The state of Illinois, deep in the hole financially, is targeting nonprofit hospitals to help balance its budget.
This month the state's revenue department identified three hospitals that it says must pay property tax because they do not fulfill their charitable mission. Fifteen others are also being investigated. The policy represents a broadening of single case last year in which a hospital in Urbana was successfully forced to begin paying taxes.
Illinois' actions could portend major changes in the hospital industry and should be watched carefully throughout the industry. Here are a few thoughts in no particular order:
When a state can arbitrarily decide which hospitals are exempt from taxes and which are not, it's exercising power that can be easily abused. Illinois, already one of the two or three most corrupt states in the country, has a tawdry history of granting Certificates of Need to politically well-connected health-care entities. That resulted in a pay-to-play scandal that helped bring down the governor. Unless there's a transparent process to decide which hospitals are more like businesses and which are more like charities, look for political shenanigans to govern this process as well. And Illinois' streak of former governors landing in prison could continue.
Hospitals have rarely been able to articulate why, when a facility mostly serves a well-insured population and pays its executives handsomely, it should be able to keep its tax-exempt status. During the Senate Finance Committee investigation of nonprofit hospitals by Charles Grassley's staff, I remember being struck by the defensiveness of the hospital lobby. For a recent example of this M.O., check out this blog entry by the head of the Illinois hospital association, where she inappropriately invokes 9-11 when discussing Illinois' actions. Let's instead have a rational discussion about when a hospital should be for-profit and when it should remain nonprofit.
If Illinois is successful, what's next? The federal government could begin asking hospitals to pay corporate income taxes. It's not too many steps more for hospitals to begin converting to full-blown for-profit status. This has already been happening through other means, with public companies and investors buying struggling nonprofit hospitals in Miami, Scranton and outside Boston. Hospitals might decide to not wait until states go after them and instead perform their own conversions.
WINDFALL FOR WHOM?
Let's say that we are about to see a rash of for-profit conversions. Who will benefit? When the same thing happened with nonprofit Blue Cross and Blue Shield plans, a lot of private wealth was created. Entrepreneurs like Leonard Schaeffer, who turned California's Blue Cross plan into Wellpoint (now with $60 billion in revenue), did well financially. Will there be similiar patterns in the hospital industry, with early converters becoming consolidators? Could HCA take over any entire nonprofit system like Catholic Healthcare West or Adventist--and not just do the occasional one-off deal? It could be fascinating to watch.