When Advocate Health Care in Oak Brook, Ill., was formed by combining EHS Health Care and Lutheran General HealthSystem, the merged organization had $148 million in tax-exempt debt.
That became a problem last year when Advocate entered consolidation discussions with SwedishAmerican Hospital in Rockford, Ill. A small but significant federal tax provision caps the amount of tax-exempt bonds certain hospitals can have outstanding at $150 million.
While the deal was set aside for other reasons, Advocate ended up using $27 million of its cash reserves to buy down its tax-exempt debt to give it leeway under the limit, says Steve Derks, vice president of government and community relations for Advocate.
The bond cap has become a barrier to integration. It has emerged as the most important of several small, targeted tax issues that hospitals hope Congress will tackle even if legislators don't debate a large-scale tax bill.
"We urge you to include legislation to repeal the $150 million limitation in the first germane tax legislation you put before your committee," a coalition of not-for-profit groups wrote House Ways and Means Committee Chairman Bill Archer (R-Texas) recently.
For Advocate, bumping up against the bond cap meant spending funds that could have been used elsewhere.
"We were right up against the ceiling, and we had to spend reserves to give us room to maneuver," Derks says. "It was an unnecessary cost of doing business."
The bond cap was signed into law in 1986 and set at the current level of $150 million. It was enacted as a response to what Congress perceived as abuses, primarily by universities that had massive endowments but still benefited from tax-exempt financing.
Not-for-profit hospitals were exempted from the law from the start. The problem now is the law restricts the definition of hospitals to inpatient facilities, so integrated systems that want to expand clinics or ambulatory surgery centers find those facilities subject to the cap.
"This is increasingly becoming a barrier to integration," says Sherry Hayes, vice president of InterHealth, a Protestant healthcare organization based in St. Paul, Minn. "It was never intended as a barrier to hospitals merging."
The first priority of hospital groups is to eliminate the cap completely. There are bills in both the House and Senate to accomplish that. Such a measure has passed Congress in the past as part of a larger package, only to be vetoed for reasons not relating to the bond cap.
However, according to Mike Rock, an American Hospital Association lobbyist, hospitals would also support broadening the hospital exemption to account for the formation of integrated systems.