IRS Hospital Community Benefit Study - Interim Report

(Tax Planning Alert dated July 31, 2007)


The Internal Revenue Service (“IRS”) has released an interim report which summarizes the responses received from its May 2006 Questionnaire, Form 13790 Compliance Check Questionnaire – Tax Exempt Hospitals. A copy of the interim report may be viewed via the following IRS website link.

In addition to the summarized questionnaire response data, the 58-page interim report contains an explanation of the scope of the IRS Hospital Compliance Project and provides some initial recommendations and next steps. Impact from the interim report may already be seen in the recently released discussion draft of Form 990

The Hospital Compliance Project consists of two review components: (1) community benefit expenditures (to include uncompensated care, medical education and training, various medical research and community programs); and (2) executive compensation. Questionnaires were sent to 544 various-sized hospitals with 487 hospital respondents participating. From the summarized response data, definitions and measurements of community benefit varied as it related to uncompensated care, with uncompensated care comprising the largest reported community benefit expenditure (56% of reported aggregate total community benefit expenditures).

Purpose and Scope

The IRS explained the purpose and scope of the Community Benefit Review component of the Hospital Compliance Project as an effort to determine whether and how nonprofit hospitals demonstrate their qualification for exemption as organizations described in I.R.C. § 501(c)(3) under the community benefit standard (as established by Rev. Rul. 69-545).

The IRS further explained that information gathered with respect to community benefit was intended to help determine how Form 990, as revised, should capture reporting of community benefit activities as well as to:

• Determine whether non-emergency services are available to everyone with the ability to pay;
• Ascertain whether hospitals treat Medicare and Medicaid patients in a nondiscriminatory manner;
• Ascertain how hospitals deal with the uninsured;
• Ascertain whether and how determinations of financial responsibility of patients are made;
• Determine the nature and extent of a hospital’s uncompensated care policy and, if such a policy exists, ascertain how the hospital distinguishes uncompensated care from bad debt;
• Ascertain the nature and extent of medical research programs;
• Look into hospitals’ financial relationships with staff members and other closely connected individuals and entities; and
• Determine whether additional guidance, education and/or compliance actions are appropriate.

Interim Reporting Recommendations

The IRS Project Team recommended the development of a special schedule to be included with the Form 990 that would enable a hospital to report activities that demonstrate its efforts to meet the community benefit standard. This recommendation has culminated into Schedule H (Hospitals) of the redesigned Form 990 discussion draft which was released for public comment on June 14, 2007. The draft Schedule H will require disclosure of the charity care (at cost) and other community benefits provided by the filing organization. The draft Schedule H also will require information regarding the organization’s charity care policies, revenue profile, bad debt expense, collection practices, and certain other activities.

Next Steps

The interim report listed three “next steps” to be conducted by the Project Team in continuation of its Community Benefit Review:

1. Analyze the reported data to determine whether differences in reporting, such as the treatment of bad debt and shortfalls as uncompensated care, may be isolated and adjusted to allow more meaningful comparisons across the respondents.
2. Obtain additional research and analyze the differences in the reported community benefit expenditure amounts to take into account varying demographics, such as rural and urban communities and hospitals.
3. Test the reported community benefit amounts and types by conducting data analysis, compliance checks or examinations of individual hospitals, and by other means, including with respect to outliers in the reported data.
   

The summary above highlights a few of the key sections from the IRS Hospital Community Benefit Study – Interim Report. The executive compensation component of the Hospital Compliance Project is ongoing, with a final report not issued to date. If you would like to discuss how your organization may compare in regard to the summarized responses from the May 2006 Tax-Exempt Hospital Compliance Check Questionnaire or how we may help qualify your organization’s community benefit activities for purposes of public disclosure, please contact Eddie Phillips, Terry Haefner or Debbie Ernsberger at (800) 270-9629.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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