Representatives of not-for-profit hospitals don't want to talk about it.
Investor-owned hospital groups say they aren't going to bring it up unless provoked.
It's so complicated and fraught with political peril it makes Medicare reform look easy.
The issue: tax reform. Or, more specifically, changing the federal tax code to settle questions surrounding the ever-blurring lines between for-profit and not-for-profit healthcare systems.
Many industry observers say that as tax-exempt systems grow and compete more aggressively with investor-owned companies, they will catch the eyes of budget-conscious state and federal lawmakers. Changing the tax rules surrounding tax-exempt status could reap billions in new revenues.
"There are questions on (Capitol) Hill about a number of the larger, more commercially successful not-for-profit systems and whether what they are doing justifies their continuing (tax) exemption," says T.J. Sullivan, an attorney with Gardner, Carton & Douglas in Washington. Sullivan is forming a not-for-profit advocacy group that will look at issues surrounding all not-for-profit groups, including tax reform questions.
And while everyone waits for congressional leaders to signal their intentions, people from both hospital ownership sectors are laying the groundwork for future action.
Taking a look. It's likely Congress will take a look at a number of tax issues in committee hearings later this year scheduled by Rep. Nancy Johnson (R-Conn.), chairwoman of the House Ways and Means oversight subcommittee.
Among the topics likely to be examined will be the tax implications of joint ventures between for-profit and not-for-profit organizations.
Hospital joint ventures are being reviewed by the Treasury Department, which is scheduled to issue long-awaited guidance on the tax treatment of such ventures later this year.
And, as is often the case, executive branch action could draw congressional review.
"I think we would still want to look at it, no matter what (the Treasury Department) does," says a GOP aide who asked not to be identified. "This affects enough members' districts that there is interest in it."
Not-for-profit providers generally are breaking into two camps over the issue of joint ventures. Some aim to keep the guidelines loose to allow them the maximum freedom to strike deals with the best available suitor. Others want the guidelines to remain strict to keep the not-for-profit bloodlines pure.
Getting strict. This wouldn't be the first time Congress has looked at the tax-exempt status of hospitals. However, lawmakers haven't made significant changes since 1969, when the Internal Revenue Service relaxed the standard for tax exemption.
Before then, hospitals had to justify their tax-exempt status by proving they offered care to the poor. But to account for the enactment of Medicare, Medicaid and other government and private aid programs, the IRS changed the standard to require hospitals merely to promote community health.
That so-called "community benefit standard" has been the subject of several bills in the past few years. Most of the legislative approaches would have returned the requirements for tax exemption to the more stringent pre-1969 standards. But none of those proposals has made it out of committee.
The new Republican leadership has a more far-reaching tax-reform agenda. Since before they took over Congress in 1994, GOP chieftains such as House Majority Leader Richard Armey of Texas have been preaching that the nation's overall tax system needs to be overhauled. Armey advocates a flat tax, as does Sen. Phil Gramm (R-Texas). House Ways and Means Committee Chairman Bill Archer (R-Texas) has vowed privately to make tax reform his crowning achievement before leaving Congress, probably after the 1998-1999 term.
The White House has been relatively quiet on tax reform issues and, aside from the Treasury Department review of hospital joint ventures, appears to have little interest in the subject.
When Congress does take up wholesale tax reform, the issue of tax-exempt status is sure to be on the table. According to a number of observers, Congress will at the very least seek to make not-for-profit hospitals justify their tax-exempt status. And it could even eliminate tax-exempt status.
But that kind of sweeping overhaul of the tax system is unlikely this Congress.
"That is a really hot fire to get near right now," says Richard Grafmeyer, national director and a tax lobbyist for Ernst & Young in Washington.
Reform roads. Several avenues, however, could lead lawmakers to address issues surrounding the tax status of hospitals on a limited basis.
One such road is the push by hospitals to enter the Medicare managed-care market as provider-sponsored organizations.
