August 18, 2023
Senators urge IRS and Treasury to increase oversight of tax-exempt hospitals
In letters dated August 7, 2023, Senate Finance Committee members Elizabeth Warren (D-Mass.), Raphael Warnock (D-Ga), Bill Cassidy (R-La.) and Charles Grassley (R-Iowa) urged the Treasury Inspector General for Tax Administration (TIGTA) and the IRS to evaluate and increase IRS oversight of tax-exempt hospitals.
Based on a 2020 IRS study by the Government Accountability Office (GAO), more than half of the 5,000 tax-exempt hospitals in the United States enjoy tax exemptions worth an estimated $28 billion. In exchange for that benefit, US tax law requires tax-exempt hospitals to promote the health of the community as a whole in a charitable manner.
Citing various media and other reports, the senators asserted that some tax-exempt hospitals are not meeting their "required obligation to provide reduced or free care to their most vulnerable patients." Examples from the reports included (1) spending far less on charitable care than the value of the hospitals' tax exemptions; (2) denying treatment for patients with unpaid medical bills; (3) filing liens on patients' homes in poor and rural areas; and (4) charging full price for services that patients should receive for free or at a reduced cost.
Part of the problem in overseeing these hospitals is a "'a lack of clarity' around what constitutes community benefits." Although the IRS previously adopted some recommendations from the GAO to address this issue, the senators suggested that the IRS needs to strengthen its oversight.
The senators asked the IRS and TIGTA to furnish, within 60 days of receiving the letters, additional information on their "existing oversight of [tax-exempt] hospitals." In particular, they asked the IRS to provide:
Similarly, the IRS asked TIGTA to evaluate and report on:
It is likely that the IRS will respond to the senators' questions and provide at least general information on its oversight of tax-exempt hospitals' compliance with IRC Section 501(r) and the community benefit standard. For instance, the IRS may report on its review of exempt hospitals' community benefit activity, based on hospitals' web sites and Schedule H reporting, as the ACA requires the IRS to review the community benefit provided by each tax-exempt hospital at least once every three years.
Given the IRS's limited resources and shifting priorities, however, it's unlikely the IRS will make any significant changes in the near future to how it regulates exempt hospitals' compliance with the community benefit standard, absent new legislation requiring it to do so. The IRS has been slow to adopt, or declined to adopt, other recommendations from regulators, press and watchdog groups on community benefit regulation. For instance, GAO reported in April 2023 that the IRS has not yet adopted GAO's 2020 recommendations to ask hospital organizations to report community benefit for each individual hospital facility (rather than for the collective organization) on Schedule H and to update Schedule H to require more clear, consistent and comprehensive community benefit reporting.
This continued congressional scrutiny underscores the need for internal review of exempt hospitals' community benefit-related policies and procedures, and for routine monitoring of compliance with IRC Section 501(r), so that tax-exempt hospitals can both fully report their community benefit and comply with 501(r) requirements and the community benefit standard. Exempt hospitals should also consider analyzing how the community benefit they provide compares with community benefit provided by both tax-exempt and for-profit hospitals, as members of Congress, state regulators, watchdog groups, and the press likely will continue asking questions about community benefit and challenge the validity and/or efficacy of a hospital's tax exemption if its community benefit seems relatively low.
Further updates will follow to discuss any developments in community benefit regulation. Until then, please contact your Ernst & Young LLP tax professional with any questions.
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor