The IRS has published its final report on tax exempt hospitals, available here. Beginning in May 2006, the IRS undertook the project, using questionnaires from a "modest portion of the nonprofit hospital sector" and follow-up examinations of 20 hospitals' executive compensation plans. The goal was to understand how hospitals apply the community benefit requirements and how they establish and report executive compensation.
An interim report was issued in mid-2007 that provided "preliminary information" summarizing the data collected on the community benefit issues from 487 hospitals, but not providing an indepth analysis. That report showed that almost all responding hospitals claimed a "written uncompensated care policy", but there was no single way of defining "uncompensated care" and there were significant differences in reporting community benefits, making "it difficult to assess whether a hospital is in compliance with current law." News release IR-2007-132, July 19, 2007. The following excerpt from the interim report executive summary (linked below) indicates the kinds of care that hospitals reported as providing community benefit.
97% of the respondents reported making uncompensated care available to at least some persons. In narrative responses to certain of the questions, most hospitals reported providing some free care to low-income patients, many hospitals reported providing discounted care on a sliding income scale, and others reported providing discounts to the poor, uninsured, or other vulnerable persons. The median percentage of patient visits that resulted in the provision of uncompensated care was 3.5%, and the mean was 10%. After uncompensated care, the next largest categories of expenditures reported as providing community benefit, ranked as a percentage of total reported community benefit expenditures, were medical education and training (23%), research (15%), and community programs (6%). A number of hospitals (76%) reported conducting medical education and training, and 21% of the hospitals reported that they conducted medical research. More than 75% of hospitals reported expenditures for producing publications and newsletters, medical screenings, and public educational programs. Many hospitals reported expenditures to study the unmet health needs of the community (28%), immunization programs (40%), programs to improve access to health care (54%), and other health promotion programs (32%).
Relevant links for the interim report follow:
- Interim report
- Executive Summary
- Questionnaire
- Information on the redesigned Form 990
- Rev. Rul 69-545 (describing factors considered for tax exemption and superseding Rev. Rul. 56-185 in setting out the standard for tax exemption; the earlier ruling required that a hospital operate to the extent of its financial ability on behalf of those not able to pay, including a general obligation to accept patients who cannot pay)
- Rev. rul. 83-157 (modifying the requirement that a hospital maintain a full time emergency room open to those who cannot pay for care set forth in Rev. Rul 69-545, to permit tax exemption even when the hopsital does not operate an ER because others provide those services or it is a specialty hospital)
- Rev. Rul. 98-15 (permitting hospitals that are run as joint ventures with for-profit companies to qualify for tax exemption)
This final report addresses steps identified in that interim report and the executive compensation component not addressed in the interim report. Following are excerpts from the final report on the community benefit issue.
The study found significant variations from community benefit reporting that will be required by the new Form 990 Schedule H beginning with 2009 tax years. The community benefit expenditures reported by some hospitals appear to overstate Form 990 reportable community benefit, due to reporting uncompensated care based on charges rather than on costs, or including bad debt, Medicare shortfalls, and private insurance shortfalls as community benefit. On the other hand, exclusion by some hospitals of shortfalls from Medicaid, other means-tested public programs, or uninsured patients as uncompensated care, may understate the Form 990 reportable community benefit attributable to those programs.
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Uncompensated care was the largest reported community benefit expenditure overall and across all demographics, other than for the group of 15 hospitals that reported nearly all of the aggregate medical research expenditures. Overall, the average and median percentages of uncompensated care as a percentage of total revenues were 7% and 4%, respectively. Reported uncompensated care expenditures were 56% of aggregate community benefit expenditures. Medical education and training expenditures constituted 23% of aggregate reported expenditures, followed by medical research (15%), and community programs (6%). This mix varied by community type and revenue size, and as described below, materially changed when the group of 15 hospitals reporting disproportionately large medical research expenditures was excluded.
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Uncompensated care and aggregate community benefit expenditures were unevenly distributed hospitals and concentrated in a relatively small group. The study looked at reported community benefit compared to certain specified revenue levels. Overall, 58% of hospitals reported uncompensated care amounts less than or equal to 5% of total revenues. Overall, 21% of the hospitals reported aggregate community benefit expenditures less than 2% of total revenues; 47% reported aggregate community benefit expenditures less than 5% of revenues.
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Overall, when data was aggregated for all hospitals, revenues exceeded expenses by 5%. This percentage was 3% for the smallest hospitals and increased with revenue size. Among the community types, critical access hospitals reported the smallest percentage, and other rural hospitals reported the largest percentage. Overall, 21% of the hospitals reported a deficit (total expenses greater than total revenues).
And here are some conclusions on the executive compensation issue.
In general, the hospitals reported widespread compliance with key indicators of sound compensation practices, including use of formal written compensation policies, use of comparability data, approval in advance by persons without a conflict of interest, and setting compensation within the range of comparability data. ....
The average and median compensation amounts paid to the top management official as reported on the questionnaire were $490,000 and $377,000, respectively. Compensation amounts varied across demographics, but generally increased as the hospital’s revenue size increased. Generally, rural hospital (CAH and non-CAH) paid lower compensation than did urban and suburban hospitals (high population and other urban and suburban).
For the 20 hospital compensation examinations, the average and median compensation amounts paid to the top management official were $1.4 million and $1.3 million, respectively.
What struck me here was how small "community benefit" expenditures are as a percent of revenues, and how substantial, and consistent, are the "excess revenues" (profits) of tax exempt non-profit hospitals--even with their high compensation levels. (Aside: The compensation practices section concluded that "nearly all" were "high" --the average hospital CEO got $490,000 and the media was $377,000--but established under the guidance and "within the range of reasonable compensation." Given the trend in compensation generally in the US, I suspect that the guidance is too generous and that compensation is uniformly higher than should be permitted for tax exempt organizations.)
So I am left pondering a number of questions about the reasonableness of the tax exemption for hospitals. What distinguishes these tax exempts from those hospitals that are openly for-profit? Would many taxable corporations' charitable contributions amount to about as much (or more?) as the value of the "community benefit" expenditures of these tax exempts? Is it reasonable to have tax exemption for hospitals that are operating as joint ventures with for-profits, and still expect a genuine attempt to provide quality care for the poor? Why did we leave the "care for the poor" criterion behind with the introduction of Medicare and Medicaid? Should research--that is likely funded in large part through other governmental grants from federal and state and from other charitable organization grants--be counted as "community benefit" permitting tax exemption? Would removing the tax exemption limit the research, or would it be done anyway since it is supported in large part through external grants? Is it really reasonable for tax exempt hospitals to pay their CEOs more than a million, in an economically devastated area like Detroit? Why don't we establish more specific criteria for the tax exemption?
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