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Do tax-exempt hospitals provide enough community benefit?

Feb 15, 2023

In the past year, Congress, various states and many articles have questioned whether nonprofit hospitals are providing sufficient community benefit to support their tax exemption.

Statistically, most tax-exempt organizations don’t generate net income; however, most hospitals do.

This leads to questions about the basis for the tax-exempt status of hospitals.

Tax-exempt hospital requirements

Prior to the Patient Protection and Affordable Care Act of 2010, in order to be exempt, a hospital needed to comply with the community benefit standard under Revenue Ruling 69-545.

The ruling determines community benefit with the following factors:

  • Operating an emergency room open to all, regardless of ability to pay
  • Maintaining a board of directors drawn from the community
  • Maintaining an open medical staff policy
  • Providing hospital care for all patients with the ability to pay, including those who pay their bills through public programs such as Medicaid and Medicare
  • Using surplus funds to improve facilities, equipment and patient care
  • Using surplus funds to advance medical training, education and research

No one factor is determinative in considering whether a nonprofit hospital meets the community benefit standard; instead, the IRS weighs all the relevant facts and circumstances when evaluating.

The IRS also requires hospitals to complete Schedule H (Form 990), beginning with the 2009 tax year. Part I, line 7 of this schedule provides information on financial assistance, or charity care, and other community benefits at cost.

Below are the categories that require numerical data regarding yearly financial assistance:

  • Financial assistance at cost
  • Medicaid
  • Costs of other means-tested government programs

In addition, numerical data must be provided for other benefits:

  • Community health improvement services and community benefit operations
  • Subsidized health services
  • Research
  • Cash and in-kind contributions for community benefit

After the Affordable Care Act was enacted March 23, 2010, Section 501(r) was added to the Internal Revenue Code, which established five additional requirements for hospitals to qualify for tax exemption under 501(c)(3).

To qualify, a hospital must:

  • Conduct a community health needs assessment (CHNA) every three years and adopt an implementation strategy to meet those needs.
  • Establish a financial assistance policy (FAP).
  • Establish a policy related to emergency medical care.
  • Limit amounts charged for emergency or other medically necessary care that is provided to individuals eligible for assistance under the organization’s FAP. (Charges should not exceed the amounts generally billed to individuals who have insurance covering such care.)
  • Make reasonable efforts to determine whether an individual is FAP eligible before engaging in extraordinary collection actions.

Recent scrutiny of hospitals

There has been a prolonged emphasis on hospitals and their community benefit, particularly whether the benefit a hospital provides is more than the benefit they receive from their exemption.

As a tax-exempt organization, hospitals may benefit from the following exemptions:

  • Income taxes from related income
  • Federal unemployment taxes
  • State property, sales and use taxes
  • Issuance of tax-exempt debt
  • Recipient of grants
  • Deductible charitable contributions to the organization

There have been various studies indicating that hospitals don’t provide sufficient community benefit. However, each study seems to use different criteria in their assumptions.

Not all articles follow what is publicly shown on Part I, line 7 of Schedule H, resulting in inconsistencies in the results.

A Wall Street Journal (WSJ) analysis showed that hospitals are often not particularly generous. The analysis indicated that tax-exempt hospitals wrote off an aggregate of 2.3% of their patient revenue on financial aid for patients’ medical bills, while their for-profit competitors wrote off 3.4%.

In response, the American Hospital Association pointed out that the WSJ article only looked at charity care (known as financial assistance in Schedule H), and did not include community benefit, which is a key component of the benefits that hospitals provide.

Each of the published articles and studies focus on a particular aspect of what is shown on Schedule H. Some use percentages of revenue versus percentage of expenses, which is required by IRS on Schedule H reporting.

This lends itself to many variants in the amounts of charity care or community benefit that is reported.

What can your tax-exempt hospital do?

The scrutiny over the amount of community benefit provided by hospitals will most certainly continue. Hospitals need to be ready to account for their generosity in both financial assistance and community benefit.

One thing your hospital can do is take a renewed interest in what you report on Schedule H (Form 990), which is open to the public.

You can start by ensuring that the relevant amounts of community benefits in Part I, line 7 are properly considered. Time should be spent making sure that each percentage clearly reflects the hospital operations.

While there is no magic percentage, a 2007 Senate discussion draft indicated that they would consider a hospital exempt under 501(c)(3) designation if it dedicated a minimum of 5% of its annual patient operating expense or revenue to charity care and community benefit. This is reflective of the IRS common practice in auditing nonprofit hospitals prior to the issuance of Revenue Ruling 69-645.

In addition, your hospital can make sure that its community understands all the good that is provided.

Many hospitals provide a variety of community benefit that is not always captured on Schedule H, such as donating to food banks, wellness programs, transportation and housing assistance. The community your hospital serves should be made aware of those efforts.

How Wipfli can help

At Wipfli, our consultants specialize in solutions to your healthcare pressures. We can help you keep pace with new technology, trends and regulations, so that you can focus on care. Contact us today to find out how we can help support your organization.

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Wipfli Editorial Team