A report commissioned by the International Health, Racquet & Sportsclub Association warns that hospital-owned fitness centers should not be organized as tax-exempt entities "without careful consideration of all costs and risks."
While the report doesn't explicitly advise hospital-based health clubs to operate on a for-profit basis, it leans heavily in that direction. Researched and written by the accounting firm Coopers & Lybrand, the report outlines the advantages and disadvantages of tax exemption.
Boston-based IHRSA represents more than 2,400 for-profit, tax-paying fitness clubs. That includes hospital-based facilities, although an exact number wasn't available. IHRSA said its members welcome the emergence of hospitals in the fitness-center business (Dec. 12, 1994, p. 45) "as long as they compete on a level playing field with other tax-paying health clubs."
The report warned of potential community relations problems stemming from competition with for-profits. "A tax-exempt organization operating commercial enterprises may be viewed as engaging in unfair competition," it said.
The report also outlined administrative hassles and limitations tax-exempt health clubs may experience.
According to Coopers & Lybrand, the Internal Revenue Service has addressed the tax status of tax-exempt healthcare organizations' health clubs in several private-letter rulings. Generally, if people who aren't hospital patients are allowed to be members, a hospital-owned health club must show that its membership is representative of the community it serves and document that its membership is representative of all economic classes in the community.
The report noted that the IRS has expanded its audit guidelines for tax-exempt hospitals and is conducting a comprehensive audit of 34 healthcare providers across the country.
Hospitals that operate tax-exempt health clubs "will have to walk a finer line in the face of stepped-up IRS scrutiny and an increasingly aggressive IRS posture toward tangential businesses operated by hospitals," the IHRSA said.