A three-year legal odyssey for a Kansas not-for-profit hospital management company ended late last month with the reinstatement of the company's tax-exempt status, but only after the company changed the way it does business, Modern Healthcare has learned.
The Internal Revenue Service on April 26 approved the reorganization plan submitted by Phillipsburg, Kan.-based Great Plains Health Alliance, which leases and manages 25 rural hospitals in Kansas and Nebraska. The administrative settlement between the IRS and Great Plains ends Great Plains' appeal of an IRS action that revoked the company's tax-exempt status on March 2, 1998.
The revocation was the first against a not-for-profit hospital or hospital system in decades.
Neither the IRS nor Great Plains has publicly announced the agreement.
The IRS said Great Plains was only a management services company that did little or nothing to deserve its exemption. Managing hospitals is not an inherently charitable act, it said, even if the hospitals are tax-exempt.
Great Plains argued that its management services furthered the charitable missions of its hospitals. It said that the services it provided were vital not only to the hospitals but to the medically underserved markets in which the hospitals operated.
The U.S. Tax Court was scheduled to hear the alliance's appeal in October 2000 but postponed the trial date because settlement negotiations for a corporate reorganization submitted in late 1999 appeared to be on track for success.
The alliance was required to reorganize itself to meet IRS demands for greater accountability over its 10 leased hospitals. "We developed a separate not-for-profit corporation for each of our 10 leased hospitals that will, in turn, contract with each hospital and negotiate new lease agreements," said Great Plains President and Chief Executive Officer Roger Johns.
He said that Great Plains paid an unspecified amount of state taxes on buildings and supplies since the tax-exempt revocation and employees paid taxes on their pension contributions. He said the system will work with the IRS to resubmit the forms for those years and get that money back. Johns declined to reveal how much Great Plains paid in taxes.
The tax-exempt status of the leased hospitals was not affected, he said.
H. Philip Elwood, a Topeka, Kan., lawyer with Goodell, Stratton, Edmonds & Palmer, who represented Great Plains, said the IRS was most concerned about the lease agreements.
"They were concerned about the lack of definition between the authority of the corporate board and the local governing board. Now the local corporation has accountability for the operation of the local hospital, and (Great Plains') role as an umbrella parent company is to provide assistance in carrying out the charitable mission of each hospital," Elwood said.
