Tuesday, May 1, 2012

Catholic Hospital Takeovers and the Community Benefit Test

In Denver and Louisville, potential mergers in which a Catholic hospital system would take over a formerly secular hospital have raised issues regarding how takeovers by Catholic health care systems alter services available to women, including abortion, contraception and tubal ligations. Catholic doctrine may also impact patient directives regarding end-of-life care. I have no quarrel with Catholic hospitals operating according to Catholic doctrine. I DO have a quarrel with the Catholic Bishops who on the one hand rail against the war on Catholicism being conducted by the U.S. government (see my earlier post about Bishop Jenky of Peoria) and on the other hand seem perfectly content to accept millions of dollars in government subsidies through property and income tax exemption.

So here's a thought. Since 1969, nonprofit hospitals have claimed exemption under what is now generally referred to as the "community benefit test." In Rev. Rul. 69-545, the IRS held that providing health care services for the general benefit of the community was charitable even if the hospital in question did not provide free care for the poor as long as the hospital provided such care in an emergency setting, had a community board, provided services to all patients who could pay (including via government programs such as Medicare and Medicaid) and did not unduly restrict its medical staff. Most states in administering their property tax exemption laws follow a similar doctrine (a very few, notably Illinois, have held that charity care is an essential element of tax exemption). The result is that even large nonprofit hospital chains, like Ascension Health - a Catholic system that in fiscal 2011 reported "an excess of revenues and gains over expenses and losses of $1.5 billion" (yes, that is "billion," with a "B") - get federal income tax exemption and state property tax exemptions, because they legitimately can claim to be providing health services for the general benefit of the community. At current corporate tax rates, if Ascension really did have profits of $1.5 billion, then its income tax exemption is worth roughly $500 million, give or take.

But when a Catholic hospital takes over a hospital and discontinues services because of Catholic doctrine, I would argue that the result is a net decrease in "community benefit." Services previously available are no longer available; rather than benefitting the community, one might argue that these transactions have harmed it (perhaps not if the target would have gone out of business without the Catholic white knight - more on this below). So I suggest a rule: in the context of an acquisition of a hospital, any discontinuance of services by the target for reasons other than financial necessity or sound medical practice within five years of the acquisition will be a per se violation of the community benefit doctrine, resulting in a withdrawal of tax exemption, unless the target would be exempt under other tests of charity (e.g., a teaching hospital would remain exempt as an educational organization; a hospital or clinic that served primarily the poor would still be exempt as a poor-relief charity).

Now I know there are a slew of problems with my proposal. First, it may be unconstitutional. My own view is that such a rule would not violate the Free Exercise Clause under existing caselaw, but I recognize that there is no Supreme Court precedent "right on point" and what case law there is that is relevant is getting long in the tooth. Maybe if the Supreme Court takes a case involving political campaign activity by a church, we'd get better clarity on this point.

Second, what about the case in which a target literally would go out of business but for a Catholic "white knight"? Would I really prefer no services at all to an elimination of certain services in order to preserve a majority of other services? No, I wouldn't. So perhaps I need an exception for cases that truly present no other option. And then I'd have to define the circumstances in which "no other option" exists.

Third, there are a host of definitional problems with phrases like "financial necessity" and "sound medical practices."

And finally, the real problem here is that most nonprofit hospitals aren't charities, and hence the real solution is to withdraw exemption from nonprofit hospitals completely (again, with the exception that hospitals could meet other tests of exemption - see my post from yesterday).

I get all this. It is likely that my idea may be completely impractical, though I'm going to spend some time thinking about it and maybe even writing a full-fledged article on it. But I am rapidly getting tired of the hypocrisy of the Catholic hierarchy, despite the fact that I am Catholic myself. If you don't want "government intervention," then don't take government handouts, either. If you're going to talk the talk, walk the walk.

JDC

 

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Comments

So that your readers can witness the spectacle of a bankruptcy specialist and a tax expert discussing constitutional law, let me ask why you think it would even be a potential Free Exercise problem? The law would be neutral on its face in that it would apply to any nonprofit hospital that discontinued services other than for financial necessity or sound medical practice. It would, for example, apply to nonprofit hospitals that decided to discontinuance a service because it was not profitable.

