The criteria that establish hospitals’ tax-exempt status are coming under closer scrutiny, with a bipartisan quartet of senators asking the IRS to ramp up its oversight of compliance with the community benefit standard.
Sens. Bill Cassidy, MD (R-La.), Charles Grassley (R-Iowa), Raphael Warnock (D-Ga.) and Elizabeth Warren (D-Mass.) sent an Aug. 7 letter to the IRS citing examples that purportedly show some not-for-profit (NFP) hospitals “may not be fulfilling their required obligation to provide reduced or free care to their most vulnerable patients.” Charity care is a category of community benefit as defined by the IRS.
The senators also referred to a U.S. Government Accountability Office (GAO) report from 2020 that found the IRS struggled to verify NFP hospitals’ adherence to the community benefit standard. Since then, the IRS has made several adjustments to its oversight, including changes to Form 990 Schedule H instructions “to ensure more relevant responses,” according to the letter.
But those changes do not necessarily incorporate the GAO’s recommendation that hospitals’ reported information on community benefits be as clear and identifiable as possible, the senators said. Much of the reporting is said to be qualitative or narrative in nature rather than specific about funds being devoted to community benefits.
“Scrutinizing nonprofit hospital tax exemption is nothing new in Washington,” said Andrew Donahue, MHA, CPA, director of healthcare finance policy with HFMA. “What makes this letter unique, however, is its specific focus on IRS oversight of community benefit reporting.
“Rather than challenging tax-exempt status outright, these senators appear to be probing for more transparency, consistency and comprehensiveness within the existing compliance regime. If so, this would suggest more time for nonprofit hospitals to demonstrate effective stewardship of tax exemptions.”
Seeking a more precise level of reporting
The senators requested information on several points within 60 days, among them:
- The most commonly reported community benefit activities that qualified hospitals for tax exemptions in FY21 and FY22
- Changes made to Schedule H since the GAO report was published in 2020
- Lists of hospitals that in recent years have been deemed at risk for noncompliance with the community benefit standard, have been referred to the IRS’s Audit Division to assess potential noncompliance, or have lost their tax-exempt status
- Lists of hospitals that had their Form 990 rejected or that failed to file the form
The senators wrote a separate letter to the Department of Treasury’s Inspector General of Tax Administration, requesting that the IRS’s oversight of NFP hospitals be assessed as part of the department’s 2024 audit plan.
Potentially, the information gleaned from the responses to the two letters will set the stage for legislation that more clearly delineates the services and activities that constitute adequate provision of community benefits. Such language would be designed to bolster the IRS’s enforcement of the community benefit standard.
“Given a crowded legislative calendar this fall, don’t expect much action on hospital tax exemption this year,” Donahue said. “Going forward, however, this letter does suggest that we are beginning to approach a bipartisan tipping point on exploring reform.”
Bicameral activity in 2023
The Senate is not the only chamber where interest in the topic has been apparent this year. In the House, the Oversight Subcommittee of the Ways and Means Committee conducted a hearing in April to explore the issue. Some of the testimony was highlighted in the senators’ letter, such as insight from a GAO representative and from a KFF analyst who had reported that hospitals’ tax exemptions in 2020 carried a value of $28 billion overall and $14 billion in federal exemptions.
The American Hospital Association (AHA) contributed testimony as well, saying hospitals actually exceed the value of their tax exemptions with the level of community benefits they provide.
Melinda Reid Hatton, AHA general counsel, cited a 2022 EY report that was prepared for the AHA and found communities receive $9 in benefit for every $1 of hospital tax exemption. She also said data from hospitals’ Schedule H forms suggest community benefits have amounted to between 11% and 14% of hospitals’ expenses each year since 2009.
“I think [that’s] probably an undercount, particularly on social determinants of health,” Hatton said. “One of the recommendations that we had, and others have had, is to elevate the importance of social determinants of health and make more clear, and I think more evident to those who are filling out the form, the importance of capturing that information and putting it on the form.”
If the community benefit standard undergoes changes, Hatton added, it will be important to retain the flexibility that allows hospitals to tailor programs to the specific needs of their communities.
A spotlight on Schedule H
Jessica Lucas-Judy, director with the GAO’s Strategic Issues team, said Congress could address technical issues with Schedule H.
“It’s difficult for [hospitals] sometimes to even know what to include, where on the form, what kind of information would be useful,” she said during the hearing. “And then it’s difficult for users, for members of the public, for Congress, for researchers to be able to know where to look on the form to find the answers as to what it is that a hospital is providing.”
The senators’ letter this month echoed Lucas-Judy’s suggestion at the hearing that regulations be changed to make information more exact and less qualitative or narrative in nature.
“One of the things for a good tax system is to make sure that you’re treating similar taxpayers similarly,” she said. “And right now, you really can’t do that with the [community benefit] standard as it currently is determined and also in the reporting itself.”
Ge Bai, PhD, CPA, professor of accounting and of health policy and management at Johns Hopkins University, called for the form to compel more disclosure from hospitals on the amount of the tax subsidy their NFP status affords them.
“At the individual hospital, how much is the income tax that they would have paid if they had been for-profit? There’s no way to know [currently] because the taxable income is very different from disclosed accounting income and also property tax,” she said during the hearing.
Donahue noted that HFMA has “long championed comprehensiveness in community benefit reporting.” In fact, Schedule H refers to adoption of standards developed by HFMA’s Principles and Practices Board on reporting charity care, implicit price concessions and bad debt.