IRS Study Finds Wide Variation in Amount, Type of Charity Care Not-for-Profit Hospitals Provide

Kaiser Daily Health Policy Report
Feb 2009

U.S. not-for-profit hospitals have large variations in the amount and type of community benefits that they provide, according to a study released on Thursday by the Internal Revenue Service, the New York Times reports. For the two-year study, IRS surveyed almost 500 not-for-profit hospitals.

The study found that the not-for-profit hospitals spent an average of 9% of their total revenues on community benefits, which include charity care, education and research (Strom, New York Times, 2/13). In addition, the study found that fewer than one-fifth of the not-for-profit hospitals accounted for 78% of the combined amount spent on community benefits. The study also found that 58% of the not-for-profit hospitals spent 5% or less of their total revenues on charity care and that slightly more than one-fifth of the hospitals spent less than 2% of their total revenues on community benefits (Martinez/Carreyrou, Wall Street Journal, 2/13).

Lawmakers over the last few years have "raised concerns over whether nonprofit hospitals provide enough free care and other community benefits to justify their tax exemptions," but no test exists for "measuring how much community benefit is enough or even what constitutes community benefit," according to the Times.

According to Lois Lerner, director of the IRS Exempt Organizations Division, assessment of whether not-for-profit hospitals qualify for tax exemptions based on the amount of community benefits that they provide remains difficult. "There are no bright lines," she said, adding, "Critical-access hospitals are among those with the lowest levels of spending on community benefit, and yet it's pretty clear that people think critical-access hospitals are pretty important because they provide health care to people where none other is available."

In a statement, Sen. Chuck Grassley (R-Iowa), who since 2005 has sought to require not-for-profit hospitals to justify their tax exemptions, said that the study did not include adequate definitions or comparable information on community benefits for-profit hospitals provide. He said, "Neither the IRS nor Congress has done a very good job when it comes to establishing the criteria for enjoying this tax status since the IRS scrapped charity care for its community benefit standard in 1969" (New York Times, 2/13).

However, the American Hospital Association said, "There are good reasons for real variation in how hospitals meet their community benefit obligations," adding, "A hospital in rural Iowa serves a very different community than one in New York City, and the programs and services they offer should be different" (Wall Street Journal, 2/13).

CEO Compensation
The study also found that most of the not-for-profit hospitals followed proper procedures in the establishment of salaries and benefits for their CEOs. According to the study, CEOs at the not-for-profit hospitals received average compensation of $490,000 annually, although CEOs at a subset of 20 hospitals received average compensation of $1.4 million. Lerner said that at least one of the CEOs at those 20 not-for-profit hospitals received excessive compensation (New York Times, 2/13).

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