Posted by: Bob Lawless | May 1, 2012 3:12:45 PM

I'm thinking here of the doctrine of unconstitutional conditions, which prohibits the government from conditioning the granting of certain benefits (here, tax exemption) on the waiver of constitutional rights (here, arguably, free-exercise rights). The existing caselaw on this issue with respect to tax exemption is a bit murky. Some cases suggest that exemption is a "privilege" that can be granted or taken away at will by the government (provided it is on neutral grounds); others suggest that taking away tax exemption as a result of exercising protected speech rights could be a problem. The only way we will know for sure is for the Court to take a case that directly addresses the issue; a group of church pastors over the past couple of years have intentionally violated the campaign intervention limitation to try to force a test case on this subject, but that has not yet even reached litigation stage, let alone the Supreme Court.

JDC

Posted by: John Colombo | May 2, 2012 6:19:37 AM

In addition to all of the problems you yourself point out, your proposal is just bad policy. What sense is there in some kind of ex-ante rule about community benefit, when, in fact, it's almost certain that a Catholic hospital's take-over of a secular hospital will lead to a net increase in community benefit: in charity care, education, social services, community development, etc. The only thing your rule would protect would be the availability of a few odious practices that don't really merit the name of health care.

Posted by: Leo Ladenson | May 3, 2012 3:07:16 PM

I think you're letting your personal dislike of the bishops cloud your legal judgment here.

Posted by: Anon | May 3, 2012 7:21:20 PM

John - The HHS mandate on contraception and abortifacient drugs would penalize Catholic hospitals regardless of whether the hospitals had tax-exempt status (it will penalize all business owners who have moral reasons for objecting to the mandate). I think you are conflating the issues. Bishops are not being hypocrits for accepting "government hand-outs" while opposing "government intervention" - the intervention they object to is a violation of their constitutional rights, which cannot be abridged by the government in any case, regardless of whether the hospitals receive government hand-outs or not. In my view, you should be upset with the Obama administration for creating this fictitious narrative about a war on women to win cheap political points, not the Catholic bishops.

Sadly, your proposal seems to emanate, at least in part, from a desire to stick it to the Bishops, which doesn't seem like a very noble objective or a good basis on which to develop sound public policies. I know that it is fashionable to criticize the Catholic Bishops, but I am not sure why your proposal has to single out Catholic hospitals: if you are really worried about the loss of services following hospital mergers for what you consider illegitimate religious or moral reasons, don't acquisitions by Mormon, Lutheran, Adventist, Methodist, Jewish, and Secular hospitals with unusual views, potentially create the same concerns?

Just on constitutional grounds alone, I think that your proposal, which targets Catholic hospitals, would fail. But even if the proposal was constitutional (perhaps by being a law of general applicability), I think it would be bad public policy.

Let's say a Jewish day school enjoys tax exempt status, and it takes over a Catholic day school. A government panel of experts decides that eating pork promotes health and is vital to our diet and therefore everyone should have access to pork (as they did at the Catholic school but do not at the Jewish school). Should the Jewish school lose its exempt status because it will not sell pork products to students in the cafeteria after the acquisition, even though it continues to offer a good education to students?

What about Shriner's hospital that enjoys tax-exempt status. Let's say it takes over a Lutheran hospital that provides a wide range of surgical procedures, including sex change operations. The Shriner's hospital has both moral and medical reasons for objecting to sex change operations, and decides that sex change operations should not be offered after the merger. Should it lose its exempt status because a panel of experts and the courts decide that sex change seekers benefit from such operations and have a fundamental right to become who they want to be, even though the hospital continues to provide a wide range of other health services and even expands its services after the merger?

My answer to those questions is "No"! Of course those organizations should not lose their tax-exempt status just because they refuse to do something they think is a bad policy(for whatever reasons, religious or otherwise), provided what they are doing is still charitable. Your proposal penalizes nonprofit organizations for not doing something they think is evil or wrong or a bad policy, instead of recognizing them as exempt for the services they do provide. Nothing in 170/501c3 says that in order to qualify for exemption a hospital must provide every service imaginable or every service that it ever offered in the past. Your proposal seems to invert the requirements for tax-exemption by looking at what services an organization is no longer providing (which is not the operational test) rather than what services it is providing (which is the operational test).

