Blaming the possible loss of its federal tax exemption, the Arlington (Va.) Health Foundation has pulled the plug on its 3-year-old joint venture with Columbia/HCA Healthcare Corp.
The foundation's board unanimously voted last week to end the controversial partnership two weeks before a Feb. 14 deadline to exercise its option to unwind the deal.
The foundation asked the Internal Revenue Service in 1996 to bless the venture and assure that its tax exemption would remain intact. The agency has yet to issue a ruling.
The IRS declined to comment on the case.
"The dissolution is occurring because of the continuing failure of the IRS to rule on the foundation's 1996 request for confirmation that its participation in the (joint venture) will not jeopardize its status as a tax-exempt charity," the foundation and Columbia said in a joint statement.
The deal may be the first victim of an IRS revenue ruling released last March on whole-hospital joint ventures.
In that ruling, the IRS addressed the tax consequences facing not-for-profit hospitals that enter ventures with for-profits to jointly operate a hospital or group of facilities (March 9, 1998, p. 3).
The agency said the not-for-profit partner must control the charitable assets involved and can satisfy that requirement by owning a majority stake in the deal.
The Arlington joint venture, Columbia Arlington Healthcare System, involved the foundation shifting control of 282-bed Arlington Hospital to an operating company, while Columbia contributed two hospitals and a surgery center to the company. Each side owned half of the company.
The breakup means that the foundation will resume control of Arlington Hospital, and Columbia will take back ownership of Dominion Hospital in Falls Church, Va.; Fairfax (Va.) Surgical Center; and Reston (Va.) Hospital.
Columbia and the foundation will also decide the fate of Pentagon City Hospital in Arlington. The joint venture acquired the hospital in 1997.
Both Columbia and the Arlington Health Foundation said the parting was amicable.
The two parties are hoping to unwind the deal by the end of June.
For the 14-month period ended Dec. 31, 1997, the joint venture reported an operating profit margin of 10.2% on net patient revenues of $136 million, according to HCIA, a Baltimore-based healthcare information company. (The company had changed fiscal years.) In fiscal 1996, the year prior to the joint venture, Arlington Hospital reported an operating margin of 6.5% on net patient revenues of $115 million, HCIA reported.
Columbia has at least 11 similar joint ventures with not-for-profits across the country, said Columbia spokesman Jeff Prescott. "The Arlington situation doesn't portend anything for the other joint ventures," Prescott said, adding that some of Columbia's partners have also sought IRS approval.