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Moose Lake, Minnesota

Mercy to explore 501c3 option

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As part of its current strategic plan, Mercy Hospital will be exploring the option of converting to a 501c3 managed organization. Questions about what that might mean and the process being followed are answered below.

What is a 501c3?

A 501c3 is an IRS recognized structure for nonprofits; it is the most common structure used for community hospitals.

What is Mercy’s current structure?

Currently Mercy is a hospital district which is considered a state governmental organization.  This means within the hospital district, representatives are elected to represent their township or city.

Why is Mercy exploring the option of converting to a 501c3 managed organization?


There are some distinct business advantages to a 501c3 structure that make it a stronger business model for a community hospital. Primarily it makes it possible to partner with other nongovernmental providers (independent clinics, hospitals and/or larger systems) on some services in ways that cannot be accomplished within a Hospital District due to its governmental structure. These partnerships would put Mercy in a stronger financial position.

Additionally, a 501c3 is eligible for far more grants that, again, do not apply to Hospital Districts.  Another advantage is the ability of the 501c3 Board to recruit board members based upon the needs of the organization.  In other words, if an attorney would be helpful for the Board, they can try to recruit an attorney, if a physician is helpful, they can recruit a physician, etc.  The 501c3 remains a local entity so it keeps control of the hospital local.


On the flip side, a 501c3 structure puts at risk the ability to garnish a person’s state income tax return for an unpaid bill. Also, some may feel like there is less control over their local hospital, despite the fact that the 501c3 would be locally controlled. Last, there is a risk of less support of the local hospital through donations and use of services.

Is this a way to allow a bigger health system (like Essentia) to take over? 

No. This is actually a mechanism to assure that governance is accomplished through local control. In fact, it has already been suggested that a part of any potential agreement with the 501c3 could prohibit transferring control of the hospital to any larger entity without District Board approval.

Who is studying this option and what is the process?

Mercy’s District Board and the 501c3 Board (which is registered with the state as Moose Lake Health) will be studying this option.

This combined group of District Board and Moose Lake Health 501c3 Board will meet regularly, 1-2 times/month, and discuss what a potential agreement might look like. They will discuss the intricacies of what Moose Lake Health would take on as duties through a lease arrangement and what the Hospital District Board’s role will be. In other words, they will determine what functions would make sense to place under a 501c3 and what should remain under the District Board.

Ordinarily hospitals that have gone through this transition have the 501c3 govern the operations of the hospital while the District Board often retains the physical assets (all equipment and buildings) of the hospital.

What would structure look like? 

This is part of what will be discussed over the next 12 months, but essentially Moose Lake Health 501c3 would sign a lease with the District Board to run the operations of the hospital.  This means that Mercy Hospital would continue operating in the same way it does today but oversight for operations would be transferred to Moose Lake Health.  Typically in these arrangements, the District Board stays in place and retains the physical assets of the hospital.  In addition, usually one or two Board positions on the 501c3 Board are held by District Board members to directly represent District Board interests.

How would it work? 

Again, this is part of what will be discussed, but generally the 501c3 Board has regular monthly meetings to discuss issues around operating the hospital, similar to what the District Board currently does.  The District Board would likely meet 4-12 times/year to receive updates on the operations to assure the terms of the lease are being followed.

Have other hospitals converted to this structure? 

Yes. Quite a large number around the state have converted–14 hospitals in the last ten years.  Some recent conversions include Cuyuna Medical Center in Crosby, Lake Region Healthcare in Fergus Falls and District One Hospital in Faribault.

All have established many more relationships with partners since changing.  This includes relationships with physician groups, specialty providers, other community hospitals as well as partnerships with larger systems and organizations that serve the community.

What is the timeline? 

Joint meetings between the District Board and 501c3 Board are expected to begin in 2019. Exploratory work is targeted for completion in 2020. As elected officials, Mercy’s District Board will then discuss and eventually decide whether or not this change is beneficial.

Will there be a referendum on the issue? 

No.  This is not required by law and, in fact, there is no voting mechanism for individuals.  The elected representatives of the District Board will each have one vote; there has already been discussion about holding public sessions to gather information and to answer questions prior to any vote.

What happens to the tax levy? 

This will be part of what the group discusses, but statutorily since the District Board will remain in place, the ability to levy will always be part of that structure. As is done now, the levy will have to be voted on each and every year by the District Board and cannot be put in place for more than 12 months at a time.

Functionally there are really two options: 1) the District Board could vote not to tax each year when the question is called or 2) the District Board could limit use of any future tax levy for capital acquisition only or more specifically, to acquire assets that will belong to the District.

It is noteworthy that within the new structure, Mercy’s District Board could no longer levy taxes for any shortfalls in operations. Levy dollars could only be used for purchasing assets such as equipment but could not be used for paying regular expenses such as payroll, utilities or supplies.

Does this affect the Mercy Foundation?

No. The Mercy Foundation has always been and will remain a completely separate 501c3 entity.