Healthcare reform legislation moving on Capitol Hill could loosen barriers to building integrated delivery systems with tax-exempt money.
The Senate Finance Committee's healthcare reform bill repeals the $150 million cap on outstanding debt that can be used by a tax-exempt hospital to finance non-acute-care facilities it owns or operates, such as nursing homes.
Finance experts said the cap, enacted as part of the 1986 tax overhaul, could interfere with providers' attempts to create integrated delivery systems. At least a dozen large healthcare institutions across the country are in danger of exceeding the cap. Mergers among healthcare providers with outstanding tax-exempt bonds also could result in potential violations.
"Certainly this is a very positive thing for the healthcare industry," said Jill Kent, chief financial officer of George Washington University Hospital in Washington. Although that hospital carries very little debt-some $50 million for an ambulatory-care renovation project-many hospitals could have difficulty adapting to the changing environment without this kind of flexibility, she said.
The provision could help many university-based healthcare institutions that are bumping up against their $150 million limits, said Laura Kalick, director of not-for-profit tax services at the accounting and consulting firm of Coopers & Lybrand.
The healthcare reform legislation approved by the House Ways and Means Committee is silent on the $150 million cap, so there's no assurance that any final legislation will provide such flexibility.
But Ms. Kalick said one good sign came at a recent Senate Finance hearing, when Leslie Samuels, assistant secretary for tax policy at the U.S. Department of the Treasury, said his department wouldn't oppose lifting the cap. The Treasury Department writes regulations for tax-exempt financing.
The Senate Finance bill also allows tax-exempt hospitals to use as much as 10% of bond proceeds for "private business" uses. Currently, tax-exempt hospitals may only spend as much as 5% of such bond proceeds on non-charitable uses. For example, space rented to a for-profit group of physicians may be considered a private use and, therefore, prohibited under Internal Revenue Service rules.
The leeway allowed in the Senate Finance bill "can make a big difference" for hospitals, Ms. Kalick said.
Hospitals also may benefit from the inclusion of intermediate sanctions against providers that violate their tax-exempt status. Such sanctions, included in the Senate Finance and House Ways and Means healthcare reform bills, are "probably fairly attractive" to bondholders, said Micah S. Green, executive vice president of the Public Securities Association and head of the PSA's Washington office.
With intermediate sanctions available, if a hospital were found to be in violation of the Internal Revenue Code, it would pay a penalty. From the bondholder's point of view, that's better than an immediate loss of tax-exempt status. The language "would ensure that it's not an all-or-nothing thing," Mr. Green said.