Not-for-Profit Hospitals’ Charity Care Scrutinized

Scrutiny of not-for-profit hospitals' tax exemptions is increasing, as an Internal Revenue Service report found that 45% of not-for-profit hospitals spend 3% or less of their revenue on uncompensated care and as state and federal lawmakers consider imposing restrictions on the hospitals, the Wall Street Journal reports.

According to the IRS study -- which involved 487 hospitals -- from 2003 to 2005, nearly a quarter of not-for-profit hospitals spent less than 1% of revenue on charity care and one in five spent 10% or more.

The Congressional Budget Office says that not-for-profit hospitals received more than $12 billion in tax breaks in 2002, and a recent CBO analysis of hospitals in five states found that not-for-profits provide only slightly more uncompensated care than for-profit hospitals.

The "scrutiny is fueled in part by the hospital industry's strengthening finances," the Journal reports. However, according to the Journal, many not-for-profit hospitals operate on "razor-thin margins," with more than 200 reporting "cash and investments valued at less than a day's operating expenses."

Sen. Chuck Grassley (Iowa), ranking Republican of the Senate Finance Committee, on Thursday released a report suggesting that Congress mandate the amount of uncompensated care hospitals must provide to qualify for tax exemptions as not-for-profits.

Grassley's report suggested that to qualify for tax benefits, hospitals must spend 5% of patient operating expenses or revenue, whichever is greater, on charity care. Grassley also proposed limiting the number of insiders and physicians who could hold seats on the board of a hospital receiving tax benefits.

In addition, states are looking at the tax status of not-for-profit hospitals. In Illinois, for example, regulators have revoked property tax breaks for several hospitals after the state determined the hospitals did not provide enough charity care. Other states require standardized reporting from not-for-profit hospitals and, in many cases, compare hospitals' charity care and tax breaks (Francis, Wall Street Journal, 7/20).

Lois Lerner, director of IRS' Charities and Other Non-Profits division, said, "The lack of consistency or uniformity in classifying and reporting uncompensated care and various types of community benefit often makes it difficult to assess whether a hospital is in compliance with current law." Lerner added that greater analysis is needed.

Melinda Hatton, American Hospital Association senior vice president and general counsel, pointed out that hospitals surveyed by IRS provide $9.3 billion in community benefits, with $5.2 billion going to uncompensated care. "It shows that hospitals are spending an awful lot of money" on such care, Hatton added (Carey, CQ HealthBeat, 7/20).