WASHINGTON -- The tax-exempt status of hospitals and health maintenance organizations, as well as the tax exemption for the billions of dollars of bonds that they issue each year, came under fire yesterday from House members and public interest groups at a hearing on health care reform.

Rep. Charles Rangel, D-N.Y., questioned the Clinton Administration's policy in its health care reform bill of largely preserving hospitals' 501(c)(3) tax status, saying the administration's proposed community benefit standards is not tough enough. The tax exemption of bonds issued by the hospitals is mostly derived from their 501(c)(3) status.

"I don't see why I should be giving a tax exemption to some hospitals in affluent communities while others can't meet the needs" of their poorer communities even with the tax exemption, said Rangel, the chairman of the House Ways and Means Committee's select revenues subcommittee that held the hearing. "All I know is there's less and less dollars out there and there's absolutely no difference between a tax exemption and an expenditure" in the way it affects the budget, he said.

Paul Bledsoe, spokesman for the Senate Finance Committee, said nonprofit hospitals will come under the same line of attack in his committee, in part because the $4.5 billion yearly tax exemption they enjoy will be viewed as a source of revenue by the committee in drafting a health care bill.

About two-thirds of the yearly revenue loss to the Treasury caused by hospitals' tax exemption is due to their issuance of tax-exempt bonds, according to Michael Rock, lobbyist for the American Hospital Association.

Bledsoe said that since hospitals and insurance companies so far have been the leading industry opponents of health care reform, some finance committee members see the threat of taking away some hospitals' tax exemption as "a way of gaining leverage" over the industry and making it more complaint.

During the hearing Rangel questioned the administration's move in its bill to codify its policy of requiring hospitals and other 501(c)(3) health organizations only to demonstrate each year that they are serving "community needs." He said the administration should tighten the community benefits standard to require hospitals to help the indigent and needy.

Rangel said that the administration's policy would "lend itself to some abuse." Specifically, he said, "it really would take little or nothing to get the exemption," and some well-to-do hospitals might simply hold classes on community issues such as "stress" and "nutrition" to earn their tax exemption.

Meanwhile, such affluent hospitals would continue paying their doctors half-million dollar salaries and doing little to help the needy, he said.

Several interest groups at the hearing agreed with Rangel that hospitals and other nonprofit health organizations should have to meet much more stringent criteria to retain their tax exemption and access to tax-exempt financing.

"Organizations that aren't doing anything charitable shouldn't be treated as tax-exempt," said Robert S. McIntyre, director of Citizens for Tax Justice. He said that with many hospitals experiencing 40% to 50% overcapacity, the privilege of issuing tax-exempt bonds should be eliminated entirely.

"Why have an open-ended government subsidy to build more hospitals? I think we should get rid of the ability of hospitals to issue tax-exempt bonds, with limited exceptions," McIntyre said.

While the tax activist went to an extreme in chaleenging hospitals' tax exemption, other interest groups at the hearing, including the National Association of Countries, agreed that the administration's bill does not go far enough in requiring hospitals to earn the exemption.

"Treating the uninsured should be included as a mandate" for retaining nonprofit status, said Larry Naake, executive director of the county association. "Even under a comprehensive, reformed system, there will be individuals who will not be covered. Undocumented immigrants and incarcerated individuals are two significant groups not covered under the White House proposal."

Maurice B. Foley, deputy tax legislative counsel of the Treasury Department, defended the administration's policy as providing the "flexibity" needed to ensure that the laws governing tax exemption are workable and fair.

Foley said that the Treasury would try to provide "guidance" to counter any abusive practices, such as inflated doctors' salaries. He agreed, however, that hospitals could meet the Treasury's proposed new community needs test by, among other things, merely offering anti-smoking classes and trying to keep the cost of health care down.

On another front, the tax exemption and access to tax-exempt financing enjoyed by some health maintenance organizations came under attack from a formidable opponent, the Blue Cross and Blue Shield Association, whose 68 members insure about one-third of Americans.

At the hearing, Blue Cross proposed eliminating anyaccess to tax-exempt financing by HMOs, even if they are nonprofit, contending that it would give them an unfair advantage in the ough competition between health care provider plans under the Clinton health reform bill.

"Our support for fundamental changes in the tax code is directly linked to the enactment of health care reform legislation that achieves a level playing field among all health plans," said Mary Nell Lehnhard, Blue Cross senior vice president.

"After the enactment of health care reform, the similarity among health plans will only be greater than it is today," Lehnhard said. "They will be required to offer identical benefits, open enrollment, community rating, and meet cost containment and quality standards. Tax subsidies to encourage these same practices will no longer be needed."

Rangel said he thought the association's proposal "sounds like a polical hot potato."

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