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The future (?) of tax-exempt hospitals

June 24, 2013

    Dan Diamond, Managing Editor

    There was a fascinating interview in Friday's Daily Briefing between Lloyd Dean, the CEO of Dignity Health, and my colleagues Chas Roades and Eric Larsen, discussing Dean’s secrets of leadership and how Dignity is repositioning in light of health reform.


    I had a chance to listen to the uncut interview (which ran three times as long as the print version) and thought this was one of the more interesting excerpts that didn't make it into Friday's issue. Note the last line.

      Chas Roades: Health systems and hospitals, in particular, can be pretty conservative organizations. That's partly because they're constrained in a number of ways compared to other businesses. They're tax-exempt, community-governed, not-for-profit, faith-based. So it constrains [hospitals'] flexibility to be revolutionary. How much of that do we have to let go?

      Lloyd Dean: I think you’re right in your observation about constraints, but you can’t have the system that we’re designing but run it through the same chassis. If you run a piece of steel through the same machine, you can say "I want it to come out different"—but it’s going to come out the same.

      How do you change it? By making changes at the core. You can’t just wish it.

      I see great legislative and great change in the future. It’ll be tough, complex, and some will survive and some won’t, but I think we’ll come out with a better system.

      Meanwhile, big systems like ours already face questions from the IRS and Congress. Were current laws designed to really serve these multibillion-dollar organizations, or were they for individual hospitals? 

      And I think the tax-exempt part will remain, but for institutions that are what I’ll call “not to exceed." My prediction is that a decade from now, no system over a billion dollars will be tax-exempt.

    A decade ago, Dean's prediction would've seemed like Cassandra forecasting the fall of Troy. Today, it's still eye-catching, but there's reason to believe he's onto something.

    For example, Dignity Health is based in California, and several officials in the state are pushing a bill to tax not-for-profit hospitals if their operating margins exceed 10%.

    Taken on its own, that's not revolutionary; lawmakers in the Golden State have floated similar legislation for years. (And the legislation often died in committee.) But the national climate is shifting, or at least catching up with California. Consider how other public officials, facing low tax collections and seeking new sources of revenue, are beginning to systemically target hospitals' tax exemptions:

    • North Carolina lawmakers are considering a bill that would cap sales tax refunds for hospitals at $100,000.
    • The city of Pittsburgh and UPMC are battling over whether the high-profile system should keep its tax-exempt status.
    • Some Illinois hospitals, like Carle Foundation, are facing renewed pressure from local regulators, one year after a new state law intended to help resolve a decade of disputes over property-tax exemptions.

    And the state-level efforts are being paired with new federal scrutiny. Under the ACA, hospitals—which currently put about 7.5% of their operating expenses toward community benefit—will have to begin assessing community needs as part of their reporting efforts to the IRS. It will be worth watching to see if those assessments allow hospitals to demonstrate their value, and help them hold on to their tax-exempt status, or just accelerate the future that Dean foresees.

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