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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:

• The "most commonly reported community benefit activities that qualified a tax-exempt hospital for tax exemption in FY 2021 and FY 2022" broken down into categories of charity care, unreimbursed costs of Medicaid, community health improvement activities, professional development and "other"
• Updates made since September 2020 to the community benefit instructions for Form 990, Schedule H, including the rationale for the updates, how the updates improved clarity in reviewing community benefit information, and whether further updates were considered
• The number of tax-exempt hospitals that the IRS identified since Spring 2021 as "'at risk' of noncompliance with the community benefit standard" and a description of the effectiveness of the IRS's review of those community benefit activities
• A list of tax-exempt hospitals that the IRS referred to its audit division from FY 2019 through FY 2022 for possibly violating the Patient Protection and Affordable Care Act, including the number of hospitals referred for noncompliance issues and how many reported no community benefit spending
• A list of tax-exempt hospitals that lost their tax exemption due to noncompliance with the community benefit standard beginning January 1, 2014
• A list of tax-exempt hospitals that had their Forms 990 rejected by the IRS for failing to properly report community benefits
• A list of tax-exempt hospitals that failed to file a Form 990 from FY 2019 through FY 2022, as well as the number of hospitals that were assessed penalties and had their exemptions revoked by the IRS
• The IRS's challenges in its ability to oversee tax-exempt hospitals

Similarly, the IRS asked TIGTA to evaluate and report on:

• "[W]hether the IRS is effectively ensuring that nonprofit hospitals comply with tax-exempt requirements and are providing sufficient community benefit"
• The IRS's "process for identifying hospitals "at risk" for noncompliance with the community benefit standard, and its resolution process to ensure future compliance"
• The "effectiveness of the IRS's controls to detect and prevent hospitals' underinvestment in improving community health"
• The effectiveness of the community benefit standard, as outlined in Revenue Ruling 69-545, in determining whether a hospital is organized and operated for the charitable purpose of promoting health
• The IRS's adjustments to Form 990 Schedule H instructions for transparency, consistency and comprehensiveness in reporting
• The "existing standards for financial assistance policies and practices that reduce unnecessary medical debt from patients who qualify for free or discounted care"
• The effectiveness of the IRS's efforts to "ensure hospitals comply with Section 501(r) by making "reasonable efforts" to determine whether individuals are eligible for financial assistance before initiating extraordinary collection actions"
• The "pervasiveness of nonprofit hospitals billing patients with 'gross charges'"
• The IRS's challenges in its ability to oversee tax-exempt hospitals

Implications

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.

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Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor