Nonprofit Hospitals Swap Breaks for Mergers Under Law: Taxes

Some nonprofit hospitals are finding it easier to give up their tax exemption and merge with a for-profit company than to meet the charitable-care rules of the new health law.

State regulators from Ohio to Rhode Island say they’re getting more requests from hospitals to weigh in on potential deals and expect another increase as more companies see the impact of the Patient Protection and Affordable Care Act, Bloomberg BNA reported.

“Even charitable hospitals must look for ways to remain profitable, so they are selling off less profitable forms of health care,” said Vivian Tate, principal assistant attorney general for Ohio.

The law, known as Obamacare, may encourage mergers because it rewards cost reductions rather than volume of care. Many nonprofits serve poorer or rural populations with more uninsured patients. These hospitals have been struggling already, and the benefits of the federal tax exemption don’t necessarily offset the costs of providing more charitable care.

The hospitals are trying to figure out whether they can survive in this new environment. If they find that the best way for them to serve their communities is by partnering with a for-profit, they may pursue a joint venture or a deal that converts them into a for-profit.

A tax-exempt nonprofit hospital merging with a for-profit hospital typically would lose its tax-exemption and sell its assets to the for-profit group. Money it has received from the sale would go to create a charitable foundation that could continue to provide services.

Accelerating Trend

There has been some movement toward these mergers in recent years and not all of the deals can be attributed to changes put into effect by the Affordable Care Act, analysts said.

Still, the law may be accelerating the trend. Tate said she has received five calls in the last few weeks asking her to speculate on transactions.

“This suggests to me that in the offices of accountants and attorneys there are discussions that will hit my desk,” she said.

Some of it is likely to be across state lines. The not-for-profit Fauquier Health -- a community health system comprised of a hospital, rehabilitation and nursing center, wellness center and cancer center in Virginia -- announced in March that it is merging with a Tennessee for-profit holding company, LifePoint Hospitals, in a joint venture. One of the byproducts was a community foundation with a $100 million endowment.

90-Day Reviews

In Rhode Island, Jodi Bourque, assistant attorney general, said she spends all her time on hospital mergers, although her position calls for her to be a health care advocate as well.

In her state there is a 90-day dual review, by her office and the department of health. There are fewer requirements when two nonprofit hospitals are being merged than when a for-profit and nonprofit are being merged, she said. Among the criteria for the review are tax ramifications, conflicts of interest and the impact on charitable assets, she said.

In Ohio, hospital transactions are subject to different types of scrutiny, Tate said. If a nonprofit corporation plans to dispose of more than 50 percent of its assets, or plans a transaction in which 50 percent of its assets have been disposed of in the last 36 months, the hospital must give her office notice.

“A good bit of it involves very large health care organizations that want to get rid of certain lines of business,” she said. “I see them selling off all their nursing homes and getting out of the nursing home business.”

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