The Internal Revenue Service has threatened to revoke the tax-exempt status of Birmingham, Ala.-based Baptist Health System, alleging it overpaid for physician practices.
Thirteen-hospital Baptist, Alabama's largest system, said it was notified of the action Dec. 8 by a letter and an examination report following a comprehensive 2 1/2-year audit.
Auditors concluded that Baptist used its charitable assets for the private benefit of physicians by paying more than the fair market value for their practices.
Baptist declined to give details of the purchases, but Robert Greene, senior vice president for finance, said the system made most of its acquisitions in the early 1990s.
Auditors also questioned ongoing losses at the system's 60 outpatient clinics, which employ 140 physicians mainly in primary care.
"Their position is, if you're losing money in clinics there has to be a clear community benefit to that," said Dennis Hall, president and chief executive officer.
Hall said the clinics expect to lose $4 million to $5 million in the current fiscal year, which ends June 30, 1998. The system expects revenues of $900 million. In previous years, Hall said, losses have run as high as $7 million.
Several recent studies indicate that not-for-profit systems often pay high prices for physician practices, and most lose money on their operations. Baptist could serve as a warning that the IRS is watching, said San Francisco attorney Gerald Peters.
The IRS has challenged physician practice purchases in previous audits of not-for-profit health systems, but this appears to be the first case where they are the sole focus. MODERN HEALTHCARE couldn't identify any system whose tax-exempt status was revoked as a result of physician practice deals.
Hall said the system would "mount a vigorous campaign to prove that we have been in full compliance with all requirements" and if necessary defend its tax-exempt status in court. He said the charges are "particularly frustrating to a church-sponsored organization."
Baptist said it will dispute another IRS contention that if its tax-exempt status is preserved, the system would owe $491,258 in taxes on "unrelated business income."
Losing tax-exempt status could jeopardize Baptist's planned affiliation with Pensacola, Fla.-based Baptist Health Care, a deal that's scheduled to close in mid-1998. Officials at the Florida system said they are proceeding with due diligence and waiting to see what happens in the case.
Baptist was given 30 days to file an appeal with the IRS office in Atlanta. Last week, it requested an extension to March 4.
Hall said auditors questioned the clinics' community benefit "without looking at the clinics in the context of the overall system."
He said the clinics have expanded access and enabled the system to work with physicians to lower utilization rates in the Birmingham area, which he said are among the highest in the country.
He also said employed physicians played a "major role" in lowering the cost of healthcare at Baptist facilities and speeded the system's entry into capitation. He said Baptist has at least 20,000 lives under capitation agreements in the Birmingham area.
"Some of these clinics are start-ups. You expect them to (lose money)," he added.
Baptist officials stressed that the system never bought a practice without receiving an independent appraisal. "We feel (auditors) must not have had access to or not understood or ignored information," Hall said.