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