Tax Exemption Of Health Care

Tax Exemption of Health Care A recent Internal Revenue Service (IRS) report is prompting both state and federal legislators to revisit laws on hospital tax exemption and “community benefit.” Hospitals are eligible for federal tax exemption as long as they provide some form of “benefit” to the community. The IRS does not define community benefit, and hospitals fulfill the requirement in a wide variety of ways, ranging from providing charity care (care for which payment is neither expected nor sought); to holding health fairs and having a governing board that includes community representatives. According to Income tax act of 1961, income from Professional Institutions are exempted under [Section 10(23A)] when the institution applies its income or accumulates it for application, solely to the objects for which it is established. And in the same way the institution is approved by the purpose by the Central Government. Exemption is provided for hospital under Income tax Act of 1961, when it is working exclusively for philanthropic purposes.

The IRS survey of 500 non-profit hospitals found that the institutions use a wide range of criteria to determine which patients are eligible for charity care, and they publicized the availability of charity care to differing degrees. Forty-five percent of all hospitals surveyed spent 3 percent or less of their revenue on charity care and nearly 25 percent spent 1 percent or less. Nonprofit hospitals may receive exemptions from state and local income, property and sales taxes, which, in some cases, are of greater value than the federal income tax exemption. Some states have tied exemption from state and local taxes to community benefits. Only a few states have specific charity care standards—outlining who receives free or discounted care and how rules are publicized—in place. In 1993, for example, the Texas Legislature established minimum levels of charity care that nonprofits must provide to gain tax exemption. Hospitals may, for example, receive tax exemption by providing charity care and community benefit in an amount equal to at least 5 percent of net patient revenue.

Benefits of tax exemption:

Society gets the services delivered at lower cost. Why? Because the non-profits do not have to pay property tax, sales tax, or income tax and because they can finance their capital needs using tax-exempt debt instead of a higher cost mixture of equity (i.e., stock) and tax debt. Also, they are more likely to receive philanthropic donations to help pay for the services offered. Thus, the underlying cost structure of non-profits to end-users and/or society, everything else being equal, should be lower. Inspection of health care: the transparency of how funds are being spent at a non-profit need to be increased and scrutinized more carefully... but more importantly, regulation needs to address strict standards as to what charity care is defined as. Currently, charity care remains fairly amorphous, with loopholes as to what can be evaluated and added into the financial reports each year. Clear standards of what falls into charity care and an audit to ensure that this is appropriately reported is a start to leveling the field. Our hospitals frequently treat patients who do not have the ability to pay, or who can only pay a portion of their bill. This is one of the many ways in which a nonprofit hospital can promote the health of the community it serves. The Federal government and state governments have granted non-profit, tax preferred status to hospitals that operate for the benefit of the community. Today's hearing primarily seeks to review what we know about the value of the uncompensated and under-compensated care provided by these non-profit hospitals, and the tax benefits and other support they receive. Although the Committee is focusing on the issue of tax exempt status for hospitals, which is within the purview (scope of authority) of the Treasury Department and the Internal Revenue Services, it might also want to review current policies that exist to assist hospitals that provide uncompensated care and to consider whether funds used in those efforts are providing care in the most efficient and effective manner possible. To address this issue, a number of related questions are relevant, including the extent to which quality, costs, and behavior of non-profit hospitals differ from for-profit and public hospitals. States are revisiting the issue of hospital community benefits. The operations of nonprofit hospitals received considerable attention after activists (advocate) publicized the fact that some bill uninsured patients the full “retail” price of care, rather than the discounted prices negotiate(agree) by insurers. Several classaction lawsuits were filed allege(charge) that nonprofit hospitals were pricegouging uninsured patients, and four states enacted legislation requiring hospitals to inform uninsured patients about Medicaid and other programs for which they might be eligible. Some states also bar hospitals from using overly aggressive collection practices to obtain payment.

Many state hospital associations and the American Hospital Association (AHA) have adopted voluntary guidelines that inform low-income patients about the public programs and discounted care that may be available to them. According to Nicholas Wolter, M.D., a member of AHA’s board, “In 2006 alone, hospitals provided more than $31 billion in uncompensated care and provided countless billions more in benefits to their communities through programs and activities to promote better health.” Assistance provided by state The number of uninsured has increased the demand for hospital uncompensated care as a safety net for the uninsured (despite increases in the share of the population covered by public programs). Tight state budgets mean increased scrutiny of dollars: many states partially reimburse hospitals for uncompensated care by allotting funds from a state-wide pool or fund. In 2006, the Minnesota Legislature directed the state Department of Health to perform a study of the amount of community benefits in the state, as well as the value of tax exemptions. It recommended that all hospitals publicize their charity care policies and that standardized reporting of community benefits be mandated. Hospitals are required to spend a minimum percentage of their revenue on charity care. In December 2007, the IRS announced an overhaul of the return form—or, Form 990—filed by tax-exempt organizations. With the new form, which will require tax-exempt hospitals to report their finances and community benefits in greater detail, the IRS hopes to bring greater transparency to the tax-exemption process. U.S. Senator Chuck Grassley encouraged the IRS to give hospitals stronger guidance on reporting community benefits but also supports a uniform charity care threshold for all tax-exempt hospitals. Senator Grassley has drafted, but not yet introduced, legislation that would require a hospital to spend 5 percent of its operating expenses on charity care in order to qualify as a tax-exempt institution.