Senators Elizabeth Warren (D-MA) and Chuck Grassley (R-IA) urged the IRS to take a closer look at hospitals claiming a federal tax exemption — and issue a revenue ruling requiring them to provide charity care “to the extent of their financial ability.”
In a November 19 letter to IRS Commissioner Danny Werfel, the lawmakers reiterated their concerns that some nonprofit hospitals are failing to meet a prerequisite for their tax-exempt status — that they “primarily benefit the community.”
The letter is the latest in a years-long effort by the lawmakers to draw attention to nonprofit hospitals’ practices of claiming they provide a “community benefit” while allegedly restricting care and increasing costs. Warren and Grassley sent letters raising the same concerns in August 2023 to Werfel as well as Tax Exempt and Government Entities Division head Edward Killen and former Treasury Inspector General for Tax Administration Russell George.
The lawmakers’ prior letter requested information on how hospitals report community benefit to the IRS and when they may face an audit or have their tax-exempt status revoked. In the latest communication, however, Warren and Grassley offer concrete suggestions to Werfel.
Leading the list of suggestions is a request that the IRS increase enforcement efforts — including conducting audits, re-evaluating hospitals’ status, and imposing penalties — to ensure community benefit requirements are met.
The lawmakers also call on the IRS to set “clear standards” for nonprofit hospital financial assistance policies. They urge the agency to require that nonprofit hospitals screen patients for financial need and to prohibit hospitals from denying care based on outstanding medical bills.
A return to the ‘charity care’ standard?
But most noteworthy, perhaps, is the lawmakers’ demand that the IRS reinstate a decades-old requirement — rescinded in 1969 — that nonprofit hospitals provide charitable care “to the extent of their financial ability.”
Currently, charitable hospitals are required to meet the “community benefit” standard under Code Sec. 501(c)(3) and Rev Rul 69-545.
Rev Rul 69-545 allows hospitals to demonstrate their community benefit through a variety of criteria. Those include:
- maintaining a board of directors drawn from the community
- maintaining an open medical staff policy
- providing hospital care for all patients who are able to pay (including Medicaid and Medicare participants)
- using surplus funds to improve facilities, equipment, and patient care
- using surplus funds for medical training, education, and research.
Grant Thornton attorney Mary Torretta explained that there’s “a lot of flexibility” in the current standard. The IRS, too, has indicated that “no one factor is determinative” as to whether a hospital is meeting the community benefit standard — rather the agency “weighs all the relevant facts and circumstances.”
Rev Rul 69-545 rescinded the more stringent 1956 “charitable care” standard. That standard, set forth in Rev Rul 56-185, provided that a hospital claiming Code Sec. 501(c)(3) status must “be operated to the extent of its financial ability for those not able to pay for the services rendered.”
Warren and Grassley point to the enactment of the Medicare and Medicaid as the reason for dialing back the standard in 1969 — along with the belief that “charity care would no longer be necessary” with these new programs. However, given what they call the “current medical debt crisis,” the lawmakers are urging a return to the 1956 standard.
Counterpoint.
The American Hospital Association’s (AHA) Julie Rapoport Schenker posited in September that charity care costs alone don’t fully account for a hospital’s positive impacts on a community.
For example, she said, a focus on charity care fails for account for investments in health professional education, research and technology, and programs that don’t drive revenue such as burn centers.
Schenker also contended that any look at a hospital’s charitable care figure should also account for care subsidies the hospital provides to patients who are covered by government health programs. A hospital’s so-called “Medicaid shortfall” number and its charity care number “tend to be inversely related,” she said.
For more on hospitals as charitable organizations, see Checkpoint’s Federal Tax Coordinator ¶ D-4150 et seq.
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