Oct 19 2009
Health care reform: nonprofit hospitals’ “charity care” surgically removed
In our September 2008 Forum newsletter , we discussed the “The Return of ‘Charity Care,’” and the evolving debate over the amount of uncompensated services and other measurable community benefit (collectively referred to as “charity care”) that nonprofit hospitals should provide to maintain their charitable tax exemption. As recent as July 2007, Senator Charles Grassley’s Minority Staff of the Senate Finance Committee released a Discussion Draft in advance of a roundtable discussion on tax-exempt hospitals proposing that nonprofit hospitals, in order to maintain their tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, satisfy a quantitative charity care standard. The proposed standard would have required hospitals to dedicate a minimum of 5% of its annual patient revenues or operating expenses, whichever is greater, to charity care in accordance with a written and widely-disseminated charity care policy.
The charity care debate permeated the early discussions of health care reform, specifically in the context of financing the health care reform. The proposals released in May 2009 by Senate Finance Committee Chairman Max Baucus and ranking member Senator Grassley and discussed throughout the summer focused on codifying certain organizational and operational requirements for determining if a nonprofit hospital qualified as a tax-exempt, charitable organization under Section 501(c)(3). The proposals required tax-exempt hospitals to: (i) frequently conduct a community health needs assessment; (ii) provide a minimum annual amount of charity care; (iii) not refuse provision of health care services based on a patient’s inability to pay; and (iv) conform to certain procedures before commencing collection actions against patients.
In addition to these proposals, Senator Grassley proposed the removal of the safe harbor under the intermediate sanctions rules (Section 4958 of the Code) that provides all tax-exempt organizations, including nonprofit hospitals, a “rebuttable presumption of reasonableness” as to the determination of executive compensation. To the relief of nonprofit hospitals and other tax-exempt organizations, the Senator ultimately decided to not seek a vote on the amendment as part of the October 1 markup.
Hospitals and health care associations were further relieved to hear that the controversial minimum charity care requirement was omitted from both the initial and amended versions of the Senate Finance Committee’s proposal, America’s Healthy Future Act of 2009 (the amended version was approved by the Committee 14 to 9 on October 13, 2009). Under the Chairman’s Mark, four new provisions affect tax-exempt hospitals, the goal of which is to ensure that these hospitals fulfill their charitable mission and maintain their tax exemption. The Mark specifically provides that these new requirements are in addition to, and not in lieu of, the requirements otherwise applicable to nonprofit hospitals under Section 501(c)(3). The Mark requires each nonprofit hospital to:
- Conduct a community health needs assessment at least once every three years and adopt an implementation strategy to meet the community needs identified by the assessment;
- Adopt and implement a written and widely-disseminated financial assistance policy;
- Bill patients who qualify for financial assistance no more than the amount generally billed to insured patients based on either the best, or an average of the three best, negotiated commercial rates, or Medicare rates; and
- Forgo undertaking certain extraordinary collection actions against a patient, such as lawsuits and liens, without first reasonably attempting to ensure that the patient does not qualify under the hospital‘s financial assistance policy.
The Chairman‘s Mark includes new reporting and disclosure requirements, requiring the Internal Revenue Service to review a hospital’s community benefit activities, currently reported on Schedule H of the Form 990, at least once every three years. This review is described as intentionally similar to the review of companies registered with the Securities and Exchange Commission. The Mark also requires each tax-exempt hospital to make its audited financial statements widely available.
In the end, should these provisions survive in the final health care legislation, nonprofit hospitals must contend with increased disclosure and more benevolent collection practices as a substitute for a quantitative charity care requirement. Some commentators have hailed this approach as recognizing that a rigid percentage standard does not take into account the particularities of each hospital and, therefore, may not result in greater community benefit. Others see this approach as placating Senator Grassley who has long pursued a more definable standard for hospitals to be tax exempt. Either way, the debate over the role of nonprofit hospitals in our society and the standards to which they must adhere for tax exemption continues to morph and evolve.