Not-for-profit hospitals should prepare for additional scrutiny from Washington concerning their tax-exempt status.
The Internal Revenue Service was the latest Washington organization to ramp up its monitoring of not-for-profit hospitals and systems. Last week, the IRS issued a workplan saying it may be sending letters to "a significant number" of not-for-profit hospitals seeking more information on executive compensation and details about how hospitals define "community benefits." Earlier in the week Sen. Chuck Grassley (R-Iowa) speaking at a conference, confirmed his commitment to examine whether not-for-profit facilities should continue receiving their tax-exempt status.
Together, said healthcare lawyers, they represent the latest salvo in an examination of not-for-profit hospitals and whether their tax-exempt status should be revoked.
"The underlying issue is: What is an individual hospital doing in terms of programs and activities to provide `community benefits,' in order to justify their continued tax-exempt status," said Michael Peregrine, a partner in the Chicago offices of law firm McDermott Will & Emery.
For more than a year now, Washington legislators and regulators have been scrutinizing the tax-exempt status of all charitable organizations and not-for-profits. But while hospitals may not have not been singled out by that movement, the spotlight shining their way at times has been particularly glaring.
In June 2004, the House Ways and Means Committee held a series of hearings focusing on what criteria should be used to grant a hospital tax-exempt status. During the most recent hearing in May, IRS Commissioner Mark Everson said it is becoming increasingly difficult to differentiate for-profit from not-for-profit facilities (May 30, p. 8). Meanwhile in the Senate, Grassley sent letters to 10 hospitals in May asking for information about their charity activities. Grassley had been preparing to introducing legislation to make not-for-hospital finances more transparent before Hurricane Katrina forced him to temporarily shelve his plan.
Some of that attention from Washington, said a former IRS official, can be attributed to the sheer size of the not-for-profit hospital sector. Aside from religious organizations, "Hospitals and the healthcare sector are a very significant sized portion of the charitable sector," said T.J. Sullivan a lawyer in the Washington offices of Gardner, Carton & Douglas. Lawsuits alleging abuse by not-for-profit hospitals in their uninsured billing practices have further put the spotlight on the industry, he said.
Last week, Grassley said that the response from hospitals to his letters "raises more questions than it answers," and called for hospitals to offer their own "substantive proposals for common definitions and reforms in areas such as community benefit, charitable care, charges to the uninsured, debt collection and joint ventures." Grassley made his remarks at the annual conference of Independent Sector, a coalition of charities, foundations and not-for-profits. Peregrine said hospitals should take the senator's statements as a warning. "For whatever reason, he's sending a signal he's not given up on this."
Similarly, the IRS has cast an eye on not-for-profit organizations. In May 2004, it launched a probe of executive pay, insider dealings and excess-benefit transactions at tax-exempt organizations (May 31, 2004, p. 6). Last week's announcement about its plans for hospitals was part of a larger initiative to focus on four new enforcement efforts. The other areas the IRS will be examining are easements, charitable trusts and the facilitation of transactions that violate tax-exemption laws.
While the IRS did not declaratively state it will be contacting hospitals for more information, Wayne Henry, a partner in the Omaha, Neb., offices of law firm Stinson Morrison Hecker, said hospitals should expect to hear from the agency. "I don't think they'd put this in print then withdraw it later," he said. Henry is a former IRS lawyer.
In light of the increased scrutiny of hospitals during the past two years, Richard Pollack, executive vice president of the American Hospital Association said last week's developments were not a surprise.
"We recognize that public accountability of tax-exempt status is a responsibility of hospitals," he said. "We're confident our members will satisfy the legitimate concerns of the IRS."