Naked City

In a case being closely watched around the country, St. David's Health Care System was handed a major setback last week by the U.S. 5th Circuit Court of Appeals, which threw out a lower court ruling that St. David's did not forfeit its tax-exempt status as a nonprofit when it formed a joint venture with for-profit HCA Healthcare (actually, with Columbia Healthcare, which was then acquired by HCA) in 1996. The two entities together form the St. David's Healthcare Partnership, which operates the chain's namesake hospital as well as South Austin Hospital, North Austin Medical Center, and Round Rock Medical Center.

U.S. District Judge James Nowlin had granted St. David's summary judgment and ordered the IRS to pay its nearly $1 million in attorneys' fees, but the three-judge panel of the 5th Circuit was far more sympathetic to the government's argument -- holding that while the Partnership clearly provides benefits to the Austin community, it is likely not "exclusively" devoted to charitable purposes -- as opposed to making money for Nashville-based HCA, the largest hospital chain in America -- and thus may not qualify for tax-exempt status.

In its 20-page opinion, the appellate panel raises questions about the degree of control that St. David's actually has over the Partnership and whether it would even be possible for St. David's to dissolve the joint venture and go back to its stand-alone status. The case was sent back to the lower courts for a full trial, where -- according to St. David's System CEO Neal Kocurek -- the hospital chain is confident it can once again prevail.

Joint ventures like the Partnership have become common -- and controversial -- and health care advocates and tax analysts around the nation have been following the St. David's case, the first such dispute to go before the federal bench. Likewise, local policymakers are watching -- and rooting heavily for St. David's, which (like its competitor Seton Healthcare Network) provides millions of dollars in charity care that helps keep the underfunded public health system from collapsing. The city of Austin filed a brief supporting St. David's before the 5th Circuit.