The ancient struggle over the tax-exempt status of not-for-profit healthcare organizations is being fought with renewed intensity-and some added wrinkles-as Congress ponders healthcare reform legislation.
At the center of the renaissance of the tax-exemption question is the Blue Cross and Blue Shield Association. Last year the Blues appealed to Congress to subject for-profit and not-for-profit health plans to the same tax rules.
At a recent congressional hearing, Mary Nell Lehnhard, senior vice president of BCBSA, broadened the scope of the organization's campaign for across-the-board taxation of health plans, arguing that the same tax treatment should extend to health plans formed by not-for-profit hospitals.
"This does not mean we are advocating the repeal of tax exemption for non-profit hospitals or their access to tax-exempt financing," Ms. Lehnhard told the Senate Finance Committee. "What we propose is that the health plan business of any organization, including an exempt hospital or HMO, should be taxed."
Furthermore, in prepared testimony, BCBSA said that until Congress enacts healthcare reform, there should be a moratorium on tax exemptions for the insurance activities of integrated delivery systems. "This is particularly important to stem the inappropriate use of tax-exempt bonds for financing the capital needs of health plans established by integrated delivery systems," the statement said.
In 1986, Blue Cross and Blue Shield plans lost their tax exemption, though Congress allowed the plans to continue deducting a portion of their reserves. According to the association, all of the Blues plans will have paid $2.3 billion in federal income taxes from 1987 through the end of 1994.
BCBSA's position is based on the argument that all health plans serve the same essential function-financing healthcare. In a reformed system, plans are bound to operate under increasingly uniform rules regarding rates, enrollment and underwriting practices, further blurring the lines between for-profit and not-for-profit entities, Ms. Lehnhard said.
It's an argument that cuts to the heart of a trend that hospital industry leaders hope to accelerate in the future: the formation of comprehensive delivery and financing systems among hospitals, payers and other providers.
The Blues' campaign has particularly infuriated not-for-profit hospital executives, who see the effort as purely self-serving. The American Hospital Association, which did not testify at the hearing, issued a statement saying that the tax exemption of "both plans and individual providers may be the appropriate means to encourage a community service mission."
The Catholic Health Association, which has been battling for a decade to preserve its hospitals' tax exemption, had a more forceful response. "Just because Blue Cross lost its exemption in 1986 because it wasn't any longer providing a community benefit, doesn't mean every other organization needs to lose its exemption as well," said William Cox, vice president of government services for CHA.
"The Blue Cross argument rests on the notion that integrated delivery networks are very much like insurance companies in the sense that they are simply mechanisms for financing the delivery of healthcare," Mr. Cox said. "We disagree profoundly with that premise." According to Mr. Cox, the networks will bring physicians, hospitals and other providers together with insurers to provide more efficient and effective healthcare.
At the hearing, Jerry Phelan, a consultant and former general counsel for the Kaiser Foundation Health Plan, tried a similar tack, countering Ms. Lehnhard's claim by professing that Kaiser offered more than mere insurance.
"We are predominantly a healthcare system," with its own hospitals and physician groups, he said. "Conventional insurers have none of that."
But at a time when lawmakers are scraping the bottom of the barrel for ways to finance healthcare reform, the case against preserving the tax-exemption for hospitals and health plans had a persuasive effect.
"I started here thinking (Ms. Lehnhard) didn't have a point," said Sen. John Chafee (R-R.I.). But after hearing the testimony, Mr. Chafee said it appeared there were "extraordinary inequities" in the system that would enable hospitals to set up networks with physicians, as well as HMOs and capitated plans, "all tax-exempt."
"This has been a disappointing day," Mr. Chafee concluded. "I figured there was no problem. Now, there's a problem."
David Hyman, a law professor at the University of Maryland, estimated hospitals' tax exemption is worth $6 billion to $10 billion a year in local, state and federal exemptions.
Some lawmakers on the panel questioned the need for a tax exemption in a system in which universal coverage was guaranteed and hospitals' charity care was eliminated.
Charles Fahey, director of the Third Age Center at Fordham University, New York, said he wasn't "the least bit sanguine" that healthcare reform would create universal coverage. Hospitals therefore would continue to serve a charity-care role, he said.
Sen. Kent Conrad (D-N.D.) said the tax exemption had "encouraged the over-construction of hospitals" since so many were operating at just 55% occupancy.
Mr. Fahey said he hoped unneeded capacity could be removed from the system without "social Darwinism," warning that "some of the least efficient hospitals are those that take care of the poor." In an increasingly competitive system, wiping out their tax exemption would make those facilities non-competitive, he said.
