Community benefit: State oversight of charitable hospitals 

Rachel Spurlock, Kim Scifres, Janice Smith
| 10/3/2023
Community benefit: State oversight of charitable hospitals

To maintain their federal tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3), charitable hospitals must meet a community benefit standard. The standard essentially seeks to ensure that charitable hospitals pay their fair share in exchange for their tax-exempt status.

Is community benefit reporting meaningful?

Charitable hospitals use IRS Form 990, Schedule H, “Hospitals,” Part I, line 7 to report financial assistance and other community benefits at cost. But with significant disparities in reported hospital community benefit percentages, is current reporting meaningful to regulatory agencies and to the public? For example, a community hospital might report 7% community benefit, while a major teaching institution might report only 0.2% community benefit (as a percentage of total expenses). Disparities in community benefit reporting among hospitals have become more apparent in recent years due to easier access to data, increased interest from regulatory agencies and the public, and published reports that bring this issue to light.1

What does community benefit look like from a hospital’s perspective?

Hospital leaders should be mindful of their community benefit percentage, how it has been trending over the past years, and how it is expected to trend in the coming years. Many hospitals have seen a decrease in their community benefit percentage due to factors such as Medicaid expansion (leading to a decreased Medicaid shortfall) and a smaller portion of the hospital’s budget being available for financial assistance and other components of community benefit. In addition, the financial condition of many healthcare organizations has declined in recent years due to the pandemic, labor shortages, and increased costs.

Is IRS oversight of community benefit activities of charitable hospitals decreasing?

There appears to be a trend over recent years toward limited IRS enforcement in the tax-exempt sector.2 With the IRS seemingly focusing more resources on tax collection, oversight of the tax-exempt sector generally seems to be flat or perhaps even decreasing. The same holds true for the enforcement of the community benefit activities of charitable hospitals.

When Section 501(r) was passed as part of the Patient Protection and Affordable Care Act of 2010, many thought that oversight of charitable hospitals, including their community benefit activities, would increase. That arguably has not come to fruition. A U.S. Government Accountability Office report, “Tax Administration: Opportunities Exist To Improve Oversight of Hospitals’ Tax-Exempt Status,”3 notes, “according to IRS officials, hospitals with little to no community benefit expenses would indicate potential noncompliance. However, IRS was unable to provide evidence that it conducts reviews related to hospitals’ community benefits because it does not have codes to track such audits.” The lack of hospital community benefit reviews by the IRS also might stem from the lack of a bright-line test to determine compliance.4

How are states overseeing hospital community benefit?

While charitable hospitals might sense flat or decreasing IRS oversight of their activities, the same cannot be said of state oversight. Perhaps these facts signal a shift from IRS oversight of the community benefit activities of charitable hospitals to regulatory review by the states.

State attorneys general, secretaries of state, or other state offices might regulate charities. But their approaches to charity regulation are not uniform from state to state, and each might follow a different statutory model, regulatory model, best practices model, or other model. Interest in charity oversight at the state level is growing, however, for a couple of reasons: Data is now readily available and provides an opportunity for state regulators to scrutinize charities more closely, and state regulators must be responsive to public concerns.

Numerous public concerns related to hospital community benefit in 2023 and looking forward include the following:

  • Millions of people are expected to lose health coverage due to the unwinding of the Medicaid continuous enrollment provision. A Kaiser Family Foundation article explains the issue as follows:
    "At the start of the pandemic, Congress enacted the Families First Coronavirus Response Act (FFCRA), which included a requirement that Medicaid programs keep people continuously enrolled through the end of the COVID-19 public health emergency (PHE), in exchange for enhanced federal funding. As part of the Consolidated Appropriations Act, 2023 [CAA], signed into law on December 29, 2022, Congress delinked the continuous enrollment provision from the PHE, ending continuous enrollment on March 31, 2023. The CAA also phases down the enhanced federal Medicaid matching funds through December 2023. Primarily due to the continuous enrollment provision, Medicaid enrollment has grown substantially compared to before the pandemic and the uninsured rate has dropped. During the unwinding of the continuous enrollment provision, millions of people are expected to lose Medicaid and that could reverse recent gains in coverage.5
  • Undocumented and uncovered immigrants do not receive Medicaid coverage, which is a growing problem as that population increases.
  • Average deductibles for underinsured individuals can be very high, and this population might or might not be covered under a hospital’s financial assistance policy. It is a growing concern because many individuals have purchased catastrophic insurance coverage with substantial deductibles.

State regulators, watchdog organizations, news outlets, and others closely monitor each of these concerns. With the information available on IRS Form 990, Schedule H, and in Medicare and Medicaid cost reports, policies posted on hospital websites, and other public sources, presumably state regulators have access to significant amounts of data to perform a thorough review and obtain a clear picture of a hospital’s community benefit contributions.

