WASHINGTON -- The Treasury does not want nonprofit health maintenance organizations that are forced to allow patients to go to doctors outside their network under the Clinton reform plan to be threatened with a loss of tax exemption, a Treasury official said.
The official made the comment in an interview after a House subcommittee heard a complaint that the Clinton Administration's proposed health care reform bill might force nonprofit HMOs to engage in taxable business activities that would threaten their tax-exempt status.
The complaint, which was made by an HMO official, arose from a provision of the proposed reform legislation that would require HMOs to offer patients "point of service benefits." That is, HMOs would be required to cover some of the costs for patients who choose to go to doctors practicing outside the HMO network.
White House officials added the provision to the draft bill just before it was released to appease critics who were complaining that the plan would eliminate a patient's right to choose a doctor.
But Marc Wolfert, vice president of the Health Insurance Plan of Greater New York, complained to the House Ways and Means Committee's select revenue measures subcommittee that an HMO probably would be engaging in a taxable business activity once it covered a portion of such a patient's costs.
An Internal Revenue Service official said after the hearing that Wolfert seemed concerned that HMOs would in such cases be treated as providing insurance.
Under the tax laws, insurance would be a taxable business activity that would be unrelated to the HMO's tax-exempt purpose. If an HMO had a significant amount of unrelated business activities, it could lose its tax-exempt status and the ability to issue tax-exempt bonds.
But the Treasury official said later that the Treasury would not want its tax rules or guidance to put an HMO in the position of losing its tax exemption if forced to comply with such a provision.
"We would be uncomfortable having the tax rules written in such a way that, if some organization was required to do something for non-tax reasons, it would be threatened with the loss of its tax exemption," he said.
If the provision remains in the health care plan, the Treasury probably will try to provide some relief for the HMOs that would be forced to comply with it, the official said.
"There is a very good chance that we will try to develop some sort of safe harbor for these point of service benefits," he said.
The safe harbor, which could be added to the draft health care plan or to the tax rules, would allow HMOs to provide a certain amount of point of service benefits without having to worry about running afoul of limits on unrelated business activities, he said.
The Treasury and the IRS have no formal regulations or revenue rulings on this issue, the official said. However, the IRS has issued informal guidance indicating such coverage would be treated as taxable insurance activities.
Apart from this issue, the Treasury official said, the health care plan "is not likely to have any significant direct effects on nonprofits."
Some health care industry officials worry that the plan's universal health care concept would make it difficult for nonprofit hospitals to continue to qualify for tax-exempt status. If the plan ensures that everyone can pay for health care, they reason, hospitals will no longer be able to serve a charitable purpose by treating those who cannot pay. Under the tax laws, hospitals must serve a charitable purpose to qualify for exempt status.
But, said the Treasury official, "I don't think that's likely to be a problem because there's no requirement today that a hospital provide any particular amount of charity care as a basis for exemption."
The health care reform bill would codify or formalize what the Treasury and the IRS have been saying for years in informal guidance - that if a hospital provides benefits to its surrounding community, it will qualify for tax exemption.
The IRS has never issued regulations or other formal guidance specifying what a hospital must do to meet this community benefit standard.
However, the agency has said in past revenue rulings that a hospital would be providing community benefits if.
*Its board was made up of community leaders that were not doctors.
*It had an open medical staff with privileges available to all qualified doctors.
*It applied operating surpluses to improving patient care.
*It operated generally accessible emergency rooms.
*It provided medical training, education, or research.
The Treasury may draft rules to provide a more precise definition of what hospitals and health care organizations must do to meet the community benefit standard, the Treasury official said.
The draft health care bill would require nonprofit hospitals to assess each year the health care needs of its community and to develop a plan to meet those needs.
Although these requirements are new, they are not harsh and would probably just formalize what most hospitals are already doing to meet the community benefit standard, the Treasury official said.
"We wanted to have something ... to provide assurance that providers are responsive to their community needs, but we were concerned about having real specific dos and don'ts because the needs of different communities differ and are likely to change as the whole health care environment and market changes," the Treasury official said.
Several lawyers said this week that they do not think the administration's health care plan will have major or direct adverse effects on the tax-exempt status of hospitals and their bond issues.
"Most nonprofits are going to adapt, whatever the rules are," said Douglas M. Mancino, a lawyer with McDermott, Will & Emery in Los Angeles. "They will change their behavior to conform to the rules."
The biggest concern about the health care plan, Mancino and others said, is that it will cause a dramatic restructuring of the health care industry so that some marginally profitable hospitals and health care organizations will not be able to make it financially.
"From a tax-exempt financing standpoint, there doesn't seem to be much panic," said R. Todd Greenwalt, a lawyer with Vinson & Elkins in Houston. "Hospitals are much more concerned about their finances."
The finance concerns would have an indirect effect on the bond market because any hospital that failed financially would probably default on its tax-exempt bond issues, market observers said.
