Recent efforts by BlackRock and other institutional investors (e.g., ISS) are encouraging the corporations in which they invest to more affirmatively pursue a "social purpose" and respond more directly to societal challenges. This effort may have unintended tax exemption consequences for large tax exempt health care systems.
As many general counsel are aware, one of the concerns expressed by Congress in the recent Tax Cuts and Jobs Act legislative process is that the nonprofit health care sector (including the health care sector) is inexorably drifting towards the purely commercial sector (and thus should be taxed accordingly). These concerns—and earlier concerns expressed by Congress—have included the consistency of exempt status with several factors: e.g., (i) the emergence of the "nation-sized" nonprofits—organizations that are national (or even global) in scope and scale; (ii) the blurring of the line between tax exempt and commercial health care; and (iii) highly complex, perceived lucrative executive compensation arrangements. The challenge to the tax exempt community is to commit greater effort toward communicating (and documenting)—for both internal and external audiences—how the delivery of health care services and, more broadly, the promotion of the health for the benefit of the community through other means by a tax exempt, non-profit model is distinguishable from the delivery of such services through a proprietary model and, accordingly, worthy of the tax "subsidy" given to such systems.
The BlackRock and ISS messages suggest the benefit of accelerating such efforts. BlackRock clearly intends to motivate companies to focus both on making a positive contribution to society, as well as on financial performance. To the extent for-profit health companies increase their emphasis on pursuing a social purpose, it is conceivable that some regulators and legislators may find it more difficult to make the distinction between taxable and tax exempt health care models. To be sure, the "sky is not falling" from a tax exempt status perspective. The necessary distinction can be highlighted through tangible steps: e.g., emphasizing the achievement of charitable purposes through the strategic plan; including language in board resolutions about how specific board actions reflect the intention that those actions serve charitable purposes; highlighting research and education that broadly benefits the public; confirming that the compliance officer monitors compliance with the various Section 501(r) requirements for charitable hospitals; and negotiating provisions in key service agreements, joint venture agreements and major transaction documents that preserve the tax exempt organization's control over the accomplishment of exempt purposes and prevent unreasonable benefits to private parties.
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