States have numerous avenues at their disposal to initiate change designed to increase the provision of community benefit by hospitals, including:

  • Imposing taxes (such as property tax and sales tax) or payments in lieu of taxes (PILOTs) on hospitals
  • Regulating medical debt collection activities
  • Mandating a state minimum level of charity care
  • Reviewing the conditions that hospitals place on charity care eligibility (such as citizenship)
  • Requiring hospitals to use a standardized charity care application form or approval process
  • Placing conditions on approvals of transactions (such as mergers) involving hospitals
  • Considering the amount of a hospital’s bad debt (which, if too high, could signal poor charity care processes)
  • Initiating lawsuits against hospitals that are deemed to provide insufficient charity care or that fail to meet minimum community benefit thresholds
  • Assessing compliance with federal law, such as IRC Section 501(r),6 as states assert that there is an obligation under state law to comply with federal law
  • Updating certificate of need laws to consider charity care and community benefit

While both pros and cons are associated with each of these items, this list should give hospitals food for thought as the issue of hospital community benefit develops over the coming months and years.

What can hospitals do now to prepare for increased scrutiny of their community benefit practices?

While it is important for hospitals to monitor their community benefit percentage and how community benefit dollars are being captured and reported on Form 990, Schedule H, that is only the beginning. Hospitals must consider that many states take a very broad view of a hospital’s community benefit-related responsibilities. Therefore, a hospital’s internal assessment also should consider other information reported on Form 990, Schedule H; an internal valuation of the hospital’s tax-exempt status; how the hospital assesses community health needs and addresses those needs; hospital financial assistance and related policies and procedures; and more. In addition to knowing the applicable state requirements that affect community benefit matters for their hospital, leaders should review trends in state requirements that affect community benefit matters nationwide, as these trends likely will continue to evolve and affect more states. Hospitals might want to consider implementing evolving best practices in community benefit matters to reduce the risk of threats to their tax-exempt status going forward.

1Jamie Godwin, Zachary Levinson, and Scott Hulver, “The Estimated Value of Tax Exemption for Nonprofit Hospitals Was About $28 Billion in 2020,” KFF, March 14, 2023, https://www.kff.org/health-costs/issue-brief/the-estimated-value-of-tax-exemption-for-nonprofit-hospitals-was-about-28-billion-in-2020/ (accessed Sept. 6, 2023).
2Treasury Inspector General for Tax Administration, “Review of the IRS’s Enforcement Program for Tax Exempt Organizations That Participate in Illegal or Nonexempt Activities,” Sept. 29, 2022, Report Number: 2022-10-064, https://www.oversight.gov/report/TIGTA/Review-IRS%E2%80%99s-Enforcement-Program-Tax-Exempt-Organizations-Participate-Illegal-or
3Tax Administration: Opportunities Exist to Improve Oversight of Hospitals’ Tax-Exempt Status, GAO, Sept. 17, 2020, https://www.gao.gov/products/gao-20-679
4While more clear-cut requirements exist when it comes to Section 501(r) compliance than the community benefit standard generally, the penalties for Section 501(r) failures are often impracticable. As an example, if a charitable hospital adopts a financial assistance policy that does not meet all of the requirements of Section 501(r), and it does not take advantage of the opportunity to correct and disclose the failure per IRS guidance, the IRS would be very unlikely to revoke the exempt status of the organization.
5Jennifer Tolbert and Meghana Ammula, “10 Things to Know About the Unwinding of the Medicaid Continuous Enrollment Provision,” KFF, June 9, 2023, https://www.kff.org/medicaid/issue-brief/10-things-to-know-about-the-unwinding-of-the-medicaid-continuous-enrollment-provision/ (accessed Sept. 6, 2023)
6Section 501(r), added to the IRC of 1986, as amended, by the Patient Protection and Affordable Care Act of 2010, imposes new requirements on Section 501(c)(3) organizations that operate one or more hospital facilities. Each Section 501(c)(3) hospital organization is required to meet four general requirements on a facility-by-facility basis:
1. Establish written financial assistance and emergency medical care policies (Section 501(r)(4)).
2. Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy (Section 501(r)(5)).
3. Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions against the individual (Section 501(r)(6)).
4. Conduct a community health needs assessment (CHNA) and adopt an implementation strategy at least once every three years (Section 501(r)(3)).

Contact us

Rachel Spurlock - social
Rachel Spurlock
Managing Partner, Exempt Organizations Tax Services, Office Managing Partner, Louisville
Kim Scifres
Kim Scifres
Managing Director
Janice Smith
Janice Smith
Managing Director