William Cox, executive vice president of the Catholic Health Association, says that as providers move to take on the traditional functions of insurers, they bring their tax-exempt status into question.
"The more we get into risk through PSOs, the more we will find insurance companies opposed to the continuation of tax-exempt status," Cox predicts. "And it becomes harder to justify. I don't think we have made our case so definitively that we can rest."
Another opening for lawmakers could be the ongoing question of what constitutes community benefit and the level of charity care provided by not-for-profit hospitals-an area Johnson's subcommittee may take up in its hearings.
According to data from the American Hospital Association, hospitals' uncompensated-care costs were stable at 6.1% of hospitals' total costs in 1995 and 1994. Uncompensated-care costs, which include charity-care and bad-debt expenses, grew just 4.2% in 1995 to $17.5 billion from $16.8 billion in 1994, the smallest increase since 1986.
A study published recently in the journal Health Affairs found not-for-profit hospitals provide more community benefit than their for-profit rivals. Other studies have shown almost no difference in charity care by ownership categories.
"We really should get this settled before someone in Congress decides to take a closer look," says a not-for-profit hospital lobbyist who asked not to be identified.
Brothers, enemies. But what hospitals probably have to fear most is each other.
The ongoing and escalating rift between not-for-profit and investor-owned hospitals could be the crowbar that pries open the Pandora's box of tax reform.
If that's the case, the vehicle will probably be a hospital conversions bill introduced by Rep. Fortney "Pete" Stark (D-Calif.). Stark's measure would give HHS' inspector general's office the right to review all conversions of not-for-profit facilities to for-profit status. Similar bills also are being considered by at least two Dem-ocratic senators.
"This is really a local fight that people are trying to make into a national issue," says another not-for-profit hospital lobbyist who requested anonymity. "The national scheme has room for everybody, but at the local level there is not, so the losing side always wants to contact their member (of Congress) to nationalize the issue."
If the Stark bill is taken up by Congress, it would necessitate a review of a number of tax-status issues.
"The real question is, when a not-for-profit converts to for-profit status, how do you treat the reserves that the not-for-profit had accumulated?" says Steve Cooper, a healthcare lobbyist with the firm of Downey and Chandler in Washington.
Such deals have been the target of lawmakers in at least 19 states, and a spokesman for Stark says it's only a matter of time before Congress debates the issue.
"The issue of charity care and conversions is probably of concern to both sectors," says Frederick Graefe, a lawyer with Baker & Hostetler in Washington. "In response to a conversions bill, members may want to make sure charity care is still being accounted for and may want to apply the same standards to transactions involving not-for-profit hospitals."
VHA, an Irving, Texas-based not-for-profit hospital alliance, has been gathering data in various markets from both ownership sectors. Dan Bourque, senior vice president of corporate and government affairs at VHA, says that while he believes "there is interest around these types of issues" in Congress, the issue is better left to state law.
That would suit many not-for-profits just fine.
"When you start opening up issues like conversions, you open the door to look at foundations and what you count as community benefits and charity care," says Sherry Hayes, vice president of InterHealth, a St. Paul, Minn.-based Protestant healthcare organization. "There are a whole bunch of questions that a whole bunch of people don't want asked."
Keeping quiet. Most likely to ask those questions are for-profit hospitals, which are frequently attacked by not-for-profit groups.
However, Thomas Scully, president of the Federation of American Health Systems, which represents investor-owned hospitals, vehemently maintains he will not be the one to beat the bushes. He views the controversy that would ensue as self-destructive and a threat to the entire industry.
"I have absolutely no intentions of bringing this up this year. None," Scully says with emphasis. "There are a lot of issues like (PSOs) that we need to work together on, and this kind of fight is counterproductive.
"I have some members who would like to stoke this up, but I would just as soon it doesn't come up," Scully adds. "However, if somebody really wants to make a problem for investor-owneds, it would not be very difficult to stir up the tax issue."