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Congress hears complaints about hospitals' outreach lab testing.

Congress hears complaints about hospitals' outreach lab testing

The tax exemptions of not-for-profit hospitals are being challenged by groups that maintain the breaks give these facilities unfair advantages in unrelated businesses such as outreach laboratory testing.

In late June, the House Ways and Means Oversight Subcommittee heard protests from the American Clinical Laboratory Association on that issue. Several other associations voiced similar complaints about such hospital "businesses' as the distribution of home health care equipment and hearing aids.

An entire morning of the hearings was devoted to health care issues. But the complaints against hospitals must be taken in context. Over the course of two weeks, the panel heard from about 75 groups addressing all sides of unrelated business income tax laws. There are currently 850,000 tax-exempt organizations in the U.S., generating an estimated $300 billion a year in revenues. Any rule changes affecting hospitals would also hit such diverse groups as the American Association of Museums and the U.S. Humane Society.

Under current laws, a special business income tax is imposed on a nonprofit organization when each of three conditions exist:

An exempt institution is engaged in a "trade or business';

Such trade or business is being regularly carried on;

The trade or business is not substantially related to the tax-exempt purpose of the organization.

For hospitals and other organizations, a trade or business is defined as any activity carried on to produce income, and which competes with a taxable business-- such as an independent clinical laboratory. The phrase "not substantially related' means that there is no significant connection between that activity and the reasons for which the organization receives a tax break.

Traditionally, the Government has given not-for-profit hospitals tax-free status because they provide certain services to society that might not otherwise exist. That primarily includes indigent care and medical education and research. But according to critics, hospitals responding to recent cost containment pressures have gone far afield to bolster their revenues. The critics reason that that portion of hospital revenues should be taxed.

At the hearing, ACLA President Harry Groome noted that many hospital laboratories perform tests on persons who are neither inpatients nor outpatients. Through such outreach programs, nonprofit hospitals compete for test business generated by private-practive physicians--the traditional market for tax-paying independent laboratories.

"Both large and small laboratories have reported a loss of business from the competition exerted by tax-exempt hospitals,' Groome said. "Many independent laboratories are small. Competition on the scale presently offered by tax-exempt hospitals may threaten the very existence of some of these businessses.

"When hospitals engage in outreach testing without tax liability, they not only threaten the independent laboratory industry but also deprive state and Federal governments of substantial tax revenues, revenues to which the governments are entitled and which they formerly received from tax-paying independent laboratories.'

Groome cited an Internal Revenue Service finding that "the providing of diagnostic laboratory testing services to nonpatients constitutes unrelated trade or business for a tax-exempt hospital.' But despite the ruling, many hospitals do not file the necessary forms detailing taxable income, ACLA charges.

As a remedy, the association suggested three changes to the Congressional subcommittee. First, draft more precise definitions for "substantially related' business activities, and consider a minimum tax on nonprofits in lieu of having the facilities compute their own taxes.

Second, require hospitals to report all types of "commercial' activities, not just those the hospitals themselves have decided are unrelated. It was suggested that an institution's failure to report activities should be punished with civil money penalties for misrepresentation.

Third, ACLA proposed that IRS enforcement be strengthened so that tax-exempt organizations that either do not report or "mischaracterize' their unrelated business income could be readily identified. Thus IRS would be able to take appropriate action to capture more taxes and correct instances of unfair competition.

Responding at the hearing, a spokesman for the American Hospital Association made it clear the group is sticking to traditional arguments in favor of tax exemptions. AHA chairman of the board John D. Leech stated: "It is our intention not to rebut anecdotal reports of unfair activities but to highlight the unique nature of the hospital industry with respect to these tax provisions.'

Leech commented that such forces as DRGs make it imperative that hospitals maintain the flexibility to move into new areas of health care service. As he put it, "The emphasis on cost containment and competition in health care has increased the importance of efficient management, competitive business ideas, and adequate capital funding. . . . Diversification with the goal of health promotion provides a coordinated approach to health care within a provider organization and among providers.

"The public's interests are served when hospitals go outside their role of acute-care providers to operate or cooperate in diversified activities within the health care arena. An integrated and coordinated approach to the delivery of all types of health care services benefits the communities served by tax-exempt hospitals.'

Regarding the volume of unrelated business activities, it was noted that the IRS generally begins to raise eyebrows if an organization collects 20 per cent or more of its revenues from such services. Leech, however, said voluntary hospitals rarely, if ever, approach that threshold at which overall tax-free status would be challenged.

The AHA spokesman did not address ACLA's complaints specifically, although he generally agreed that outreach testing is a taxable business activity. He seemed to suggest that problems that do exist are more a matter of enforcing existing bookkeeping rules rather than creating new guidelines.

The entire matter of bookkeeping is, however, another sore point among hospital critics. A spokesman for a group of home care equipment suppliers, for example, noted that not-for-profits are able to transfer such assets as computerized billing services and thereby subsidize unrelated businesses. The issue of asset transfer could emerge as a major sticking point as more hospitals create for-profit subsidiaries for such businesses.

The Ways and Means panel also heard testimony from the Catholic Health Association, Shriners Hospitals for Crippled Children, and the American Healthcare Institute. They recounted the historic justification for their tax exemptions and noted the various charitable functions their membership provides.

The nonprofit hospital groups represented at the hearings form a significant lobbying coalition in Washington. Still, many veteran observers believe that some groups--particularly AHA--have lost some credibility in recent months. These analysts believe AHA has tarnished its reputation by asking for budget-busting increases in reimbursement rates.

Members of Congress have yet to introduce or even draft proposals regarding unrelated business income tax. The Treasury Department is still working on its recommendations, and the IRS is conducting a broader analysis of tax-exempt organizations. As these processes unfold, the credibility of hospitals and the complaint of independent labs will be on trial.

Red Cross activities also criticized

The House Ways and Means panel also heard complaints that the American Red Cross Association is hurting tax-paying competitors in the plasmapheresis and fractionation industry.

Representatives from Alpha Therapeutic Corp. and HemaCare Corp. said the Red Cross has unfair advantages in that its raw material, advertising, and most labor is free. The companies charged that Red Cross price-cutting policies are harming the industry. They asked for a tax to be levied on that portion of the association's revenue.

Responding, Red Cross spokesman Lewellys F. Barker said that tinkering with the current tax laws could hurt his organization's many worthwhile programs. "If the line between the private for-profit and not-for-profit sectors requires some clarification from time to time, the method lies in enforcement of existing laws,' Barker stated. "Increased regulation of the not-for-profit sector will have a chilling effect on the creative forces of philanthropy and volunteerism that energize it.'
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Title Annotation:tax exemptions of not-for-profit hospitals
Publication:Medical Laboratory Observer
Date:Aug 1, 1987
Previous Article:Revenue and lab enhancement opportunities.
Next Article:Lab staffing and career trends: time for cautious optimism?

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