(Imagine how the balancing would work if a Catholic hospital bought a secular hospital that did 1 abortion per year. After the merger, the Catholic hospital adds a new oncology ward (where the abortion unit used to be) that treats 15,000 patients a year, many of them for free. Under your proposal, the loss of 1 abortion per year would be fatal to the organization's exemption, and the increased community benefit created by the new oncology ward (and free service to cancer patients) would apparently be irrelevant. That does not seem like a community benefit-enhancing outcome.)

Your proposal also invites bureaucrats to decide whether a church-affiliated hospital is making a decision for religious, medical, or financial reasons. Even if government probing into such decisions is constitutionally permissible (which is not a certainty), I suspect that the government body making that decision would be policiticized almost immediately, and every decision it makes will divulge into partisan rhetoric about women's rights and religious freedom. Moreover, I suspect that the government body making that decision would waste enormous amounts of time and public resources trying to decide whether a private hospital has "financial necessity" or "sound medical practice" to change the services it offers. It doesn't seem worth it.

I would much rather have an open market where Planned Parenthood can come in and set up a clinic across the street from the Catholic hospital to fill the abortion void after the Catholic hospital terminates that abortion services at the secular hospital (or the government itself can establish a rival hospital that provides abortions). That makes a lot more sense than using the government to coerce religious groups into doing what they do not want to do and should not have to do to qualify for exemption.

Posted by: Anne | May 3, 2012 10:42:14 PM

Thanks for the comment, Anne. Actually, my proposal is not limited to Catholic hospital takeovers; it would apply to any takeover. I was just using Catholic doctrine as the example because it is the two proposed takeovers in Denver and Louisville that are currently in the news and because I happen to be familiar with Catholic doctrine.

I do agree that if on balance a takeover increases available services, that ought to be OK. Maybe I would make my rule only a rebuttable presumption (e.g., discontinue services and there is a presumption of violation of the community benefit test; rebuttable by a showing that services were actually increased). This would also take account of the "we'll go out of business but for the white knight" scenario.

JDC

Posted by: John Colombo | May 4, 2012 6:54:37 AM

John - your rebuttable presumption position still inverts the test. An organization should not lose its exemption because it doesn't do everything some other organization did. It should lose its exemption if it is no longer organized and operated for exempt purposes. Canceling some services is not a sign that an organization is not operated for exempt purposes.

If the government wants a particular service to be offered, it can (i) buy the hospital itself; (ii) subsidize the service; (iii) provide tax breaks; etc. But why force a hospital (or any group of people) to do something they think is wrong, immoral, or imprudent, if what they are doing is legitimately a charitable activity?

I guess I just don't understand the rationale here, unless your rebuttable presumption proposal is really pretext for one of two other goals: (1) denying exemption to all hospitals (as you indicated in your first post); or (ii) forcing religious groups to perform abortions, hand out contraception, and do other things they find unconscionable. If you want option (i), why not write an article advocating that hospitals should not be exempt, rather than advocating yet another test that will only lead to lead the IRS to waste more taxpayer moeny in disputes with hospitals? As a Catholic you should not want option (ii), but if you do want it, why not be forthright about it and advocate for a rule that says something like this: if the target hospital provides abortions before the merger, the buyer must provide abortions afterwards (or whatever other services you think are absolutely necessary for a community).

If those are the goals, I think we should honest about it and not try to use tax law in place of actual legislation.

Posted by: Anne | May 8, 2012 11:01:52 AM

If a hospital, religious or secular, takes taxpayer money for health care costs, are they not required to follow the law and not decide what laws they will obey, tax-exempt or not? I have always wondered how it is that religious institutions, either hospitals or faith-based charities, do not run up against the wall of state-church separation, ie. tax money funding religious organizations.

Posted by: Ken Van velsor | Feb 5, 2013 10:06:21 AM

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