[Source: "Update: IRS 'Community Benefit' Compliance Check" by Michael Peregrine et al.]
The community benefit standard serves as the principal standard under which most modern-day hospitals derive their tax-exempt status under Code § 501(c)(3).
The community benefit standard was not adopted by federal legislation but, rather, was adopted by the IRS primarily in a 1969 revenue ruling (Rev. Rul. 69-545, discussed below). Satisfaction of the Revenue Ruling 69-545 community benefit standard depends on a demonstration of appropriate facts including, but not limited to, whether the hospital: (1) operates a full-time emergency room that provides treatment regardless of patients' ability to pay; (2) provides non-emergency services to all individuals who are able to pay, including Medicare (and later Medicaid) beneficiaries; (3) has an open medical staff; (4) has a board of directors composed of independent civic leaders drawn from the community; and (5) uses any operational surplus to further the hospital's exempt purposes by improving the quality of patient care and advancing the hospital's medical training, education, and research programs. Outside of Revenue Ruling 69-545, the IRS has identified the following additional factors as evidence of community benefit (1) creation of a new provider of healthcare services; (2) expansion of community health resources; (3) improvement of treatment modalities; (4) reduction in healthcare costs; and (5) improvement in patient convenience and access to physicians. See, e.g., General Counsel Memorandum 39862 (November 21, 1991). The above lists should not be interpreted as being exhaustive, as many other factors could be used to demonstrate community benefit as well.
Notably, the community benefit standard set forth in Revenue Ruling 69-545 imposes no charity care requirements on a tax-exempt hospital other than in an emergency room setting. To the contrary, the ruling specifically recognizes as tax-exempt a hospital that referred all nonemergent charity care cases to the nearby public hospital. This 1969 IRS position with respect to the treatment of non-emergent charity care patients (which is binding precedent on the IRS), however, is in stark contrast to the more recent IRS position taken in Field Service Advice (FSA) 200110030 (February 5, 2001) (which is not precedential). In FSA 200110030 the IRS instructed its agents that when reviewing the tax-exempt status of a hospital, the agents should look critically at the amount of charity care the hospital actually provided. The FSA directs the IRS agents to ask fourteen questions when reviewing the tax-exempt status of a hospital. These questions include: (1) does the hospital have a specific, written plan or policy to provide free or low-cost healthcare services to the poor or indigent; (2) under what circumstances might the hospital deviate (or has the hospital deviated) from its stated policies to provide free or low-cost healthcare services to the poor or indigent; (3) what directives or instructions does the hospital provide to ambulance services about bringing poor or indigent patients to its emergency room; and (4) what documents or agreements does the hospital require poor or indigent patients to sign before receiving care?
This article addresses the IRS's Compliance Questionnaire (read more)
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[Source: "Current Perspectives on Healthcare GovernanceA Roundtable Discussion Among Experts: Part II", AHLA]
Excerpt:
Mr. Silverman: Mr. Griffith, we see increased scrutiny at the federal level, from Congress and the IRS, focusing on the tax-exempt status of nonprofit hospitals. Are those efforts raising the same kind of issues that are being pressed at the state levels of government?
Mr. Griffith: The proposals and questions have a number of similarities. The law at the federal level for nearly 40 years has been a community benefit standard. A hospital can qualify for exemption if it avoids a profits interest or unreasonable compensation for insiders and it is organized and operated in a manner that provides a benefit to a sufficiently broad segment of the community. Charity care is only one factor that the IRS considers, and it is not a requirement for federal tax exemption. The IRS looks for factors such as oversight from a community board, an open medical staff consistent with the size and nature of the facility, an emergency room open to all (or a needed specialty service), participation in government healthcare programs, charity care, certain medical research activities, community health outreach activities, medical education, contributions to community health organizations, and any other activity that can be demonstrated to be reasonably expected to improve the health of the community. Activities that improve the quality of healthcare, improve access or availability of healthcare, or contain the costs (without compromising quality) of healthcare provide a community benefit.
Mr. Silverman: The IRS seems to have taken steps to enhance monitoring of hospitals.
Mr. Griffith: Yes, with the mailing in 2006 of the community benefit questionnaires to hundreds of hospitals, the IRS served notice that it intends to become more active in monitoring how hospitals are satisfying the community benefit standard. Under the Republican leadership, Congress pushed the IRS to get results quickly and share them with Congress. It remains to be seen how much interest Sen. Baucus, Rep. Rangel, Rep. Stark, and other key Democrats will have in forcing the IRS’ hand on community benefit and other reviews of the nonprofit sector.
Mr. Silverman: There were hearings on Capitol Hill which focused on adherence by hospitals to the community benefit standard.
Mr. Griffith: Yes, that is correct. In part, the hearings were an outgrowth of allegations about billing and collection practices. Hearings were held before the Senate Finance Committee and the House Committee on Ways & Means. Those hearings focused on what hospitals do in return for their exemption, both in terms of adequacy of the current community benefit standard and in terms of what is being done by the IRS to enforce that standard. There has also been a fair amount of attention paid, at least in committee, to executive compensation, conflicts of interest, hospital pricing, and transparency in the governance of the nonprofit sector, including healthcare.
We have seen some reforms in the Pension Protection Act, such as the new prohibition on loans to certain insiders of supporting organizations (which would include many healthcare system parents), increases in potential excise taxes on management for approving excessive compensation packages, and mandated public disclosure of unrelated business income tax returns. We have also seen significant information gathering efforts, including the letters and information requests from Senator Grassley, the Government Accountability Office, and the Congressional Budget Office (the latter two both requested by Rep. Thomas) asking about various community benefit activities, joint ventures, and compensation practices. We may see more activity in this area in the new Congress, though the Democratic win in the mid-term elections may lead to a focus on other issues first in the new Congress, with more being done by the IRS and at the state level. For example, it is unclear as we have this discussion whether the Senate Finance Committee staff report that Senator. Grassley requested after the September 13, 2006 charity care and community benefit hearings will be completed or lead to specific legislation. I would note though that there are no guaranties the issue is going away, and on many points Senators Baucus and Grassley appeared to see eye to eye.
Mr. Silverman: Mr. Griffith, what advice would you give the General Counsel of a nonprofit hospital, and its management, in efforts to avoid and address the threats on the horizon?
Mr. Griffith: I think there are four key steps to consider. First, get your message out early and often. Let the community know about all of the good the hospital does. Second, look at ways to improve how you track and report community benefit. It has to become part of the culture that there are certain basic operational steps that need to be done daily. Third, reexamine your conflict of interest procedures. Independent directors and committees approving transactions can add significant protections. Fourth, take a close look at the role mission fulfillment plays, or should play, in executive compensation. Financial performance is important and supports the mission, but if mission also matters for executive compensation the program is more difficult to criticize.
Mr. Silverman: Mr. Levine, you wanted to make a last point?
Mr. Levine: Yes, I think that the trends we have been talking about are fueled by Congress’ continued focus on fraud and abuse recoveries from hospitals and other providers under the False Claims Act. The healthcare sector remains under the microscope. The role of the board in "good governance" has a much wider reach than was perhaps previously believed, and it is inextricably linked to compliance issues.
