Tax-exempt hospitals should pay close attention to new Congressional scrutiny of their tax-exempt status under the Internal Revenue Code. Within the last week, both the Senate Finance Committee and the House Ways and Means Committee have brought the legal rationale for the extension of federal tax-exempt status to charitable hospitals under debate. Furthermore, the Senate Finance Committee delivered extensive questionnaires to 10 tax-exempt hospitals and health systems asking for detailed information relating to their charitable operations. These actions suggest that Congress may be preparing to revisit the conditions for tax-exempt status as part of its larger consideration of legislation expanding federal oversight of nonprofit charities. These developments are particularly worrisome given the comments of some elected officials that it is becoming increasingly difficult to distinguish between for-profit hospitals and nonprofit hospitals on the basis of the services they provide. On the positive side, the actions may motivate tax-exempt hospitals to modify mission-based strategic planning and proactively respond to Congressional concerns.
The Grassley Letter
Over the last year, Senator Charles Grassley has led the Senate Finance Committee through a close examination of the nonprofit sector in general and considered the need for legislation that would extend federal oversight of the governance and operation of nonprofit entities. A draft legislative proposal in this regard surfaced last winter, and the committee has held two hearings on the subject, most recently on April 5. In addition, the committee shortly will receive certain legislative recommendations from the Panel on the Nonprofit Sector, an independent group of individuals with tax-exempt laws and practice experience impaneled by The Independent Sector at Senator Grassley's request. As part of the committee's debate, consideration has been given to (i) granting the Internal Revenue Service greater enforcement powers to address perceived violations of tax-exempt status, (ii) increasing the transparency of tax-exempt organizations through enhanced Form 990 filing requirements and (iii) requiring a tax-exempt organization to seek periodic reconfirmation by the IRS of the organization's tax-exempt status. Importantly, none of the committee's deliberations, the draft legislative proposal or the Panel's anticipated recommendations currently address the fundamental issue of the rationale for continuing hospital tax-exempt status, as this issue was not part of the original Committee hearings on tax-exempt organizations.
However, on May 25 Senator Grassley’s focus clearly shifted toward continued exemption for tax-exempt hospitals with the public release of a ten-page letter to leading tax-exempt hospitals and health systems. In his letter, Senator Grassley requests that these 10 “lucky” tax-exempt hospitals selected assist Congress in its review of tax-exempt organizations and submit responses to over 45 detailed questions (many of which involved detailed information for multiple years) by early July. Topics covered by these questions include (a) the provision of charity care and community benefit, (b) payments, charges and debt collection and (c) tax exemption and other matters. Many of Senator Grassley's questions relate to information that the responding health system may consider highly proprietary. Furthermore, these questions only add to the scrutiny tax-exempt hospitals face regarding general billing practices, property tax exemption challenges and class action lawsuits.
The Ways and Means Committee Hearing
The hearing on May 26 was called by Representative Bill Thomas for the specific purpose of examining hospital tax-exempt status. Particular issues covered at the hearings included (a) how the standards for hospital tax-exempt status have evolved over time, (b) what criteria are used to assess a hospital’s tax-exempt status and (c) if hospitals operate principally as businesses selling their services in a competitive market. This hearing was preceded by an initial hearing of the Committee, held on April 20, which focused on the general history of the tax-exempt sector, the legal rationale for tax exemption and its economic impact.
Testimony at the May 26 hearings was presented by Mark Everson, Commissioner, Internal Revenue Service; David M. Walker, Comptroller General, U.S. Government Accounting Office; Mark McClelland, Administrator, Centers for Medicare and Medicaid Services; John Columbo, Professor, University of Illinois College of Law; Stan Jenkins, Chairman, Champaign County (Illinois) Board of Review; John T. Thomas, Senior Vice President and General Counsel, Baylor Health Care System, Dallas, Texas; Sr. Carol Keehan, Chairperson, Catholic Health Association of the United States; Jill R. Horwitz, Assistant Professor, University of Michigan Law School and Nancy M. Kane, Professor of Management, Department of Health Policy and Management, Harvard School of Public Health.
In his opening remarks, Rep. Thomas said the tax-exempt status of the nation's nonprofit hospitals should be reviewed and questioned the difference between nonprofit and for-profit hospitals. Because hospitals are the largest single type of charitable organization, it makes sense to ask what the taxpayer is getting in return for the tens of billions of dollars per year in tax subsidies given to tax-exempt hospitals. Commissioner Everson agreed that it had become increasingly difficult to differentiate for-profit from nonprofit health care providers. However, Everson expressed concern that a bright-line test could have unintended consequences and said Congress should proceed with caution.
Testimony from researchers presented a varied picture. According to her research, Professor Kane noted that many nonprofit hospitals do not provide charity care in amounts that would justify the value of their tax-exempt benefits; she urged Congress not to revoke the federal tax exemption for nonprofit hospitals but rather to strengthen the tax exemption standard and tie it more specifically to the provision of charity care. Mr. Walker presented a U.S. Government Accounting Office study of five states, that showed government hospitals, when compared to nonprofit hospitals, devoted substantially larger shares of their patient operating expenses to uncompensated care. Nonprofit hospitals in turn devoted more (but not as much more) of their operating expenses to uncompensated care as did for-profit hospitals. Professor Horwitz, on the other hand, presented research indicating that for-profit hospitals, when compared to tax-exempt hospitals, were more likely to offer the most profitable services, less likely to offer unprofitable but essential services and more likely to initiate and drop services in response to changes in profitability.
Democratic members of the committee defended nonprofit hospitals. Congressman Stark cited figures showing the vast majority of hospitals ranked in the top tiers were nonprofits. Representative Rangel questioned why the focus was on hospitals and not on other types of exempt organizations such as colleges and universities. Other members pointed out the devastating effect of losing tax-exempt status.
Rep. Thomas indicated the committee’s hearings on the tax-exempt sector would continue.