Non-profit hospitals are coming under increased scrutiny for paying dramatically high salaries to their CEOs and involving private physicians in their activities, which leaves judges no option but to remove their tax-exemptions. This was the case of the non-profit Morristown Medical Center, property of the Atlantic Health System, as it had its tax-exempt status eliminated this summer because of its several profitable operations.

Vito Bianco, the judge in the court case in New Jersey indicated that the medical center was related to for-profit subsidiaries and runs numerous for-profit physician practices, among other businesses. “By entangling and co-mingling its activities with for-profit entities, the Hospital allowed its property to be used for forbidden for-profit activities”, the judge noted.

The Morristown Medical Center Health Pavilion located next to the Rockaway Town Square mall in Rockaway, NJ offers a range of health care and diagnostic services in one convenient location. Credit: Atlantic Health

He also remarked the fact that the Morristown Medical Center’s CEO earned $5 million in 2005, an unreasonable amount for a non-profit organization. According to experts, the New Jersey judges’ decision could lead to serious consequences for the rest of non-profit hospitals across the U.S. Bianco pointed out that modern non-profit hospitals that operate like Morristown Medical Center are “essentially legal fictions”, referring to tax exemption.

Healthcare industry analysts emphasize that such hospitals that aim to help the poor are having trouble in properly financing pension plans due to the ongoing low discount rates. These have a huge negative impact on the medical centers’ operations because their future becomes less viable in terms of financial health. As a result, they are gradually allowing for-profit activities that are supposed to be forbidden, which is why they are at a high risk of losing their tax exemptions.

Another consequence of the current situation is that hedge funds are seeing a great opportunity to purchase non-profit hospitals that would otherwise end up in bankruptcy. This Monday, December 14, came the announcement that Daughters of Charity Health System (DCHS) closed a deal with BlueMountain Capital Management. The New York-based firm will start managing the Catholic hospital chain through its subsidiary Integrity Healthcare.

The financially stressed chain has been serving the poor for more than 150 years and BlueMountain has saved it from bankruptcy with a $260 million deal, marking the greatest transaction linked to a non-profit organization in California’s history. As the California Attorney General Kamala Harris approved the deal on Dec. 3, 2015, it was made known that BlueMountain would have to comply several conditions, including that Daughters of Charity must remain as non-profit for up to 15 years.

This means that after that time-period low-income patients will have to look for other options to seek accessible medical treatment, since the hedge fund will be able to do whatever it wants with the hospital chain.

Source: Value Walk