August 22, 2022

Tax Exemption Scrutiny Continues (Again) for Nonprofit Hospitals

Client Alert
Don Stuart

Scrutiny of nonprofit hospitals and the tax exemptions they receive is nothing new. Nonprofit hospitals can qualify for a variety of exemptions from federal and state income taxes, property taxes and sales taxes, resulting in significant savings. In exchange for this tax-free existence, nonprofit hospitals are expected to provide a level of charity care and community benefit to their communities served. However, there appears to be a renewed level of interest in bringing the tax exemption issue back into the spotlight.

Recently, the Wall Street Journal published an article, “Big Hospitals Provide Skimpy Charity Care - Despite Billions in Tax Breaks,” in which nonprofit hospitals are scrutinized for lagging behind their for-profit hospital peers when it comes to providing charity care to their communities. The article specifically focused on the share of patient revenue of particular nonprofit hospital systems going towards charity care compared to such amounts provided by for-profit hospital systems. What counts in the “good bucket” as far as financial assistance in the form of charity care and whether or not other community benefit expenses are included will nearly always sway the numbers.

The comparisons and disparities between nonprofit and for-profit hospitals noted in the article also hinged on whether the particular state the hospital is located in had expanded its Medicaid program under the Affordable Care Act or not. Of more concern is that the article also questions the financial assistance and billing and collection practices of certain hospitals with real life patient billing cases highlighted - a lingering topic that hospitals have still been struggling with in the media and other watchdog groups.

We started seeing similar headlines (from the Wall Street Journal and other publications) on nonprofit hospitals starting in the mid-2000s when Senator Charles Grassley zeroed in on nonprofit hospitals and demanded justification for their tax-exempt status. After years of inquiries, questionnaires, IRS compliance checks, hearings and sweeping legislation in the form of Section 501(r), community benefit reporting and the redesigned IRS Form 990 and Schedule H, there appeared to be a new environment. Nonprofit hospitals could finally see some calming of the storms and an agreed upon and reasoned accountability and justification for their tax exemptions.

Are we in for a new round of storms? For-profit hospitals, who shoulder a significant tax burden as taxable entities, are also taking notice of these charity care comparisons and media-reported numbers and could become more vocal as to why tax breaks such as property taxes are only going in one direction and not also in their direction. Calls for revising the hospital community benefit standard are again resurfacing and studies continue to come out on community benefit and charity care. Some appear supportive for nonprofit hospitals, but other studies may not be.  States are also jumping back in with state attorney generals focused on violations by hospitals of state collection agency acts and consumer protection acts relating to patient notices, financial assistance eligibility and aggressive collections. Washington is the latest example.

Many will find the recent Wall Street Journal article either directly on point or entirely missing the point of what counts in determining how nonprofit hospitals justify their tax exemption.  There are two sides to every story, but this is still an issue, even today, that nonprofit hospitals cannot afford to ignore. 

So what does this mean for nonprofit hospitals moving forward, and do these hospitals and health systems find themselves in a defensive situation again to react to these developments and headlines? Some key questions our legal team is keeping in mind for the entire hospital landscape (both nonprofit and for-profit) are:

  • How does the nonprofit tax-exempt structure for a hospital matter as to what care and benefits are provided to the community?
  • How do you address nonprofit/for-profit hospital joint ventures and the provision of charity care and community benefit with the blurred lines of hospital ownership and management?
  • What solutions are available to create more certainty around communicating charity care and community benefit, both at the state and federal level?
  • Where is there opportunity to make sure that hospitals have the appropriate oversight on billing and collections - including over the collections agencies following the hospital’s policies?
  • Property tax exemption for nonprofit hospitals - a harder justification?

Future blogs will dive further into these issues.

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