In a major policy development for not-for-profit hospitals, those institutions will have to prove to the Internal Revenue Service that they give care to the poor in order to keep their tax-exempt status.
New guidance from the IRS says simply having hospital policies on indigent care isn't enough to satisfy the charity-care requirement of a community-benefit standard that all tax-exempt hospitals must meet. Instead, "the hospital also must show that it actually provided significant healthcare services to the indigent," according to an IRS field service advice memo dated March 9 that surfaced in tax circles last week.
The memo doesn't carry any legal precedent as does a formal revenue ruling, which is the IRS' equivalent of a regulation, but it does give hospitals insight into the IRS' enforcement thinking. Advice memos are issued by the IRS' national office in Washington to clarify questions from agents in the field.
Tax lawyers said the memo is an indication that the IRS is broadening the community-benefit standard for tax-exempt hospitals it established more than 30 years ago in a landmark revenue ruling. Under that 1969 ruling, tax-exempt healthcare organizations must provide their communities with certain benefits, including maintaining an open medical staff, accepting Medicare and Medicaid patients, and treating anyone who enters the emergency department regardless of his ability to pay.
Now, the IRS is looking for proof of indigent care and is expanding its purview beyond the emergency department to care given to the poor throughout the hospital.
"It's basically shining a very bright light on the community-benefits standard," said Michael Peregrine, a healthcare tax lawyer with Gardner, Carton & Douglas in Chicago.
Douglas Mancino, a healthcare tax lawyer with McDermott, Will & Emery in Los Angeles, said the memo is "a deliberate mischaracterization of what the community-benefit standard is." Mancino said the standard does not include an express charity-care requirement.
In 1999, the latest year for which figures are available from the American Hospital Association, there were 3,012 private not-for-profit hospitals, which represented 61% of the nation's 4,956 acute-care facilities. That same year, all U.S. hospitals spent $20.7 billion on uncompensated care, up from $19 billion in 1998, also according to AHA data. Uncompensated care is the total of charity care and bad debt.
In its memo, the IRS said the providing of free or subsidized care to the indigent is a big indicator to the courts and the IRS itself that a hospital promotes health for the benefit of the community. The memo cites several revenue rulings and court decisions to support its position.
The memo came from a lawyer in the IRS' office of chief counsel in Washington, and it responded to questions from a regional IRS lawyer who covered the Great Lakes and Gulf Coast areas. The regional lawyer raised the issue of whether a hospital with indigent-care policies satisfied the community-benefit requirement.
The memo includes no identifying information about the particular situation in question. An IRS spokesman had no comment on what precipitated the memo.
Still, the IRS is clear in the memo that a hospital won't qualify for an exemption unless it can document that it provides the care promised in its policies. The memo also said case law is moving in that direction.
As part of the memo, the IRS suggests a series of 14 questions an agent might ask to determine a hospital's charitable policies and activities (See chart).
The memo sends a clear message to providers. "It simply reiterated the need for hospitals and other healthcare organizations to document the actual results of their charity care, and, frankly, they are going to be doing that anyway," said Thomas Hyatt, a healthcare tax lawyer with Ober, Kaler, Grimes & Shriver in Washington.
At the Bon Secours Health System, Marriottsville, Md., documenting charity care and other community benefits already is business as usual. The 24-hospital system has policies for tracking what it calls community commitments, which include charity care, in-kind services, direct support and advocacy, said Joeann Karibo, Bon Secours' director of community commitment.
She said hospital bills can help document the indigent care hospitals provide because even though someone can't pay, a bill is still generated detailing what care was received.
In the fiscal year ended Aug. 31, 2000, Bon Secours' community commitments totaled $86.3 million.
