Tax-Exempt Hospitals –
Senate Finance Staff Draft Proposals for Reform

By Laura Kalick

On July 18, 2007, the Senate Finance Committee Minority Staff released draft proposals (Draft) for hospital tax reform (http://grassley.senate.gov/releases/2007/07182007.pdf). The Staff is concerned that between $12.6 billion to $20 billion per year in federal, state and local tax exemption benefits go to hospitals and that a commensurate amount of uncompensated care is not being provided. Also of concern is that the provision of uncompensated or charity care is unevenly distributed among tax-exempt hospitals.

The Draft proposes specific requirements for 501(c)(3) hospitals and also proposes that a hospital could be exempt under 501(c)(4) by meeting less stringent requirements. Of course, a hospital that merely had a 501(c)(4) exemption would not be able to receive the benefits of tax exempt financing and charitable contributions and could be ineligible for state property tax exemptions.

The Staff recommends setting specific standards for hospitals that seek exemption under §501(c)(3), including:

• establishing a charity care policy with wide, comprehensible publication;
• quantitative standards for charity care;
• charity care requirements for joint ventures with for-profit entities;
• board composition and other governance requirements covering joint ventures and hospital conversions from tax exempt to for-profit;
• limiting charges billed to the uninsured;
• placing restrictions on conversions;
• curtailing unfair billing and collection practices;
• transparency and accountability requirements; and
• sanctions for failure to comply with applicable requirements.

The Draft provides for setting standards for hospitals that seek exemption under 501(c)(4), including a quantitative amount of annual community benefits, limiting charges billed to the uninsured, governance reforms, restrictions on conversions, curtailing unfair billing and collection practices, heightened transparency, and sanctions for failure to comply with applicable requirements.

Simultaneous to the release of the Draft, the Internal Revenue Service (IRS) released an Interim Report on its Hospital Compliance project, which focused on the manner in which hospitals provide uncompensated care (www.irs.gov/pub/irstege/eo_interim_hospital_report_072007.pdf). A second report will be released at a latter date that provides information on compensation of hospital executives. Also, IRS has just released a draft of its redesigned Form 990, which includes a specific schedule for hospitals that would require information on uncompensated care (www.irs.gov/pub/irs-tege/form990scheduleh.pdf).

Laura Kalick is a senior manager in the Nonprofit Tax practice in BDO Seidman’s Greater Washington, D.C. office. She can be reached at lkalick@bdo.com.

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