Do Nonprofit Hospitals Provide Community Benefit? A Critique of the Standards for Proving Deservedness of Federal Tax Exemptions
Folkerts, Laura L., Journal of Corporation Law
I. INTRODUCTION II. BACKGROUND A. History of the Standards for Nonprofit Hospitals 1. The Charity Care Standard 2. The Community Benefit Standard 3. Criticisms of the Community Benefit Standard 4. Criticisms of Nonprofit Hospitals B. Recent Action by the Senate Finance Committee 1. The Committee Staff's Proposals 2. Reactions to the Prospect of New Legislation C. Recent Action by the Internal Revenue Service 1. Reporting Requirements for Tax-Exempt Hospitals 2. The IRS's "Hospital Compliance Project" 3. The IRS's Recent Amendments to Form 990 III. ANALYSIS A. Analyzing the Senate Finance Committee's Actions 1. Quantitative Measure of Community Benefit 2. Defining "Charity Care" 3. Accountability and Transparency 4. Sanctions B. Analyzing the IRS's Actions IV. RECOMMENDATION A. Congress Should Enact Legislation to Replace Revenue Ruling 69-545 1. Charity Care Policy 2. Joint Ventures 3. Community Needs Assessments 4. Calculating Charges 5. Board of Directors 6. Quantitative Standards 7. Reporting Requirements 8. Sanctions B. Congress Should Define All Critical Terminology C. The IRS Should Refine and Enforce Redesigned Form 990 V. CONCLUSION
According to Senator Charles Grassley, (1) we are at a "critical crossroads for nonprofit hospitals." (2) Many qualified nonprofit hospitals have received great financial benefits from tax exemption. (3) For example, in 2002, qualified nonprofit hospitals reportedly saved $2.5 billion in income taxes and $1.8 billion through the use of tax-exempt bonds. (4) Whether they deserve these exemptions is questionable. A 1990 report by the Government Accountability Office (GAO) showed that "57 percent of the nonprofit hospitals provided less charitable care than the value of the tax exemption they received." (5) This conflicts with the rationale for tax exemptions: that the benefits nonprofit hospitals provide to society outweigh the benefits that the government would receive from taxing the organizations. (6) Despite congressional proposals in 1991 for stricter standards, (7) the community benefit standard remains in effect. (8) The debate over deservedness has recently reignited, and nonprofit hospitals have been under great scrutiny for the tax exemptions they receive. (9) A study by the Congressional Budget Office (CBO) found that nonprofit hospitals still provide only a mean of 4.7% uncompensated care as a share of total hospital operating expenses. (10) A small number of hospitals, where the majority of charity care is concentrated, significantly influence this average. (11) This suggests that a substantial number of nonprofit hospitals are not earning-but are still receiving-the same tax exemptions. Since nonprofit hospitals are important to the community, (12) and because it is unfair to allow undeserved tax exemptions, this issue demands serious attention from Congress, the Internal Revenue Service (IRS), and hospital directors.
Part II describes the history of tax exemption for [section] 501(c)(3) hospitals, from the historical "charity care" tax exemption standard to the current "community benefit" standard. Part II also discusses the criticisms of the current standard and the action the government has taken to improve it. Namely, Part II addresses the discussion draft released by staff members of the Senate Finance Committee (the Committee staff) in July 2007 with proposals for improving the community benefit standard. Part II also discusses the IRS's redesign of Form 990, the tax form that [section] 501(c)(3) hospitals must file with the IRS each year. (13)
Part III examines the Committee staff's proposals and subsequent reactions by interested persons, including hospitals and scholars. It also examines the changes and reactions to the redesigned Form 990. …