COMMUNITY BENEFIT AND TAX EXEMPTION COME UNDER THE MICROSCOPE

Volume 29, Issue 506 January 7, 2008

Anna Wolke

A recent Internal Revenue Service (IRS) report is prompting both state and federal legislators to revisit laws on hospital tax exemption and “community benefit.”

Hospitals are eligible for federal tax exemption as long as they provide some form of “benefit” to the community. The IRS does not define community benefit, and hospitals fulfill the requirement in a wide variety of ways, ranging from providing charity care (care for which payment is neither expected nor sought), to holding health fairs and having a governing board that includes community representatives.

The IRS survey of 500 non-profit hospitals found that the institutions use a wide range of criteria to determine which patients are eligible for charity care, and they publicized the availability of charity care to differing degrees. Forty-five percent of all hospitals surveyed spent 3 percent or less of their revenue on charity care and nearly 25 percent spent 1 percent or less.

Nonprofit hospitals also may receive exemptions from state and local income, property and sales taxes, which, in some cases, are of greater value than the federal income tax exemption. Some states have tied exemption from state and local taxes to community benefits. Only a few states have specific charity care standards—outlining who receives free or discounted care and how rules are publicized—in place.

In 1993, for example, the Texas Legislature established minimum levels of charity care that nonprofits must provide to gain tax exemption (Texas Health & Safety Code Section 311.045 http://law.onecle.com/texas/health/311.045.00.html). Hospitals may, for example, receive tax exemption by providing charity care and community benefit in an amount equal to at least 5 percent of net patient revenue.

A Re-emerging Issue

States are revisiting the issue of hospital community benefits. The operations of nonprofit hospitals received considerable attention after activists publicized the fact that some bill uninsured patients the full “retail” price of care, rather than the discounted prices negotiated by insurers. Several class-action lawsuits were filed alleging that nonprofit hospitals were price-gouging uninsured patients, and four states enacted legislation requiring hospitals to inform uninsured patients about Medicaid and other programs for which they might be eligible. Some states also bar hospitals from using overly aggressive collection practices to obtain payment.

Many state hospital associations and the American Hospital Association (AHA) have adopted voluntary guidelines that inform low-income patients about the public programs and discounted care that may be available to them. According to Nicholas Wolter, M.D., a member of AHA’s board, “In 2006 alone, hospitals provided more than $31 billion in uncompensated care and provided countless billions more in benefits to their communities through programs and activities to promote better health.”

The issue is gaining prominence again partly because the rise in the number of uninsured has increased the demand for hospital uncompensated care as a safety net for the uninsured (despite increases in the share of the population covered by public programs). Tight state budgets mean increased scrutiny of dollars: many states partially reimburse hospitals for uncompensated care by allotting funds from a state-wide pool or fund.

Several state Attorneys General are looking into the issue, and it is gaining traction among some legislators. In 2006, the Minnesota Legislature directed the state Department of Health to perform a study of the amount of community benefits in the state, as well as the value of tax exemptions. The report, released in January 2007, found that Minnesota hospitals provided $80 million in charity care in 2005, and received $482 million in exemptions from local, state and federal taxes. The report recommended that all hospitals publicize their charity care policies and that standardized reporting of community benefits be mandated. Legislation implementing these recommendations was introduced in March 2007 by Senator Linda Berglin and will carryover to next session.

In Michigan, Senator Hansen Clarke plans to introduce community benefit-related legislation during the 2008 session.

“States need to look at this issue, especially since many are in budget crises,” said Senator Clarke. “If states are going to give up money (through tax exemption), we need to make sure people are getting a proportionate amount of benefits and that care is being provided to people who otherwise would not be getting care.”

Currently, Michigan does not specify how much charity care hospitals must provide, nor does the state require hospitals to report that amount. Senator Clarke is considering requiring that hospitals spend a minimum percentage of their revenue on charity care, but he also is interested in reforming the state’s ‘community benefit’ standard as a whole.

New York is currently evaluating whether hospitals are complying with its law on discounted care. The 2006 statute, which went into effect on Jan. 1, 2007, gives hospitals specific discounted care guidelines to follow if they wish to receive funds from the state’s $847 billion charity care reimbursement pool.

Each of the state’s general hospitals must provide discounted care to low-income, uninsured or underinsured patients based on their incomes, and this policy must be clearly posted or publicized and explained to a patient upon request. A recent survey conducted of New York City’s general hospitals found that most are complying with the new standards.

In December 2007, the IRS announced an overhaul of the return form—or, Form 990—filed by tax-exempt organizations. With the new form, which will require tax-exempt hospitals to report their finances and community benefits in greater detail, the IRS hopes to bring greater transparency to the tax-exemption process. U.S. Senator Chuck Grassley encouraged the IRS to give hospitals stronger guidance on reporting community benefits but also supports a uniform charity care threshold for all tax-exempt hospitals. Senator Grassley has drafted, but not yet introduced, legislation that would require a hospital to spend 5 percent of its operating expenses on charity care in order to qualify as a tax-exempt institution.

Anna Wolke is an intern with the Forum for State Health Policy Leadership.