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IRS change would exclude hospitals' grant-funded work from 'community benefit'


By Joe Carlson
Posted: December 19, 2013 - 4:45 pm ET
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A little-noticed proposal from the Internal Revenue Service this month may cause many hospitals to look a lot less charitable than they did in years past.

Earlier this month, the IRS rolled out a draft of its 2013 instructions for hospital tax departments that changes how healthcare providers account for grant money they receive. The result of the change would be that not-for-profit hospitals will no longer be able to use many grants to prove to their local communities how much charity work they do in exchange for their tax exemptions.

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“That's a huge change,” said Ivy Baer, senior director and regulatory counsel with the Association of American Medical Colleges, whose members receive many grants that will now not count as “community benefit” work. “We were surprised to see that in these instructions. But we are glad to know that these are draft instructions and we will have a chance to make our voice heard.”

But not much time. IRS officials couldn't immediately say when the instructions for the IRS Form 990 Schedule H must be finalized, but tax-filing season is scheduled to start during the last week of January 2014. The 23-page draft instructions (PDF) were published Dec. 9.

Verite Healthcare Consulting President Keith Hearle, who helped the IRS write the instructions for the first-ever Schedule H in 2008, said the change in how grant revenue is accounted for would make hospitals more transparent in their finances.

“This represents positive change in Schedule H and it will increase its reliability of use when comparing hospital community benefits across teaching hospitals and non-teaching hospitals,” he said. “It will remove a source of distortion in the portrayal of what community benefits hospitals are providing.”

Roughly three quarters of all U.S. nonfederal hospitals are tax exempt, and they are required by law to provide community benefits in exchange for their exemptions. Congress has never approved any of the proposals to set defined spending requirements, but hospitals tend to be extremely sensitive about portraying the good works they do on behalf of their local communities anyway.

Community benefits commonly include local outreach efforts, health-education programs and the millions of dollars in free and discounted healthcare provided to uninsured residents and Medicaid patients each year.

In the past, hospitals could label grant-funded programs like medical research on behalf of a drug company or a government agency as community benefit.

But for the 2013 tax year, the IRS is proposing to change that. The proposal says that any money required to be spent on a specific grant program—known as a “restricted grant”—no longer counts toward the community benefit total.

“If a hospital didn't get a grant, they wouldn't provide the research. So the grant creates the expense,” Hearle said. The change “aligns Schedule H with generally accepted accounting principles, which say if you accept restricted grant funding, you need to show the funds being used for that purpose.”

The change will affect hospitals that rely on grant-funded research to show that they're doing enough work to justify their exemptions.

For example, a 2011 analysis of hundreds of tax forms by Modern Healthcare found that the Mayo Clinic's two-dozen hospitals gave away free care equal to less than 1% of their expenses in 2009—at a time when Congress considered setting spending requirement at 5%. But including the system's more than $1 billion in research spending boosts the system's community benefits to 11% of its expenses. Under the new rules, Mayo would have been forced to disclose how much of its research was grant-funded, and subtract that amount from the community benefit report.

Mayo officials declined to comment for this story.

Baer said the changes would create a disincentive for hospitals to accept grants that benefit their communities, because such grant funding would now count against a hospital's community benefit total.

“Why should that count against you? It is enabling you to do things that you otherwise would not be able to do,” she said. “Now that money is going to count against you.”

Follow Joe Carlson on Twitter: @MHJCarlson


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