MERGERS: IRS Rules May Dampen For-Profit/Nonprofit Deals
The Internal Revenue Service yesterday issued "long-awaited guidelines" that will "curb the explosion of joint ventures between for-profit and not-for-profit hospitals" the Wall Street Journal reports. The new rules, which define "for the first time" what types of hospital joint ventures qualify for tax exempt status, may not only limit future deals, but will likely call into question some two dozen existing hospital partnerships.
The new rules specify that in joint ventures between not-for-profit and for-profit hospitals, the not-for-profit hospital "must be the one to exert control." In many existing arrangements, "the for-profit partner has management and ownership control, an apparent violation of the IRS guidelines." In issuing the new guidelines, the IRS also sent a clear message that such mergers must "give charitable purpose priority over maximizing profits."
Winners And Losers
According to the Journal, the IRS plans to implement the new guidelines retroactively. Columbia/HCA Healthcare Corp. hospitals could be "among the hardest hit" by the new merger rules. Columbia partnered with numerous not-for-profit hospitals as part of its growth strategy, "including a major Catholic system in Ohio." Although the for-profit chain has ceased to pursue such mergers, it nonetheless has "seven or eight such partnerships involving about 20 hospitals that must be reviewed to see whether they meet the IRS' new criteria." Milton Johnson, Columbia's vice president for taxes, said he "doesn't believe the ruling will put an end to the deals Columbia has entertained with not-for- profits." He said the IRS' ruling "doesn't mean we can't do them -- it means that we have to do them within certain guidelines," such as ceding management control to the not-for-profit partner in any arrangement. Johnson said "it is 'too early to say' whether the impact of the ruling will be positive or negative for Columbia." Dan Bourque, senior vice president of Irving-based VHA Inc., an alliance of not-for-profit hospitals nationwide, was much more emphatic. He called the new IRS guidelines "a victory for community-owned hospitals" (Burns/Lagnado, 3/5).