An influential bipartisan group of U.S. Senators sent letters to regulators within the U.S. Treasury for detailed information on nonprofit hospitals’ reported charity care and community investments. This is a sign of legislators’ increasing scrutiny of tax-exempt hospitals‘ business practices
Sens. Elizabeth Warren, D-Massachusetts, Raphael Warnock, D-Georgia, Bill Cassidy, M.D., R-Louisiana, and Chuck Grassley, R-Iowa, wrote they “are alarmed by reports that despite their tax-exempt status, certain nonprofit hospitals may be taking advantage of this overly broad definition of ‘community benefit’ and engaging in practices that are not in the best interest of the patient.”
Back in February 2018, Grassley and then-Chairman Orrin Hatch of Utah pressed the IRS for information on enforcement practices and compliance data on non-profit hospitals. In May 2018 he received a “Report to Congress on Private Tax-Exempt, Taxable, and Government-Owned Hospitals” which documented some decline in charity care provided to qualified patients in their geographical care.
And now the newest round of letters to the IRS outlined studies from academic and policy groups highlighting that the tax-exempt status of the nation’s nonprofit hospitals collectively was worth about $28 billion in 2020 and how this tally paled in comparison to the charity care most of those hospitals had provided during that same period.
For example, Nonprofits like Allina Health System, which runs more than 100 hospitals and clinics in the Midwest and rakes in $4 billion in revenue annually, get tax breaks in exchange for providing care to the poor. In 2020, the health system avoided $266 million in taxes thanks to its nonprofit status, according to the Times reporting, citing data from the Lown Institute, a think tank that studies health care. The health system spent less than half of 1% of its expenses on charity care, whereas the national average is about 2%, according to an analysis of hospital financial filings published in Health Affairs.
At the center of the tax debate is what counts as community care and charity to qualify for tax exemption under IRS guidelines. For instance, 82% of nonprofit hospital systems spent less on community programs than the value of their tax exemptions in 2019, according to a Lown Institute report. The American Hospital Association disputed that analysis claiming Lown ignored a range of community investment categories in its math. Lown research said that was intentional – because many of those categories should not count.
Federal law does not say how much community benefit hospitals have to provide, but they do have to report their spending to the IRS each year, broken down by free and discounted care, unreimbursed care from government programs, and public health programming. And claims of abuse of the vagueness of the tax law have been quickly contested by the hospital lobby, which highlights that charity care is just one component of the broader activities that constitute a nonprofit hospital’s community benefit spending.
However, that ambiguity was squarely in the crosshairs of the legislators authoring this newest round of inquiry, who said the long-standing community benefit standard “is arguably insufficient in its current form to guarantee protection and services to the communities hosting these hospitals.”
They said we “are alarmed by reports that despite their tax-exempt status, certain nonprofit hospitals may be taking advantage of this overly broad definition of “community benefit” and engaging in practices that are not in the best interest of the patient. These practices – along with lax federal oversight – have allowed some nonprofit hospitals to avoid providing essential care in the community for those who need it most.”
A 2020 report by the GAO found that the “lack of clarity” around what constitutes community benefits makes IRS’ oversight of nonprofit hospitals “challenging.”In response, GAO made specific recommendations to the IRS to further increase transparency and ensure nonprofit hospitals are meeting their community obligations.
Since the report’s publication in September 2020, the IRS has implemented several of GAO’s recommendations: creating a “well-documented process to identify hospitals at risk for noncompliance with the community benefit standard,” adjusting the Form 990 Schedule H instructions to ensure more relevant responses, and establishing specific audit codes to better identify potentially noncompliant institutions.
Yet the Senators complain in their letter that “more is required to ensure nonprofit hospitals’ community benefit information is standardized, consistent and easily identifiable.”