The IRS, Nonprofit Hospitals, and the Meaning of “Community Benefit”
Filed under: 501(c)(3), Hospital Finances, IRS
Photo by Maulbagi via Flickr
Kaiser.org has written an interesting article about the recent two year IRS Study of nonprofit hospitals under 501(c)(3). The IRS queried 5oo nonprofit hospitals, with the study’s findings based primarily upon examination of 489 of those. Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In the study’s executive summary, the IRS puts it so:
“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”
“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”
The Kaiser article notes that according to the NY Times, “Lawmakers over the last few years have ‘raised concerns over whether nonprofit hospitals provide enough free care and other community benefits to justify their tax exemptions,’ but no test exists for ‘measuring how much community benefit is enough or even what constitutes community benefit.’”
These limitations may be seen in the characterizations of “community benefit” available to the hospitals in the study. Bad debt and Medicare payment shortfalls may be construed as “community benefit.” As the debt, the credit injury, and the collection calls all inure to the community member who received treatment but could not pay, one might question if the “community benefit” involved in a failure of collection practices might be distinguishable from the “community benefit” involved in intentional charitable care. In addition, there simply is no set criteria to determine the appropriate amounts to be charged as “community benefit.” The IRS study poses the following under the heading of
“Limitations: …although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the respondents’ discretion.
Which is to say that those being monitored (nonprofit hospitals) to gauge the amount of money spent– to justify their tax exempt status– were free to characterize their contributions in the manner they thought best.
Medicare shortfalls: So… if a non-profit hospital has a fee schedule rate of $100 for a procedure, and Medicare has a reimburse rate of $80 for that procedure, if a “charge” rate of measurement is used then there has been a $20 “community benefit” if the federally designated tax exempt nonprofit hospital accepts as payment the federally designated and predetermined Medicare reimbursement amount. Significantly, 19% of the hospitals also claimed “shortfalls” in payment from private insurers as uncompensated care/community benefit (See Chart: “Figure 82,” p. 105, full report).
Cost vs. Charge: So… if a procedure has a cost to the hospital of $80 and a fee schedule rate of $100, and the recipient of the procedure does not pay and the hospital categorizes the non-payment as “bad debt,” it has the ability to count as “community benefit” not only the cost of its unintended largesse, but also the amount it had expected as profit.
Perhaps even more telling than this latitude in characterization are the amounts actually submitted to the IRS as community benefit. Here are a few of the findings:
- The average and median percentages of total revenues reported as spent on community benefit expenditures were 9% and 6%, respectively.
- Uncompensated care accounted for 56% of aggregate community benefit expenditures reported by the hospitals in the study.
- Uncompensated care was the largest reported community benefit expenditure for each of the study’s demographics, other than for a group of 15 hospitals reporting large medical research expenditures (93% of all research expenditures reported by the study’s respondents).
- Further, the group of 15 hospitals reporting large medical research expenditures materially impacted the overall numbers in this area. For example, when the research group is removed, the percentage of total community benefit expenditures reported as spent on uncompensated care increases from56% to 71%, and that spent on medical research decreases from 15% to 1%.
- Uncompensated care and community benefit expenditures were concentrated in certain hospitals and unevenly distributed. For example,9% of the hospitals reported 60% of the aggregate community benefit expenditures of the overall group; 14% of the hospitals reported 63% of the aggregate uncompensated care expenditures.
So… if we were to take the 15 research hospitals out of the mix, 73% of the “community benefit” for the remaining 474 hospitals was in the form of uncompensated care–Medicare (and private insurance) shortfalls and bad debt inclusive.
In addition, of the substantial uncompensated care component, hospitals contributions were disparate: 14% of the hospitals reported 63% of the total–which is to say that roughly 68 hospitals out of the 489 accounted for 63%, while the other roughly 421 hospitals chipped in a somewhat less magnanimous 37% of the total. This despite the considerable latitude in characterization.
The Kaiser article notes that according to the NY Times
“In a statement, Sen. Chuck Grassley (R-Iowa), who since 2005 has sought to require not-for-profit hospitals to justify their tax exemptions, said that the study did not include adequate definitions or comparable information on community benefits for-profit hospitals provide. He said, “Neither the IRS nor Congress has done a very good job when it comes to establishing the criteria for enjoying this tax status since the IRS scrapped charity care for its community benefit standard in 1969″ (New York Times, 2/13)”
I am very interesed in this information regarding “community benefit” good to know that someone, Senator Grassley is watching. I live in Iowa, and the Iowa Health System has this community benefit statement. I am not sure if bad debt is part of that, but I would not doubt it. The thing that botheres me is that they have some practices that I think should be examined. I have been unsuccessful in getting anyone one including ERISA and Civil Rights Commission both of whom I have applied to for help to do anything but pass it off as nothing. I believe that first of all, it is discrimination and that if their policies are allowed to continue, then I believe that there is a potential for wrondoing and harm to a lot of innocent folks. I am currently trying to sue them in court. But, they have powerful attorneys, and I am a pro se litigant because I can’t afford an attorney and I can’t get one even to help me, I am trying to do this as I go along. I have no idea what I am doing. The legal system is overwhelming and, the scales of justice tip in favor of the person with the big attorney and even bigger pocket book. Their debt collection practices are ruthless. And their policies allowing them to cancel a person’s insurance (while continuing to collect monthly premiums) and then to ban the person from Iowa Health System Clinics (approx 128) and physicians (approx 450) for what they call a “failure to pay” on the co-pays is harmful. This action occurred despite the fact that I did try to rectify the situation. This was done to me after the diagnosis of Diabetes not before even though I have always had trouble paying the co-pays.Then they force you to accept the higher cost insurance or no insurance at all which has a more expensive premium and co-pay, plus less coverage for the cost of procedures. Now if you have Diabetes like I do, just try and get affordable coverage from anyone else. As soon as you say the word Diabetes they hang up on you. I then had to go to the Community Health Free Clinic in Cedar Rapids (who wondered why I was comming to them for help when I worked for a hospital affiliated with Iowa health System and therefore part of a non-profit medical care facility) to get medication and other medical care. By the way, the Community Health Free Clinic really is free and really does help people. I am concerned also about what will happen to this wonderful clinic if the health reform bill goes through. There really are people who though they work for a living, do not generate an income that would allow for monies to be spent on monthly premiums. In fact this is part of the problem with low-income people and people on Medicare (me), is that after premiums are paid, one cannot afford the co-pays for the services and the cost of medications. So, without the Community Health Free Clinic many people would just suffer and possibly die from curable infections and other health conditions that required medication and monitoring. I can’t imagine that these people whose lives are already miserable from a financial standpoiont and can’t pay living expenses will be fined if they don’t purchase insurance. Why?? These people will just get kicked off for a failure to pay. Then what will they do? The medical bankruptcies are the result of insurance and the difference in what the patient can pay after the insurance pays its share. These costs are overwhelming for a person who barely makes enough money to pay rent. It makes me wonder if the ability to file bankruptcy will become non-existent. People like me can’t afford the money to file. Well, anyway, I hope that these so called benevolent benefactors will have to provide proof of the community care and the justification of the huge salaries that are paid to corporate. Also, this information is being sent from a business that does not know of my situation nor do they probably share my feelings about these health measures. So, please respond to 319-241-3539 or to the lil_patches2001@yahoo.com e-mail and ignore the computer that the mail comes from. I have computer problems at home or else I would e-mail from there. I do not have a website at this time. I just stumbled on this site and decided to enter my imput. Thank you for providing the information. Sincerely, Louetta Finch