Not-for-profit hospitals last week found themselves in the cross hairs of a powerful congressional committee when its chairman announced he would review their tax-preferred status and possibly create a massive new revenue stream for the federal government.
The House Ways and Means Committee will conduct a "broad examination of what taxpayers get for their money when 501(c)s are given preferential tax status," the committee's chairman, Rep. Bill Thomas (R-Calif.), told members of the Federation of American Hospitals. The federation represents the for-profit hospital sector and held its annual policy meeting last week in Washington.
Organizations designated as 501(c)- which include groups that provide charitable, religious or scientific services-are considered tax-exempt by the Internal Revenue Service. Some 61% of the nation's 4,927 community hospitals fall into this category, according to the American Hospital Association.
It was unclear what form Thomas' examination will take. "This is at a very preliminary stage," said Christin Tinsworth, a committee spokeswoman. No timeline or hearing schedule has been established, she said, but staff members are researching the subject "with no preconceived notions" and will determine what congressional action may be necessary.
Among the questions Thomas said his committee would explore: Can charitable activities be easily discerned as different from the activities of for-profits? Do the not-for-profits continue to uphold the "social compact" they originally created with the taxpayer? To what extent do not-for-profits duplicate the business behavior of their for-profit counterparts?
The preliminary nature of Thomas' announcement was not enough to prevent a heated industry debate from taking shape. Hospital officials widely agreed that it's appropriate for healthcare organizations to prove why they deserve tax-exempt status, but lobbyists and others are already speculating about the implications, which range from new standards governing 501(c)s to greater tension between hospitals and doctors.
"This is an issue that has the potential to be extremely divisive within the hospital community," William Cox, president and chief executive officer of the Alliance for Catholic Healthcare, wrote in a March 3 letter to federation President Chip Kahn.
"When it has arisen in the past, the question of not-for-profit status has created conflict and controversy but not progress for anyone involved. Another round of debate is likely to do little but reopen old wounds and fuel new animosities at a time when the hospital community can ill-afford it," Cox wrote.
Last month six-hospital Provena Health learned that the Illinois Department of Revenue plans to revoke the property tax exemption of its 199-bed Provena Covenant Medical Center in Urbana, Ill.
Situations like the one at Provena will become increasingly widespread as county and state governments struggle with budget deficits and declining tax revenue, said James Unland, president of the Health Capital Group, a healthcare consulting firm.
Thomas' call for a federal examination of tax-exempt organizations will only fuel that fire, Unland and others said. Hospitals that claim a tax exemption and then chase and sue uninsured patients to collect their bills could also fan the flames (See related story below).
After Thomas' remarks, the Consejo de Latinos Unidos, a Hispanic advocacy organization, launched a six-figure ad campaign calling for the revocation of tax-exempt status at four Florida hospitals that the group said use "ruthless collectors and aggressive attorneys" to collect from the uninsured.
K.B. Forbes, the group's executive director and a GOP strategist, said the campaign was planned before Thomas's speech.
Some advocates of tax-exempt hospitals, among them the lead lobbyist for Catholic healthcare, said they fear Thomas' examination will take attention from other important issues such as the uninsured and Medicaid reform.
"Public oversight is an appropriate role of government when you've been given a gift of tax-exempt status," said the Rev. Michael Place, president and CEO of the Catholic Health Association.
"That being said," Place said, "I think perhaps (Thomas) could learn more about what not-for-profit healthcare is actually doing for the well-being of the country. I'd look forward to inviting the chairman to leave the halls of Congress and come walk the halls of Catholic healthcare."
Speaking with reporters after his address to the federation, Thomas said there is an "enormous area of potential revenue" in taxing organizations that currently enjoy an exemption but behave more like a for-profit organization than a not-for-profit. Thomas' examination will include not just hospitals but all charitable organizations classified as 501(c).
It's unlikely that the federal government will revoke not-for-profit status on a large scale, Unland said, but lawmakers could set new rules for maintaining such status, which would force many hospitals to re-evaluate their operations.
Hospitals that establish joint ventures with for-profit subsidiaries or outside organizations might find themselves under a microscope, said David Main, chairman of the healthcare practice at the law firm Shaw Pittman.
"Every now and then this issue flares up," he said, "and if you look at these not-for- profit hospital systems, I'm not sure they're prepared to explain why they should be tax-exempt."