Who Owns a Not-for-Profit Hospital? What Does a Not-For-Profit Hospital Owe?

The possible sale of North Kansas City Hospital has been in the local news for some time now.  The more than 50 year old not-for-profit hospital was first rumored to be heading toward sale this past summer when the North Kansas City Council hired a New York investment bank to advise on the possible sale of the city-owned hospital. 

The press resports NKCH was built with property tax revenue and city bonds though it has neither received funding from nor provided revenue to city coffers in decades.  At present, the city's involvement with NKCH appears to be limited to appointing the board of trustees. Of course, that is a very powerful appointment power to retain — as witnessed by the current dispute over the City's attempts to add new members to the board of trustees while litigation over the authority to sell the facility is pending. A Clay County Court judge has approved the ongoing appointments while simultaneously entering an injunction to prevent the actual sale of the facility while the authority to sell litigation is pending.

This litigation is a brilliant example of all the issues exposed in hospital sales — and particularly raised in the sale of public hospitals and in the potential sale of not-for-profit facilities to for-profit entities.

Who owns this not-for-profit hospital?  Who owns any not-for-profit hospital? Those who conceived of it, built it, and nurtured it in its early years?  Those who took on its operation when the city cut the financial chord?  Those who operate it now, consistent with its mission statement on public service? The residents of North Kansas City who granted tax exempt status to shelter the founding and continued operation of the facility? What does this not-for-profit hospital owe, if anything, the community of North Kansas City?

The North Kansas City Attorney claims that the hospital is owned by the City –hence the board of trustees appointment power.  Seen from this perspective, current members of the NKCH Board are suing themselves: one part of the City attempting to sue another "like a dog chasing its own tail," to quote their legal counsel.

The analogy is apt, though perhaps not in the way the NKC Attorney meant it.  NKC is conflicted over its future plans for the hospital and over its own obligations to the citizenry who raised the hospital up. Maybe the situation is less like a dog chasing its own tail than two mother dogs squabbling over a puppy each believes is hers.

This concern with trying to track the ownership – but not necessarily legal ownership — of not-for-profit health care facilities is manifest all over our country as publicly funded hospitals decline in number. Who "owns" the return on that initial investment?  Has it been recompensed many times over by decades of service?

Maybe some of the answer to this conundrum in North Kansas City will depend on how good and generous a neighbor NKCH has been, how closely it has honored its mission statement, how carefully it can document what it has already given back to the community in exchange for a good start in life and ongoing tax exempt status.

For more than a decade the federal government have been making inquiry into these matters as they concern federal tax exempt status.   Most recently, proposed regulations under the Affordable Care Act propose to beef up the charitable care reporting requirements of not-for-profit hospitals. You may see changes the IRS has already made to 501(c)(3) entity reporting requirements here:http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/New-Requirements-for-501(c)(3)-Hospitals-Under-the-Affordable-Care-Act   And you may see further proposed regulations relevant to the assessment of community needs here: http://www.healthreformgps.org/resources/irs-issues-nprm-for-charitable-hospital-organizations/

On a parallel track, some states have become quite agressive in considering what it takes to justify the public sacrifice of tax dollars for a non-profit health care facility and what, if anything, is owed to the public when and if the entity changes hands. The Provena Hospital loss of tax exempt status in the State of Illinois, which you can read about here:http://www.fiercehealthcare.com/story/il-hospital-loses-high-profile-tax-case/2006-10-03, illustrates how searching the inquiry into public return on tax exempt status can be.

We are in a state of flux in defining what we expect from not-for-profit hospitals.  And those same hospitals are struggling to find a place in increasingly concentrated hospital networks, concentration that may be increased by the implementation of the ACA.

Maybe the dispute over the ownership of NKCH is so complex because both senses of "ownership" are in play — legal ownership and principled ownership of and responsibility for the mission statement of a not-for-profit hospital.


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