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Tax-Exempt Hospitals Under Fire:  Part I - Latest Shots from Senator Grassley

Tax-Exempt Hospitals Under Fire: Part I - Latest Shots from Senator Grassley


Health Care Law Note
(August 2007)

On July 18, 2007, Senator Chuck Grassley (R - Iowa) released "Tax-Exempt Hospitals:  Discussion Draft," available at http://finance.senate.gov/press/Gpress/2007/prg071907a.pdf.  The discussion draft continues Senator Grassley's critical examination of tax-exempt hospitals and may be used to support legislation that could radically alter present law.

Sen. Grassley's primary assertion is that the current "community benefits" test for recognition under Section 501(c)(3) of the Internal Revenue Code as a tax-exempt hospital is inadequate to assure that such hospitals provide sufficient public benefit to justify their tax advantages.  The draft proposes replacing the present standard with a quantitative "charity care" requirement.  The draft suggests that a hospital seeking recognition under Section 501(c)(3) could satisfy the proposed charity care requirement by dedicating at least 5% of its annual patient operating expenses or revenues to one or more of the following:

  1. medically necessary hospital services provided without any expectation of payment for all patients at or below the federal poverty level ("FPL");
  2. the cost of free or discounted care for low-income uninsured, underinsured, or medically indigent individuals (income is 100% to 300% of the FPL for all three categories), less any payment received; or
  3. medical care provided to vulnerable populations through free clinics or school-based programs.

Under the proposal, hospitals that fell short of the 5% mark would be subjected to a crippling excise (penalty) tax.  It goes without saying that such requirements, if implemented, would have a materially negative impact on the financial performance of any hospital, and could make continued operations cost-prohibitive for hospitals that are already on the brink.

Hospitals that could not meet the proposed charity care requirements would be eligible to remain tax-exempt by converting to an entity recognized under Section 501(c)(4); however, with that conversion, they would lose the ability to benefit from the lower interest rates afforded by tax-exempt bonds and would no longer qualify to receive tax-deductible contributions.  The ability to receive grants from the government and from public charities and private foundations would also be negatively impacted.

The staff additionally made recommendations for both 501(c)(3) and 501(c)(4) hospitals in the following areas:  rates charged to medically indigent patients; regular community needs assessments; termination of tax on assets converted to for-profit entities; hospital debt-collection practices; informational reporting on proposed Form 990-H; joint ventures; governance; and executive compensation.

As of the date of this writing, no legislation altering the current requirements for recognition as a tax-exempt hospital has been introduced.  However, Senator Grassley's report is expected to be influential in shaping future legislative action.  Accordingly, those who have an interest in Senator Grassley's recommendations should submit comments directly to Senator Grassley's office no later than August 24, 2007.  The draft expressly seeks comments on the following topics, as well as others listed in the final paragraph of draft:  (1) the application of the proposed standards in the context of a hospital system involving multiple hospitals; (2) the propriety of any transition rules from present law to the new standards, particularly in regards to the 5% quantitative test; (3) the circumstances under which revocation of tax-exempt status would be appropriate; (4) consideration of requiring 501(c)(3) hospitals to provide particular community benefits, especially targeted at vulnerable populations; and, (5) consideration of rewarding nonprofit hospitals that provide quantitative charity care amounts significantly above the 5% minimum.

Authors
David L. Kyger
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