Tax-exempt yardstick: Defining the measurements - includes related article

Healthcare Financial Management, Feb, 1992 by Joseph A. Kuchler

About the author

Joseph A. Kuchler is a director of policy and government relations in HFMA's Washington, D.C., office.

Congress, the Internal Revenue Service (IRS), and state and local governments still are trying to determine requirements a hospital must meet to warrant tax exemption. Revisions to a bill introduced by Rep. Brian Donnelly D-Mass.) likely will focus Congressional debate on whether charity care or the broader concept of community benefits is the most appropriate measure for not-for-profit hospitals to meet; the IRS may develop intermediate sanctions it could impose on errant not-for-profit facilities in lieu of a total revocation of tax-exempt status; and perhaps the most stringent clamp-down on healthcare facilities' tax-exempt status will come from state and local governments that develop boundaries for tax-exempt hospitals to maintain. Not-for-profit facilities can respond to increased scrutiny by viewing government challenges as opportunities to "tell their stories" about charity care and community benefits.

Tax exemption-once granted without question to not-for-profit hospitals-was the subject of heated debate in 1991, both in Washington, D.C., and at state and local levels of government. In Congress, the House Ways and Means Committee held a day-long hearing last summer on legislation to make a hospital's tax-exempt status contingent upon its provision of measurable levels of charity care and care to the indigent-a fundamental change from the -community benefit' standard that has been used for more than 20 years to determine hospitals' eligibility for tax exemption.

In agency action, the Internal Revenue Service (IRS) began a program of intensive audits of large hospital organizations, seeking to identify systems whose many business activities make their stated charitable mission suspect.

Meanwhile, state and local governments, often prompted by revenue shortfalls, continued to raise challenges to hospitals' exemption from property and other taxes.

The debate will resume in 1992. Although Congress did not change the basis of tax exemption for hospitals in 1991, action could occur this year or in the future. To counter challenges to their tax status at any level, hospital executives must understand the issues involved in the debate and the steps they can take to justify their facilities' tax exemption to government policymakers, the press, and the public.

Since 1969, hospitals' tax-exempt status has been based on the broad array of community benefits they provide, including charity care (see related story). Recent debate has focused on whether the community benefit standard should be replaced by a standard centered on demonstrated provision of measurable levels of charity care. Federal policy-makers' current interest is prompted by two related questions:

* Have the diversification and corporate restructuring many hospitals have undertaken since enactment of Medicare's prospective payment system made them operate so much like businesses that they no longer deserve tax-exempt status? and

* Faced with increased competition, payment reductions by government and third-party payers, and growing numbers of uninsured or underinsured patients seeking treatment, are tax-exempt hospitals meeting their obligation to provide charity care to those who cannot pay?

In 1991, action on these questions occurred in two arenas: Congress and the IRS. hospital tax-exempt status was prompted by the May 1990 publication of a General Accounting Office (GAO) report, "Nonprofit Hospitals: Better Standards Needed for Tax Exemption." The GAO report concluded that uncompensated care was spread unevenly among hospitals, with large urban teaching hospitals providing disproportionate levels of uncompensated services compared to other not-for-profit hospitals.

GAO also concluded that some hospitals do not provide services to the poor equal to the value of their tax exemption. The report ended with the recommendation that: [i]f the Congress wishes to encourage nonprofit hospitals to provide charity care to the poor and underserved and other community services, it should consider revising the criteria for tax exemption.'

ROYBAL. House Aging Committee Chairman Edward Roybal (D-Calif.), who had asked GAO to conduct its analysis, quickly held a hearing in june 1990 on the report's findings. Although hospital representatives denounced the report's data, findings, and methodology, Roybal proposed legislation (H.R. 5686) to link tax exemption to hospitals' provision of specified levels of charity care.

Roybal's proposal would have required that a not-for-profit hospital, to the extent financially possible, provide an amount of charity care (measured by costs) equal to at least 50 percent of the value of its tax exemption. A hospital also would be required to:

* Document an open-door policy for Medicare and Medicaid patients consistent with the size of its community;

* Document community benefits equal to at least 35 percent of its tax exemption; and