March 6, 2019

The Senate Finance Committee chair is scrutinizing nonprofit hospitals' tax exemptions

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    Read Advisory Board's take: Why hospitals should take this probe seriously

    Senate Finance Committee Chair Chuck Grassley (R-Iowa) last month renewed his investigation into whether nonprofit hospitals are meeting uncompensated care and other requirements for tax exemptions, John Commins reports for HealthLeaders Media.


    Nonprofit hospitals receive tax breaks in exchange for providing certain services, such as:

    • Community health assessments; 
    • No-cost care for low-income patients; and
    • Public health outreach.

    In addition to such charity care, nonprofit hospitals are responsible for covering the cost of patients who do not pay back their debts for care. Those costs, combined with charity care costs, account for nonprofit hospitals' overall uncompensated care costs.

    Grassley in a release published last week said, "Making sure that tax-exempt hospitals abide by their community benefit standards is a very important issue for me." The release noted that Grassley and former Senate Finance Committee Chair Orrin Hatch (R-Utah) last year launched an investigation into whether nonprofit hospitals are meeting their requirements for tax exemptions, including uncompensated care requirements. The senators requested information from IRS regarding enforcement practices and the agency's compliance data on nonprofit hospitals.

    Commins reports that former acting IRS Commissioner David Kautter in response to the request last year said the agency reviews the tax-exempt status of approximately 1,000 nonprofit hospitals annually by assessing regulatory forms, hospital websites, and other information to identify hospitals with the highest potential for noncompliance. Kautter said IRS either assigns a compliance check for nonprofit hospitals or launches an investigation into the hospitals the agency deems at the highest risk of noncompliance.

    Grassley renews investigation

    Grassley in a letter sent last month to current IRS Commissioner Charles Rettig renewed that investigation following reports that "at least some [nonprofit] hospitals … cut charity care, despite increased revenue [under the Affordable Care Act], calling into question their compliance with the standards set by Congress."

    Grassley in the letter requested information on how many hospitals IRS has determined are not in compliance with the tax exemption requirements under section 501 of the Internal Revenue Code, as well as an update on the status of the agency's investigations into noncompliant nonprofit hospitals.

    Industry group reacts

    Melinda Hatton, general counsel for the American Hospital Association (AHA), said AHA is confident nonprofit hospitals are meeting IRS requirements for tax exemptions. "In 2015, an AHA analysis of Schedule H filings reported that 13.3% of tax-exempt hospitals and health systems total expenses were devoted to community benefits programs, and that half of that spending was attributable to expenditures for providing financial assistance to needy patients and absorbing losses from Medicaid and other means-tested government program underpayments," she said.

    Hatton added that an analysis conducted by Ernst & Young on behalf of AHA found that nonprofit hospitals' community health assessments and other benefits outweigh the value of their federal tax exemptions by a factor of 11:1. She said, "According to the report, non-profit hospitals in 2013 were exempt from an estimated $6 billion in federal taxes and provided an estimated $67.4 billion in community benefits" (Commins, HealthLeaders Media, 2/26; Grassley release, 2/25).

    Advisory Board's take

    Eric Fontana, Managing Director, Data and Analytics Group

    We've seen Senator Grassley go on hospital oversight campaigns in the past which have put hospital finances squarely under the microscope. Don't think he and other senators won't look to make an example of hospitals or health systems if the opportunity arises. Such lines of investigation can play out with serious consequences: Recall in the early-mid 2000's that the State of Illinois made waves through the industry as it revoked the tax-exempt status of Provena Covenant and Carle Foundation, as a result of what was, at the time, deemed inadequate community benefit.

    Tomi Ogundimu, Practice Manager, Population Health Advisor

    This story reminds me of an interesting conversation I was having with the chief community health officer of a large health system in the Northeast last week. He was explaining how hard it can be for hospitals and health systems to truly move the needle on addressing their community's social determinants of health (SDH) without having the proper financial structure in place to incentivize and support these initiatives. He suggested that policymakers could help—by making nonprofit hospitals' community benefit requirements for tax exemption more tied to meeting certain community SDH outcomes.

    “Hospitals allocated less than 8% of their community benefit spending to community health improvement efforts.”

    Of course, providing uncompensated care will always be an important part of the nonprofit exemption. However, just as the ACA updated the 501(c)(3) tax code to require hospitals to conduct community needs assessments at least every three years—and develop strategies to meet these community needs. These regulations are a good initial step toward incentivizing hospitals to participate in broad-based efforts to address determinants of health in their respective communities. Particularly in light of data like a 2011 study that found that hospitals allocated less than 8% of their community benefit spending (or less than 1% of their total expenditures) to community health improvement efforts. The majority of spending was dedicated to offsetting the cost of providing care to public insurance beneficiaries (e.g., Medicaid and CHIP).

    The community health officer's suggestion made me think there might be an opportunity for policymakers to make community benefit spending more impactful in the communities hospitals actually serve. Doing so could present a unique opportunity for nonprofit hospitals to tie their spending to the hot topic of the day, SDH, and pinpoint their community's unique needs. And by tying exemption status to meeting certain community health outcomes, rather than just requiring a certain amount of spending, we could help drive and reflect the overall health care industry's shift from fee-for-service to fee-for-value.

    Certainly, any new requirements would have to be tied to measureable, actionable outcomes. And they would have to be designed so as to not drive unnecessary regulatory burdens on hospitals. Yet, I think they could help push hospitals and health systems to prioritize the upstream factors that could actually improve health and lower costs for patients down the line.

    “Providers shouldn't just rely on existing community benefit spending to support population health objectives.”

    Perhaps this move by Sen. Grassley might open up a broader conversation about the way regulators approach tax exemption and community benefit. In the meantime, however, hospitals and health systems shouldn't just rely on their existing community benefit spending to support their population health objectives. Rather, they should be implementing community health interventions that are data-driven, targeted, strategically aligned, and sustainable.

    To learn how to identify these opportunities and prioritize the options that align to the greatest community needs and core population health goals, view our toolkit with 10 Tools for Prioritizing Community Health Interventions.

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