RSM Resources

August 2007

Proposed Nonprofit Hospital Reforms
On July 19, 2007, Senator Chuck Grassley released a "Discussion Draft" of potential charity care and community benefit reforms. On Thursday, July 20, the Internal Revenue Service (IRS) issued an Interim Report from the Hospital Compliance Project. Together, these documents provide insight on potential legislative and regulatory reform. Follow these links to view documents.

• Tax-Exempt Hospitals: Discussion Draft
• Hospital Compliance Project Interim Report

Senator Grassley's Discussion Draft of potential reforms was created to address whether there is an adequate level of charitable care from the nation's nonprofit hospitals. Grassley's comments came at the conclusion of hearings examining the level of charitable care at nonprofit hospitals compared with the tens of billions of dollars of tax breaks they received. The Discussion Draft recommends setting specific standards for hospitals that seek exemption under Section 501(c)(3), including:

• Establishing a charity care policy and wide publication of that policy
• Quantitative standards for charity care
• Requirements for joint ventures between nonprofit hospital and for-profit entities
• Board composition and other governance requirements and executive compensation
• Limiting charges billed to the uninsured
• Placing restrictions on conversions
• Curtailing unfair billing and collection practices
• Transparency and accountability requirements
• Sanctions for failure to comply with applicable requirements for a 501(c)(3) or 501(c)(4) hospital

The IRS' interim report summarizes responses from almost 500 tax-exempt hospitals to the IRS Form 13790-Compliance Check Questionnaire for Tax-Exempt Hospitals. Specifically, this interim report summarized how they provide and report benefits to the community. This report contains preliminary information on the way nonprofit hospitals, which comprise one of the largest components of the tax exempt sector, responded to questions about how they provide community benefit. The IRS is still analyzing the reported data.

Some significant interim conclusions were that there is no uniform definition of what constitutes "uncompensated care," and that there are significant differences in the way other components of community benefits are reported.

Lois Lerner, director of the IRS Exempt Organization Division, stated, "The lack of consistency or uniformity in classifying and reporting uncompensated care and various types of community benefit often makes it difficult to assess whether a hospital is in compliance with current law. That's one reason more analysis is needed."

The IRS report did recommend the new draft Form 990 Schedule H for hospitals. Use the following links for more information.

• Form 990 Schedule H
• Draft Form 990 Redesign Project - Schedule H

We recommend that you share the executive summary of the hospital compliance project with your board of directors and your executive team. In tandem, the tax-exempt hospital discussion draft issued by the Senate Finance Committee deserves serious consideration. It is important to understand the committee's perspective on what they view as a requirement for exempt status as a hospital as a public charity.

Although these standards are in draft, the end result anticipated will be clear and measurable community benefits and charity care. Tax benefits provided to nonprofit hospitals will be exchanged for providing health care for those in need in the community.

Action steps: Review the proposals and understand where your hospital aligns with the current Senate Finance Committee proposal. Review the new Draft Form 990 Schedule H and complete a mock version to identify areas of concern and action steps your hospital will need to implement.

Although the report is not legislation, if this report becomes law, it would represent the most significant change in hospital exempt standards in 40 years. This merits careful study and consideration. If you have any questions, please contact your RSM McGladrey tax advisor, who can explain how this proposed legislation and the IRS Interim Compliance Report could impact your hospital organization.

Author: Ginny Striegel is a tax director based in RSM McGladrey's Des Moines office and works exclusively with tax-exempt clients across the country. If you have any questions regarding the information in this article, please contact Ginny Striegel at 515.281.9272 or email her at ginny.striegel@rsmi.com.