Senate Committee staff report calls for stronger charity care requirements for tax-exempt hospitals

In brief

Senator Bernie Sanders (I-VT), chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, on October 10 released a Majority Staff Report (Report) calling for Congress and the IRS to take steps to hold tax-exempt hospitals more accountable for the tax benefits they receive and their obligation to provide accessible healthcare in their communities. 

Nearly half of US hospitals are nonprofit organizations generally exempt from federal, state, and local taxation. In exchange for these tax benefits, the federal government requires tax-exempt hospitals to operate for the public benefit, which may include the provision of charity care (i.e., providing low-income individuals with medical care for free or at significantly reduced rates).

The 2010 Patient Protection and Affordable Care Act (ACA) enacted additional requirements for tax-exempt hospitals, including stipulating that they must maintain a publicly available financial assistance policy, limiting charges to patients eligible for charity care, and prohibiting them from taking ‘extraordinary collection actions’ against patients who are eligible for charity care.

The Report cites various studies to support its findings that tax-exempt hospitals have provided less charity care even as they saw steady increases in their revenues and operating profits. The Report makes several recommendations on actions Congress and the IRS could take to address the perceived legislative and administrative gaps that the Report says fail to hold tax-exempt hospitals accountable.  

Action item: Tax-exempt hospitals report community benefit expenditures, including expenditures for charity care, on Schedule H of Form 990, Return of Organization Exempt from Income Tax. No specific minimum level of community benefit expenditure currently is required; however, given the current scrutiny focused on this issue, tax-exempt hospitals may wish to analyze whether their reporting practices identify community benefit expenditures and appropriately report them. 

Report recommendations for Congress

The majority (Democratic) staff report calls on Congress and the IRS to hold tax-exempt hospitals accountable for the tax benefits they receive and their obligation to provide accessible healthcare in their communities. According to the Report, 2,978 tax-exempt hospitals in the United States received an estimated $28 billion — an average of $9.4 million per hospital — in federal, state, and local tax benefits in 2020, accounting for 44% of their net income for that year. The Report cites a study that found that 86% of tax-exempt hospitals spent less on charity care than they received in tax benefits between 2011 and 2018. 

In an effort to address the perceived legislative gaps that the Report says fail to hold tax-exempt hospitals accountable, the Report recommends that Congress:

• Take steps to ensure that tax-exempt hospitals are offering charity care at levels consistent with the tax breaks they receive. In 2020, tax-exempt hospitals spent an estimated $16 billion — or about 57% of the value of their tax breaks — on charity care, according to the Report. The Report suggests that the tax breaks the hospitals receive could be limited to the value of the community benefits they provide. 
• Establish clear, enforceable standards for tax-exempt hospital financial assistance programs, requiring hospitals to determine whether a patient is eligible for such assistance and provide it regardless of whether the patient proactively requests information on financial assistance or charity care. In 2017, tax-exempt hospitals billed $2.7 billion to patients who likely were eligible for charity care, according to a study cited by the Report. 
• Impose further restrictions on tax-exempt hospitals engaging in extraordinary debt collection processes. Some tax-exempt hospitals have taken steps to garnish wages and place liens on personal items, even as they fail to provide charity care to eligible patients, according to the Report.
• Define community engagement necessary to justify a hospital’s tax-exempt status. The ACA requires tax-exempt hospitals to conduct community health need assessments (CHNAs) to identify key health concerns for those living in the surrounding communities. In developing these CHNAs, tax-exempt hospitals are required to solicit input from underserved, low-income, and marginalized communities, but are not required to address the concerns they hear. The ACA does require each tax-exempt hospital to complete and publicize an implementation strategy in which it describes how the hospital facility plans to address significant community health needs identified in its CHNA. If the hospital does not intend to address every identified significant health need, the implementation strategy must explain why the hospital facility does not intend to address such needs.
• Require tax-exempt hospitals to specifically address the needs raised by community members, which the Report suggests could be achieved in part by encouraging partnerships with other community resources or health providers to ensure patients can access free or discounted services.

American Hospital Association (AHA) response

The AHA responded to the Report stating that it “does not fully account for the wide range of community benefits that hospitals provide” and “neglects to consider that under the law community benefit is defined by much more than charity care and includes patient financial aid, health education programs, and housing assistance.” According to a new AHA report, Results from 2020 Tax-Exempt Hospitals’ Schedule H Community Benefit Reports, tax-exempt hospitals provided $129 billion in total benefits to their communities in 2020 — about $20 billion more than the prior year and 15.5% of total hospital expenses.