A Roman Catholic hospital came within a whisker of losing its tax exemption because its sister corporation paid illegal kickbacks to physicians.
What may have saved the tax-exempt status of 289-bed St. Joseph's Medical Center in South Bend, Ind., is the Internal Revenue Service's reluctance to look like a bully-especially with Congress and the public screaming for change at the agency.
"Certainly the IRS is reluctant (to take away tax exemptions from healthcare organizations) because the IRS is aware of the huge impact that can have on the community," said Thomas Hyatt, a tax attorney with Ober Kaler Grimes & Shriver in Washington. "It may take away the financial viability of the hospital. Patient care and community service can be hindered by taking away an exemption."
The IRS has been targeted by congressional hearings this month, which have sought to paint the agency as overzealous in collecting taxes.
After a parade of taxpayers presented horror stories to a bipartisan panel, the U.S. Senate voted 97-0 on May 7 in favor of a bill to overhaul the IRS and make it more citizen-friendly.
The political attack on the agency may make the IRS even more loathe to revoke the exemptions of misbehaving healthcare organizations, especially a Roman Catholic hospital like St. Joseph's.
Under a 1997 IRS ruling, a hospital that violates the federal anti-kickback statute could lose its tax-exempt status.
But when the IRS disciplines healthcare organizations, revoking tax exemptions is the last resort.
"If the status is going to be revoked, there's going to be a whole basket of problems that are substantial and significant and involve significant dollars," said Marcus Owens, director of the IRS' tax-exempt organizations division.
"If it's a situation where a transgression has been identified and a correction has been obtained, a good argument can be made that the (IRS) needs to take those factors into consideration."
St. Joseph's sister corporation, Horizon Group Enterprises, pleaded guilty in April to giving financial perks to two physicians in exchange for patient referrals to St. Joseph's. The hospital and its parent companies, Holy Cross Health System and St. Joseph's Care Group, were not charged with any wrongdoing.
Owens declined to comment specifically on the Horizon case but said a hospital generally would have to commit a flagrant crime to lose its tax exemption.
Hospital and Horizon officials also declined to elaborate on any negotiations with the IRS.
Assistant U.S. Attorney Donald Schmid, who successfully prosecuted Horizon in this case, said the hospital did not get off easy.
"They have to implement a state-of-the-art compliance plan that's going to cost millions of dollars," Schmid said. "Shutting the hospital down would only hurt the community."
Another factor that helped the hospital avoid a harsh penalty was the way it set up Horizon to contract directly with physicians, thus distancing St. Joseph's from those operations.
"Horizon is a separate corporate entity engaged in activities that were reported to entities other than Holy Cross and were not matters that were understood by these organizations to constitute violations of law," said Patrick Coffey, an attorney with Gardner Carton & Douglas in Chicago who is representing Horizon, St. Joseph's and Holy Cross.
That kind of hospital-sister corporation structure is not uncommon, some attorneys said.
"They did the right thing in insulating the hospital (from the physician recruiting company)," Hyatt said. "This underscores the value of separating that function from the hospital, which is the golden goose of the operation."
The last time the IRS was lenient on a hospital accused of paying kickbacks to physicians was in 1994, one year before the revenue ruling was floated by the agency in its earliest form.
Hermann Hospital in Houston paid a $1 million fine and agreed to follow a 27-part set of guidelines as part of the settlement of charges that it illegally used income guarantees and free office space to recruit and retain physicians (Oct. 24, 1994, p. 2).
At the time, Owens said Hermann didn't lose its exemption or pay a higher fine because it turned itself in after an internal audit.