Recently, an official from the Government Accountability Office (GAO), Director Jessica Lucas-Judy, testified about IRS oversight of private tax-exempt hospitals before the House of Representatives Ways and Means Committee. There are over 2,500 hospitals that are classified as private tax-exempt medical facilities and they have a combined tax exemption value of over $28 billion.
As with other § 501(c)(3) nonprofit organizations, in order to qualify for tax exempt status, hospitals must be organized and operated exclusively for a charitable purpose. However, hospitals must also maintain a written financial assistance policy, conduct a community health needs assessment and set limits on charges, billings, and collections in order to qualify. These heightened requirements for hospitals were added in 2010 through the Patient Protection and Affordable Care Act, yet a far older requirement mandating hospitals to provide community benefits was the focus of Director Lucas-Judy’s testimony. In 1956 a tax-exempt hospital was required to provide charity care only “to the extent of its financial ability,” this meant that the hospital had to provide healthcare services at or below their cost for indigent patients. This limit to the requirement lasted for only 13 years.
At the time of the aforementioned limit, another revenue ruling, Rev. Rul. 69-545, introduced the possibility of benefiting the community as a substitute for the charity care requirement. Instead of defining an articulable standard for what constitutes benefiting the community, the IRS gave 6 possible measures of meeting the requirement, those measures include such things as such as providing emergency room services to all, regardless of ability to pay. In the recent testimony, the GAO observed that this factor is obsolete because all hospitals have been legally required to offer emergency care services to all since 1986, and this is not the only of the 6 factors that is no longer relevant.
Tax-exempt hospitals are generally required to file Schedule H, a form that details how much of their activities should be considered as community benefit, with their annual IRS filings. At least 30 hospitals in 2016 reported the absence of any expenditure for community benefit activities to the IRS. In 2020, the IRS reported to GAO that it had not revoked a single hospital’s exempt status because of insufficient community benefit activities within the prior 10 years. According to GAO, the IRS was unable to cite even a single instance of reviewing a hospital for inadequate community benefit activities despite the statutory requirement to review the community benefit activities for each private nonprofit hospital at least once every 3 years. Chairman David Schweikert appeared receptive to GAO’s critical findings regarding the IRS’s conduct in this area. Chairman Schweikert cited a study from the Kaiser Family Foundation indicating that hospital expenditure toward charity care ranges between 0.1% to over 7% of operating expenses, and attributing this disparity to the absence of a clear IRS standard for required community benefits. This places the blame squarely on the IRS, and effectively puts them on notice that their conduct in this area is subject to ongoing scrutiny.
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