• Tax-Exempt Hospitals Facing Increasing Scrutiny
  • May 15, 2008 | Author: Megan Christensen
  • Law Firm: Blank Rome LLP - Washington Office
  • On April 4, 2008, the front page of the Wall Street Journal contained an article discussing the large profits many tax-exempt hospitals are experiencing, outpacing those of their for-profit counterparts. This article is just the latest in a series of close examinations tax-exempt hospitals are receiving from many sectors, including Congress, the Internal Revenue Service, and the public.

    Originally, nonprofit hospitals qualified for tax exemption because they served the poor and distressed. More than fifty years ago, the IRS standard for granting tax exemption required that such hospitals operate, to the extent of their financial ability, to serve those unable to pay and ordinarily not refuse those who could not pay for hospital services. This standard was commonly referred to as “charity care.” Then, in the late 1960s, the IRS permitted a hospital to qualify for tax exemption based on the promotion of health for the benefit of the community—the “community benefit” standard. Since that time, the community benefit standard has primarily governed how nonprofit hospitals have justified their tax-exempt status.

    In the last several years, many charitable organizations have undergone extensive scrutiny from the federal government, nonprofit hospitals in particular. First, Congress, and specifically Senator Grassley, ranking member of the Senate Finance Committee, considered introducing legislation to require a minimum amount of charity care to be provided by nonprofit hospitals. Senator Grassley also held a roundtable discussion to examine, among other issues, the provision of charity care by nonprofit hospitals and the relationship between the billions of dollars in tax exemptions received by such hospitals and the exemption standards currently in place. (Details regarding this roundtable will be the subject of a separate Advisory to be published later this year.)

    Additionally, the IRS has issued a redesigned Form 990, Return of Organizations Exempt from Income Tax, the annual return filed by tax-exempt organizations. The redesigned Form 990 includes a new schedule for hospitals, Schedule H. Schedule H explores, in detail, the charity care policies and costs of providing charity care, as well as the community benefit operations of the filing hospital. The new form and schedules are due to be used in 2009 to report on 2008 activities.

    Now the mainstream press is criticizing tax-exempt hospitals for their reported revenues, executives’ salaries, and spending habits, stating that tax-exempt hospitals’ for-profit brethren do not fare as well and that the tax advantages available to the exempt hospitals may no longer be justified.