Nonprofit health-care institutions may need to rejustify their tax-exempt status if national health-care reforms are passed, finance officials said last week.
Paul Cooney, a partner at the law firm of Foley & Lardner, said that up until now 501(c)(3) health-care institutions have justified their tax exemption by pointing to their role as providers of charity care for poor people. That argument could be called into question if universal health care becomes a reality, he said.
"When you reform the system and remove the need for charity care, why is it you need tax exemption?" Cooney asked.
Cooney made his comments on the tax-exempt status of hospitals during a health-care symposium sponsored by AMBAC Indemnity Corp. in New York City.
Cooney said he viewed the issue as an intermediate or long-term one. He pointed out that nothing in President Clinton's health-care reform proposal attempts to take away the tax-exempt status of the nonprofit health-care industry.
"I would be very surprised to see any great rush to remove the tax exemption from the industry until the [health-care profit] margins get a little bit higher and revenue capture may become attractive to Congress," Cooney said.
State and local governments, not the federal government, will probably be the first to change the tax-exempt status of hospitals, Cooney said. Increased taxation may take the form of property and other taxes by states and local governments, he said.
Cooney said he could envision the federal government gradually imposing limitations on projects that qualify for tax exemption. He noted that about a decade ago the federal government began to gradually narrow the tax exemption for small industrial development bonds.
At a recent hearing, Senate Finance Committee Chairman Daniel P. Moynihan, D-N.Y., questioned whether the extensive definitional changes in the tax-exempt status of health-care organizations contained in the President's reform bill might harm hospitals that are currently classified as 501(c)(3) nonprofits.
Nonprofit hospitals have issued about $100 billion of bonds, which qualify for tax exemption largely because of the hospitals' 501(c)(3) status.
Speaking to Treasury Secretary Lloyd Bentsen, Moynihan said he doubted it was the Treasury's intention to change the tax status of such hospitals, but he asked Bentsen for clarification of the issue.
Bentsen replied that the Treasury did not intend to change the tax status of nonprofit hospitals. But he said that under provisions of the Clinton health-care bill, 501(c)(3) organizations would have to demonstrate that they are serving their communities to retain their tax-exempt status.
Hospitals might have to conduct community surveys or produce other hard proof that they are performing charitable work, Bentsen said. But he added that most such hospitals already do community surveys and would easily be able to comply with the new requirements.
Howard Manning, a senior vice president at Putnam Management Co., said it is difficult to predict what impact the loss of tax exemption would have on demand for hospital debt or the cost of incurring debt.
"I don't have an apocalyptic vision where it happens across the board. But the burden of justification will be on the 501(c)(3) [institution to show] that it really does' provide the community a benefit," Manning said.
James Reinertsen, president and chief quality officer for Health-system Minnesota, which is the parent organization of Methodist Hospital and Park Nicollet Medical Center in the Minneapolis-St. Paul area, said he believed that HealthSystem's 501(c)(3) status is bolstered by its commitment to provide research and education for medical professionals.
"We're not just a [health] care provider. We have a real legitimate [501 (c)(3)] role. But I think there is a question, and it's a good question, as to whether the 501 (c)(3)'s that don't have those types of additional [research and educational] services could be challenged," Reinertsen said.