Mercy Health systems operates as a 'church' for tax purposes

2011-10-23T00:15:00Z 2012-12-23T16:12:34Z Mercy Health systems operates as a 'church' for tax purposesBY JIM DOYLE • jdoyle@post-dispatch.com > 314-340-8372 stltoday.com

Mercy Health, with revenue of nearly $4 billion, could qualify as one of the largest corporations in the St. Louis region.

But its owners, with the blessing of the Vatican, prefer to call it a "church," which helps tremendously come tax time.

The system — whose headquarters is located in Chesterfield — operates Mercy Hospital St. Louis in Creve Coeur, along with 27 other hospitals in Oklahoma, Arkansas, Missouri and Kansas. Like other nonprofits, it pays few corporate, income, property, capital gains or sales taxes.

Unlike other nonprofits, Mercy claims that — because it's technically a "corporation within the Catholic Church" — it is exempt from federal requirements that all charities must disclose certain financial data about their operations. For the first time this year, Mercy's parent company filed a Form 990 with the Internal Revenue Service detailing such information but with the caveat from its lawyers that it filed "voluntarily."

Mercy Health oversees a network of more than 55 tax-exempt organizations, including fundraising foundations, physician groups and hospitals in Missouri and three other states.

"We bring to life the healing ministry of Jesus through our compassionate care and exceptional service," reads Mercy's mission statement.

Executives and staff fly to and from some business meetings in Mercy's midsize corporate jet, a Rockwell Sabreliner. Ten of Mercy's key employees received more than $1 million each in executive compensation in the past fiscal year. Six family members of Mercy's highest paid employees and former officers have been employed by Mercy in recent years.

Two years ago, Mercy board members held a retreat in Dublin, in part to commemorate where the health system's sponsor — the Sisters of Mercy religious order — was founded in about 1830. The cost: $279,000. Mercy's leadership also took a retreat in 2008 to the resort and spa town of Scottsdale, Ariz., in the Sonoran Desert, at a cost of $304,000.

Mercy has investments totaling about $1.5 billion, which earned nearly $19 million in the past fiscal year. More than $200 million of Mercy's assets are invested in hedge funds and private equity ventures. And the health system's executive retirement plan has nearly $70 million in assets.

'SHOULD WE PAY TAXES?'

Several of these disclosures were made in a recent Mercy federal tax information filing, the first of its kind by the health system's parent company. Some of Mercy's nonprofit affiliates have previously filed IRS Form 990.

"The Sisters of Mercy Health System is classified as a church and is therefore not required to file a Form 990," the organization told the Internal Revenue Service in its May tax filing. The church "is voluntarily filing a Form 990 in a good faith effort of full disclosure and transparency of operations."

The system's name was changed to Mercy Health on Sept. 1. About 15 of Mercy's affiliates are taxable, for-profit corporations or partnerships.

Like other nonprofits, Mercy pays no federal taxes on its corporate earnings and capital gains, nor does it pay state or local taxes on most of its property holdings. Except in Oklahoma, it doesn't pay sales tax on the medical supplies it purchases. Through its issuance of tax-exempt bonds, Mercy has access to low-cost capital to build and modernize its hospitals. In 2008, Mercy sold about $411 million in tax-exempt bonds in part to build new patient towers at Mercy Hospital St. Louis and a new data center in Washington, Mo.

"The issue is, should we pay taxes?" said Philip Wheeler, Mercy's general counsel and a senior vice president. "If we're required to pay taxes, what happens to all the charity care we provide?"

Mercy Hospital St. Louis and Mercy Hospital Washington provided a total of about $27.4 million in charity care, including free care and financial aid, in the 2010 fiscal year. It also says it provided $9 million that year in additional community benefits including medical research, education and clinics.

With 28,000 employees and land, buildings and equipment valued at about $2 billion, Mercy Health is the nation's eighth largest Catholic health system. Systemwide, it claims to have provided $95.7 million in charity care (about 2.4 percent of its total operating revenue) and $54.2 million in community benefits.

Mercy officials have declined to specify what percentage of its charity care is provided for free, as opposed to at discounted rates. Some hospitals calculate such discounts using the highest possible price an uninsured patient could be charged, which tends to inflate the estimate of charity care.

BONUSES AND BENEFITS

In the late 1800s, Sisters of Mercy health ministries were established as small hospitals and infirmaries in Oklahoma, Kansas, Arkansas and Missouri. But the number of nuns in the religious order has declined in recent years. Since 2008, the health system has been sponsored by the Mercy Health Ministry, a "public juridic person" created by canon law and approved by the Vatican. Only four of the Mercy Health system's 15 current board members are religious Sisters of Mercy. None of the board members of MHM Support Services — a key affiliate of Mercy Health that oversees many of its corporate expenses — are members of the Sisters of Mercy, according to its latest tax filing.

According to its tax filings, Mercy's executive compensation packages include a bonus system that is contingent on the company attaining certain financial targets.

In the 2010 fiscal year, Mercy president Lynn Britton received about $1.6 million in compensation — including salary, bonus and benefits — from Mercy's network of subsidiaries. Mercy's executive vice president and chief operating officer, Michael McCurry, received about $1.5 million. Mercy treasurer James Jaacks received about $1.1 million.

According to the parent's tax filing, Mercy's executives are provided additional perquisites, including first class and charter travel on Mercy's aircraft and the opportunity at times for their spouses to accompany them to business meetings and other events. Mercy pays for the country club and social club dues of select executives "with the intention that they be used to further the mission of the organization through activities related to the recruitment of physicians, as well as donor and local business leader relations."

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