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Not-for-Profit Hospital Systems: Time for a Clear Path Toward Integration?

by Carlos J. Corral on Categories: healthcare law

Not-for-Profit Hospital Systems: Time for a Clear Path Toward Integration?
Not-for-profit organizations and for-profit organizations are dissimilarly situated in many respects. In an era of healthcare integration where hospital systems are facing consolidation and partnering with other healthcare providers, not-for-profit hospital systems are facing significant obstacles toward integration. 

On a state level, many not-for-profit hospital systems are public taxing districts. In short they are creatures of Florida law. Their charters must be examined to determine whether a particular transaction would be permissible. In certain circumstances, seeking Attorney General Advisory Opinions are warranted.

On a federal level, not-for-profit hospital systems face similar challenges. With respect to antitrust law, acquisitions, or partnering opportunities, may raise competitive issues that may warrant Federal Trade Commission (FTC) guidance prior to consummation.

In the realm of not-for-profits, tax status considerations may also present significant obstacles toward integration. Section 501 (a) of the Internal Revenue Code (the Code) provides an exemption from federal income tax for organizations described in Section 501(c) (3) of the Code. Section 511(a) of the Code imposes a tax on the unrelated business income of organizations described in 501(c). Section 513(a) of the code defines the terms “unrelated trade or business” as any trade or business of which the conduct is not substantially related to the exercise or performance of the organization’s exempt purpose. However, Section 513(a)(2) of the Code provides that term “unrelated trade or business” excludes any trade or business, which is carried on, in the case of an organization described in Section 501(c)(3), by the organization, primarily for the convenience of its members, students, patients, officers, or employees, or in the case of a local association, from the definition of unrelated business income. Treasury Regulation Section 1.513-1(d)(2) clarifies that in order for the conduct of trade or business from which a particular amount of gross income is derived to be substantially related to purposes for which exemption is granted, such conduct or trade must contribute importantly to the accomplishment of exempt purposes.

Put another way, if a not-for-profit hospital system should choose to partake in a new activity, which could be argued to not be substantially related to the primary purpose of the tax-exempt status, then the hospital system may face the risk of losing its tax-exempt status. In essence, not-for-profit health systems may face uncertainties when considering partnering with another healthcare provider.

It is time for clearing the regulatory path toward greater integration and partnering between not-for profit health systems. New regulatory paradigms should give primary consideration to factors such as patient access to care and quality of patient care. New regulatory paradigms should give secondary consideration to the “relatedness” of a new line of business, which may lead to subjective interpretations regarding whether there is an “unrelated trade or business”. And while an exception to Section 513(a)(2) cites patient “convenience,” that term is far too subjective and should be replaced with clearer standards, such as patient access to care and quality of patient care. The degree of relatedness to the existing service should be treated as an issue secondary to these two factors. The complex nature of the healthcare industry in recent years has forced many healthcare systems to consider partnering or consolidating with other healthcare providers. It is imperative that the Code be updated in light of the recent changes in healthcare policy so that not-for-profit healthcare systems are not facing subjective obstacles to integration. 

Innovative lines of business are crucial to the rapidly changing healthcare field in order to ensure that our nation maintains the highest degree of patient access to care and quality of patient care possible. It just may be that by instructing more objective measures centered on access and quality of care, in the long run we all may be better off. 

Carlos J. Corral is a third-year associate at Zumpano, Patricios & Winker, P.A., where he concentrates his practice in the areas of healthcare, international, and real estate law. He earned his juris doctorate from Villanova University School of Law in 2012. Corral can be reached at or 305-444-5565

By Carlos J. Corral
Zumpano, Patricios & Winker, P.A.
312 Minorca Ave.
Coral Gables, FL 33134

South Florida Legal Guide 2015 Edition

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