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Could Nonprofit Hospitals Become an Endangered Species?

Philip Betbeze, for HealthLeaders Media, June 18, 2010

Several of us were meeting recently about story ideas in HealthLeaders magazine. A story idea I mentioned about nonprofit status was discussed in our conference call, and I speculated that given the increasing levels of insured patients, that some people might get the idea that tax breaks are no longer necessary for nonprofit hospitals and health systems.

Undoubtedly, some will get that idea, especially in an era where the federal government beholds huge deficits as far as the eye can see, and no easy way of raising additional revenue, otherwise known as raising taxes. My point was that if hospitals are no longer having to spend huge amounts covering charity care and bad debt write-offs, will they be seen as a potentially big source of revenue not only for the feds but for state governments as well?

My contention was that they would. Another idea postulated as we discussed that story idea was that many hospitals, especially of the local, government-owned variety, might consider ditching their nonprofit missions entirely and move toward a for-profit business model. Most of us shot that down as extremely far-fetched, though some wags might argue that many nonprofits operate like for-profits as it is, with the high executive salaries and focus on the bottom line that characterize such institutions.

Certainly there's a lot of revenue at stake if all such entities were taxed. But much of the hubbub about this subject has died down recently with the passage of healthcare reform legislation. That doesn't mean powerful people, like Sen. Charles Grassley, aren't still thinking about it. And little sandstorms of controversy periodically erupt over hospitals and their nonprofit status. Just this week, New Hampshire's attorney general launched an inquiry into salaries of CEOs at nonprofit hospitals.

So following the meeting, I started thinking a little more about that far-fetched alternative theory. As I said, we shot it down. I mean, what would be the motivation? But then as I thought about it more, I can see a few good reasons for doing so. Still, I can't think of any hospitals that would take such a drastic step willingly. Regulations for justifying that tax break would have to get a lot more teeth. And think about the negative public relations hit hospitals would take, for foregoing their tax-exempt status. And think about the hit they would take to the pocketbook, even though they would be relieved of the charitable contribution requirement. Still, I'd be interested in hearing from anyone who has a good argument for that course of action.

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