Meet the Taxman

IT'S A SCENARIO that ought to bring a smile to any schlub who's ever grappled with the Internal Revenue Service and wondered why the feds don't fry bigger fish: During the past few months, tax agents have camped out at the Bloomington headquarters of HealthPartners, looking at the books of Minnesota's largest HMO. HealthPartners officials say the audit is part of a routine process where the IRS randomly selects nonprofit groups to scrutinize. HealthPartners spokeswoman Julie Dappen says the IRS has yet to give the HMO a thumbs up, but says she thinks it will happen: "We feel very good about how it went."

But like nearly any audit, there's a sticking point, and given HealthPartners' stature, it's not surprising that it's a large one--tax officials are zeroing in on $55 million in revenue bonds the HMO sold in 1992. The bonds were sold as tax-exempt investments by Group Health Inc., a non-profit HMO that later formed HealthPartners by merging with MedCenters Health Plan. Group Health used the money to refinance mortgages on some of its clinics. At issue, according to people familiar with IRS inquiries, is whether HealthPartners--which cleared $3.2 million on revenues of $591.4 million in 1996--is still a nonprofit group that can sell tax-free bonds.

That's a potentially important distinction. If the IRS concludes that the bonds should be taxable, HealthPartners could face two unpleasant choices: pay the feds a hefty fee or tell its bondholders that the debt they bought five years ago has become taxable. "If that happens,"says a local securities lawyer, "HealthPartners' name would be mud in the bond market."

The latter prospect has also pricked up the ears of the Minneapolis Community Development Agency (MCDA), which issued the majority of the bonds on behalf of Group Health. While the agency wouldn't be on the financial hook under either scenario (nor, for that matter, would the St. Paul Housing and Redevelopment Authority, which issued the rest of the bonds), MCDA officials worry about tarnishing their image in the investment community, which they rely upon to buy up millions in agency-issued debt each year.

"I think someone there [at HealthPartners] got careless,"says MCDA Executive Director Rebecca Yanisch. "When they did the merger and changed the structure they should have made sure they didn't jeopardize the bonds." If the IRS does find fault with the bonds, Yanisch says, the MCDA prefers that HealthPartners pay up--even though the tab could run "in the millions"--rather than stick bondholders with a tax bill. "I think it's just not the MCDA or the city of Minneapolis that has a concern, it's Group Health whose reputation is on the line again as well," she says.

Local IRS officials won't comment on the audit. Dappen, meanwhile, allows that "there were some remaining questions about the bonds," but says HealthPartners officials aren't worried. "We have every reason to believe it will be resolved quickly and successfully," she said.

Regardless of how the audit plays out, the issue highlights a larger concern--whether the state's huge nonprofit health-care groups, which work in an industry characterized by mergers, "strategic alliances," and for-profit subsidiaries, should still be afforded the tax advantages of charitable organizations. Bond experts say that's a subject the IRS has paid increased attention to in recent years; local observers say the scrutiny is well-deserved.

"I have long thought that HMOs' nonprofit status in Minnesota is a fraud," says Kip Sullivan, research director of Minnesota Citizens Organized Acting Together, an advocacy group critical of the current health-care system. "I think that there can only be a real nonprofit when the group is operating in an arena where for-profits aren't operating--when its revenues aren't dependent on selling goods and services." On the other hand, Sullivan says, he'd rather keep the current system in place than place health care in the hands of the market altogether.

Nazie Eftekhari, CEO of the Araz Group, a privately held managed-care company based in Bloomington, also finds fault with nonprofit status for HMOs. She argues that they'd likely run better if they simply came clean and ran as for-profit businesses. "I don't believe that [nonprofit HMOs] serve a charitable mission," she said. "I believe that they will be more accountable and there would be less bombastic decision-making if they were accountable to shareholders."

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