Tax Exemption of Health Care

A recent Internal Revenue Service (IRS) report is prompting both state and
federal legislators to revisit laws on hospital tax exemption and “community
benefit.”

Hospitals are eligible for federal tax exemption as long as they provide some
form of “benefit” to the community. The IRS does not define community benefit,
and hospitals fulfill the requirement in a wide variety of ways, ranging from
providing charity care (care for which payment is neither expected nor sought); to
holding health fairs and having a governing board that includes community
representatives.

According to Income tax act of 1961, income from Professional Institutions are
exempted under [Section 10(23A)] when the institution applies its income or
accumulates it for application, solely to the objects for which it is established. And
in the same way the institution is approved by the purpose by the Central
Government.

Exemption is provided for hospital under Income tax Act of 1961, when it is
working exclusively for philanthropic purposes.

The IRS survey of 500 non-profit hospitals found that the institutions use a wide
range of criteria to determine which patients are eligible for charity care, and they
publicized the availability of charity care to differing degrees. Forty-five percent of
all hospitals surveyed spent 3 percent or less of their revenue on charity care and
nearly 25 percent spent 1 percent or less.

Nonprofit hospitals may receive exemptions from state and local income,
property and sales taxes, which, in some cases, are of greater value than the
federal income tax exemption. Some states have tied exemption from state and
local taxes to community benefits. Only a few states have specific charity care
standards—outlining who receives free or discounted care and how rules are
publicized—in place.

In 1993, for example, the Texas Legislature established minimum levels of

charity care that nonprofits must provide to gain tax exemption. Hospitals may,
for example, receive tax exemption by providing charity care and community
benefit in an amount equal to at least 5 percent of net patient revenue.

Benefits of tax exemption:

Society gets the services delivered at lower cost. Why? Because the non-profits
do not have to pay property tax, sales tax, or income tax and because they can
finance their capital needs using tax-exempt debt instead of a higher cost mixture
of equity (i.e., stock) and tax debt. Also, they are more likely to receive
philanthropic donations to help pay for the services offered. Thus, the underlying
cost structure of non-profits to end-users and/or society, everything else being
equal, should be lower.

Inspection of health care:

the transparency of how funds are being spent at a non-profit need to be

increased and scrutinized more carefully... but more importantly, regulation needs
to address strict standards as to what charity care is defined as. Currently, charity
care remains fairly amorphous, with loopholes as to what can be evaluated and
added into the financial reports each year. Clear standards of what falls into
charity care and an audit to ensure that this is appropriately reported is a start to
leveling the field.

Our hospitals frequently treat patients who do not have the ability to pay, or who
can only pay a portion of their bill. This is one of the many ways in which a
nonprofit hospital can promote the health of the community it serves. The Federal
government and state governments have granted non-profit, tax preferred status
to hospitals that operate for the benefit of the community. Today's hearing
primarily seeks to review what we know about the value of the uncompensated
and under-compensated care provided by these non-profit hospitals, and the tax
benefits and other support they receive. Although the Committee is focusing on
the issue of tax exempt status for hospitals, which is within the purview (scope of
authority) of the Treasury Department and the Internal Revenue Services, it
might also want to review current policies that exist to assist hospitals that
provide uncompensated care and to consider whether funds used in those efforts
are providing care in the most efficient and effective manner possible. To address
this issue, a number of related questions are relevant, including the extent to
which quality, costs, and behavior of non-profit hospitals differ from for-profit and
public hospitals.

States are revisiting the issue of hospital community benefits. The operations of
nonprofit hospitals received considerable attention after activists (advocate)
publicized the fact that some bill uninsured patients the full “retail” price of care,
rather than the discounted prices negotiate(agree) by insurers. Several class-
action lawsuits were filed allege(charge) that nonprofit hospitals were price-
gouging uninsured patients, and four states enacted legislation requiring
hospitals to inform uninsured patients about Medicaid and other programs for
which they might be eligible. Some states also bar hospitals from using overly
aggressive collection practices to obtain payment.
Many state hospital associations and the American Hospital Association (AHA)
have adopted voluntary guidelines that inform low-income patients about the
public programs and discounted care that may be available to them. According
to Nicholas Wolter, M.D., a member of AHA’s board, “In 2006 alone, hospitals
provided more than $31 billion in uncompensated care and provided countless
billions more in benefits to their communities through programs and activities to
promote better health.”

Assistance provided by state

The number of uninsured has increased the demand for hospital uncompensated
care as a safety net for the uninsured (despite increases in the share of the
population covered by public programs). Tight state budgets mean increased
scrutiny of dollars: many states partially reimburse hospitals for uncompensated
care by allotting funds from a state-wide pool or fund.

In 2006, the Minnesota Legislature directed the state Department of Health to

perform a study of the amount of community benefits in the state, as well as the
value of tax exemptions.

It recommended that all hospitals publicize their charity care policies and that
standardized reporting of community benefits be mandated.

Hospitals are required to spend a minimum percentage of their revenue on

charity care.

In December 2007, the IRS announced an overhaul of the return form—or, Form
990—filed by tax-exempt organizations. With the new form, which will require
tax-exempt hospitals to report their finances and community benefits in greater
detail, the IRS hopes to bring greater transparency to the tax-exemption process.
U.S. Senator Chuck Grassley encouraged the IRS to give hospitals stronger
guidance on reporting community benefits but also supports a uniform charity
care threshold for all tax-exempt hospitals. Senator Grassley has drafted, but not
yet introduced, legislation that would require a hospital to spend 5 percent of its
operating expenses on charity care in order to qualify as a tax-exempt institution.