to hedge against interest-rate increases and support working capital needs of non-hospital activities: $22 million.