Health Care Reform Could Mean Fewer Nonprofit Hospitals
Sen. Charles Grassley (R-IA) issued his proposals on how to fund health care reform on May 18, 2009. Based on his past sentiments about broad exemptions, it shouldn’t be a surprise that several of the tax changes he suggests are aimed directly at nonprofit hospitals. For years, he has questioned if these hospitals deserve the millions they get in annual tax breaks, when some seemingly don’t do much to justify their tax-exempt status.
Why nonprofit hospitals are under the microscope again
When discussing options to finance universal health care, Grassley, ranking member of the Senate Finance Committee, reiterated his belief that there are not obvious differences in the work of some nonprofit and for-profit hospitals. He stated that if everyone in the nation had health care, charity care would decrease, making it even more difficult to distinguish the two types of providers. So, he’s toying with the idea of all hospitals being taxable.
In response to Grassley’s criticisms, Theresa Pattara, tax legislative counsel to the Senate Finance Committee, told the May roundtable meeting of the American Bar Association Section of Taxation that if there are no distinguishable differences between nonprofit and for-profit hospitals, “maybe everyone should be taxable.” She hasn’t taken a stance, but she acknowledged Grassley’s point.
Grassley’s early proposals
In the Senate Finance Committee’s
news release, Grassley’s proposals are brief and general. But it’s clear he wants to modify the rules for tax-exempt hospitals by requiring they:
- Regularly conduct a community needs analysis
- Provide a stated minimum level of charity care
- Not be allowed to refuse treatment based on a patient’s inability to pay
- Follow certain procedures before initiating collection efforts against patients
Details or explanations have not been provided yet, including what the minimum level of care given to poverty-stricken patients or those who can’t pay should be. And charity care is only one of the factors of the tax expenditure in the Internal Revenue Code. In February 2009, the IRS released a study to help show the differences in nonprofit and for-profit hospitals. The tax-exempt hospital project is based on information submitted by nearly 500 hospitals.
Protecting your tax-exempt status
“Grassley’s early proposals are vague and seem to be focused on charitable activities, but one thing is evident—he will continue challenging the exempt status of nonprofit hospitals. Demonstrating charity care and community benefit is crucial,” urges Terry O’Reilly, health care tax principal with LarsonAllen.
Protecting the tax-exempt status of a hospital requires being transparent. Provide proof of your activities through documentation, so efforts don’t get lost. Make sure you have procedures in place to regularly report on charitable activities and community benefit:
- The net and gross costs
- Revenue offset
- Lack of reimbursement from Medicaid
- Community health improvement services
- Subsidized health services
- Research
- Cash and in-kind contributions
- Community building activities
- Bad debt, Medicare, and collection practices
- Management companies and joint ventures
Health care providers and their advisors are concerned about the impact and potential burden these proposals would cause. We expect Grassley will release details in the coming weeks and months.
For more information, contact Terry O’Reilly, health care tax principal, or a health care principal in your region.