Support for our city’s challenge to UPMC’s status as a charity has been overwhelming. Many people would like to know more about what the challenge means and what we can expect:
Doesn’t the federal government get to decide what a charity is?
The IRS definitely sets out standards that institutions must meet to qualify as a charity at the federal level (a status that would make it exempt from federal income tax).  However Pennsylvania gets to set separate standards for “institutions of purely public charity” that apply at the state and local level.  . These state standards determine whether organizations like UPMC qualify for exemption from local property and payroll tax, state income tax, and other taxes that are levied inside the Commonwealth.
Where does Pennsylvania define “institutions of purely public charity?
In our state, the standard for being designated an institution of purely public charity is laid out in a 1985 Pennsylvania Supreme Court Case (Hospital Utilization Project v. Commonwealth, or “HUP” for short), in which the justices ruled that a non-profit must meet five criteria to qualify as an institution of purely public charity.  This 5-factor test is known as the “HUP Test”.
Since 1985, Pennsylvania courts have decided dozens of cases that further define each factor of the HUP Test.  In 1996, however, the state legislature passed a law (Act 55) that defined each HUP factor in ways that are easier to satisfy than the definitions articulated by the courts.  As a result, Act 55 effectively lowered the standard for qualifying as an institution of purely public charity.
Some not-for-profits claim tax exemptions based on that easier standard. But last year, a new Supreme Court case (Mesivtah Eitz Chaim of Bobov v. Pike County Board of Assessment Appeals) reasserted that organizations must satisfy the courts’ interpretation of the HUP test—and not the Act 55 version—to be deemed a charity and qualify for state and local tax exemptions.
What are the five criteria laid out by the “HUP” test?
Every non-profit in the state must meet all five criteria in order to be considered a purely public charity.
1. It must advance a charitable purpose
2. It must donate or render gratuitously a substantial portion of its services
3. It must benefit a substantial and indefinite class of persons who are legitimate subjects of charity.
4. It must relieve the government of some of its burden; and
5. It must operate entirely free from a private profit motive.
Why doesn’t UPMC pass the “HUP” test?
In order to be considered a purely public charity, UPMC must pass all 5 of the requirements of the HUP test. However, certain aspects of UPMC’s operations suggest that, at a minimum, they fail to satisfy the second factor (which requires UPMC to provide a “substantial” share of its services “gratuitously,” i.e., free-of-charge), and the fifth factor (which requires UPMC to operate entirely free from profit motive).  These facts include:

• UPMC devotes less than 2% of its net patient revenue to charity care, a level that is not substantially more than Pennsylvania’s for-profit health systems.
• UPMC has downsized or closed facilities in lower-income communities while expanding or opening entirely new facilities in more affluent communities.
• UPMC has recently stopped seeing patients who carry Highmark’s Community Blue insurance, even when patients are willing to pay cash. This has left many patients stranded and unable to continue the care they need with the doctors they know.

• UPMC’s CEO received nearly $6 million in compensation in 2011—an amount that dwarfs the compensation received by the CEOs of other charitable healthcare systems—and 22 other UPMC executives, each received compensation of more than $1 million that year.

So what does this all mean?
UPMC’s tax-breaks cost taxpayers an estimated $204 million dollars in federal, state and local taxes income and property taxes in 2011. In addition, UPMC receives subsidies in the form of tax-exempt bonds, exemption from tax on the sale of intellectual property and other financial breaks that are not accorded businesses without charity status.  Our City is claiming that its largest private landowner, employer, and healthcare provider needs to act like a charitable institution—and satisfy the legal requirements for tax-exempt status, as set forth in the HUP Test—to be worthy of these benefits.