Senators press Treasury, IRS on nonprofit hospitals' tax exemptions

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Four U.S. senators, led by Elizabeth Warren (D-Massachusetts) and Dr. Bill Cassidy (R-Louisiana), have penned letters to the IRS and Treasury Department asking for more detail on nonprofit hospitals' charity care and community investments, saying they're "alarmed" by reports of facilities taking advantage of the broad definition of "community benefit."

Joined by Raphael Warnock (D-Georgia) and Chuck Grassley (R-Iowa), the senators said nonprofit hospitals may be engaging in practices that are not in the best interests 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," the lawmakers wrote.

Under IRS rules, nonprofit hospitals that provide "benefits to a class of persons that is broad enough to benefit the community" may qualify for tax exemptions. One study cited by the senators estimated that these exemptions were worth over $28 billion in 2020.

They also cited findings from the Community Service Society showing that 56 nonprofit hospitals in New York filed liens on nearly 5,000 patients' homes in 2017 and 2018. The liens were placed predominantly on homes in poor and rural areas, with nearly 80% occurring in counties with median incomes below 300% of the poverty line.

In another example based on an investigation by Grassley, many uninsured patients of the nonprofit hospital Mosaic Life Care of St. Joseph were allegedly charged full price for healthcare services that they should have received for free or a discounted rate. The lawmakers also cited instances in which hospitals filed lawsuits against patients and employees for unpaid medical bills, leading to attempted wage garnishments, and pressured patients to pay for services when they were eligible for free care.

WHAT'S THE IMPACT

The Tax Exempt and Government Entities (TE/GE) Division within the IRS oversees nonprofit hospitals and uses two primary methods to collect information to comply with the law: annual tax forms and regular reviews of nonprofit hospitals' community benefit activities. In addition to annually filing an IRS form requiring organizations to report information on compensation, revenue and expenses, assets and liabilities, and tax compliance, nonprofit hospitals must also report information on community benefits, community building activities, collection practices, management structure and facilities.

The community benefit standard, first enacted in 1969, relies on "10 holistically analyzed metrics," which the lawmakers said is likely insufficient to guarantee protection and services to the communities hosting these hospitals. One study of more than 1,700 nonprofit hospitals found that 77% spent less on charity care and community investment than the estimated value of their tax breaks. The authors estimated that the total deficit of charity care for nonprofit hospitals was nearly $14.2 billion in 2020.

The IRS is required to review hospitals' community benefit activities at least once every three years, but the senators cited a 2020 report from the Government Accountability Office finding that oversight is made challenging by a "lack of clarity" around what constitutes community benefit.

Based on the GAO's recommendations, the IRS did implement a number of changes, including a well-documented process to identify hospitals at risk of noncompliance. But the senators said more is required to ensure nonprofit hospitals' community benefit information is standardized, consistent and easily identifiable.

The lawmakers made a number of requests to the IRS, including: providing  a list of the most commonly reported community benefit activities that qualified a nonprofit hospital for tax exemptions in FY2021 and FY2022; describing any changes made to how community benefit information is identified and provided; identifying the number of hospitals tagged as "at risk" for noncompliance since spring of 2021; providing a list of the nonprofit hospitals that the IRS referred to its audit division for potential ACA violations; providing a list of nonprofit hospitals that lost their tax exemption due to noncompliance with the community benefit standard since the full implementation of the ACA; and providing a list of nonprofit hospitals that had their IRS Form 990 rejected for failing to meet requirements related to community benefit reporting.

THE LARGER TREND

An April report examining the finances of 1,773 nonprofit hospitals in the U.S. found that more than three-quarters fall short on expected investments in their communities.

Lown Institute analysts identified more than 1,350 hospitals that have "fair share" deficits, meaning the value of their community investments fails to equal the value of their tax breaks. The combined deficits of nonprofit hospitals totaled $14.2 billion in 2020, enough to relieve the medical debt of 18 million Americans or prevent 600 at-risk rural hospitals from closing, data showed.

"Americans desperately need hospitals to use their billions in tax breaks as intended: to promote health while relieving the problems of medical debt and access to care," said Dr. Vikas Saini, president of the Lown Institute. "These are charitable organizations, and they should do a better job at prioritizing social responsibility over profitability."

A 2021 study in JAMA Network Open found 40% of nonprofit hospitals fell short of meeting the community health needs assessment (CHNA) requirements put in place in the Patient Protection and Affordable Care Act, and that by not fulfilling these mandates, a significant portion of them put their tax-exempt status at risk.

Other reports have shown that it's been a rough few years financially for the nation's nonprofit hospitals. A January Fitch ratings report found that credit ratings for nonprofit hospitals will be under threat this year due to investment losses and rising expenses eating into margins.

Twitter: @JELagasse
Email the writer: Jeff.Lagasse@himssmedia.com