ABA Health eSource
April 2009 Volume 5 Number 8

Recent GAO Report reconfirms variations in measuring and reporting community benefit
By Gwen Spencer and Erin Couture, PricewaterhouseCoopers LLP, Boston, MA

AuthorAuthorIn September 2008, the Government Accountability Office (GAO) released its report entitled "Nonprofit Hospitals: Variation in Standards and Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements." 1 Senator Charles Grassley (R-Iowa), Ranking Member of the Senate Finance Committee, requested the report. The report reviews the current community benefit standard established by the Internal Revenue Service (IRS), and examines other federal and state standards and guidance nonprofit hospitals use to define their community benefit activities and the associated costs. The report found a wide variation in how nonprofit hospitals define and account for their community benefit activities, including charity care. The report set the stage for continued dialogue in the community benefit reporting area.

Community Benefit Standard

Beyond the requirement that a tax-exempt hospital is organized and operated exclusively for charitable purposes, there is currently no federal law that defines what a hospital must do to obtain and retain tax-exempt status. The current standard, rather, has evolved from revenue rulings and other IRS guidance. In 1969 the IRS established that to be considered tax-exempt, nonprofit hospitals must engage in activities that promote the health of the people in the community. 2 The "community benefit standard," as it has come to be known, has remained substantially unchanged since 1969. The community benefit standard does not have a strict definition; rather, it encompasses a wide range of activities that promote public health from care of patients to health education. This standard has lead many, including Senator Grassley, to question whether nonprofit hospitals can truly be held accountable for their tax-exempt status.

Senator Grassley's Focus

Senator Grassley is known for his focus on public charities and his belief that they must be held accountable for the tax benefits they receive at the federal, state and local levels. 3 Senator Grassley's interest in public charities is often concentrated on two of the largest groups of public charities: colleges/universities and hospitals. As noted below, in the healthcare arena, Senator Grassley has, for example, held hearings, directly questioned organizations, and requested a staff report to examine whether nonprofit hospitals provide sufficient community benefit to justify their tax-exempt status. In looking at the standard for hospital tax-exemption, Senator Grassley has continued to call for a more precise and measurable definition of community benefit.

In 2005 Senator Grassley, then Chairman of the Senate Finance Committee, sent a questionnaire to 10 hospitals and health systems. The questionnaire asked for information regarding the organization's charitable activities, patient billing, and ventures with for-profit companies and hospitals. In September 2006, the Senate Finance Committee released the questionnaire responses to the public. In commenting on the responses, Senator Grassley noted, "[n]on-profit doesn't necessarily mean pro-poor patient. Non-profit hospitals may provide less care to the poor than their for-profit counterparts." 4 He further noted in reviewing the responses,

it's almost impossible to get an exact measurement of how much charity care and community benefit, such as vaccination clinics or cancer screenings, that non-profit hospitals offer to earn their special tax status. That's because non-profit hospitals don't have to report any kind of information about those activities to the IRS. And there are no uniform standards or definitions for charity care and community benefit. The IRS, and Congress, have allowed non-profit hospitals to use their own definitions. 5

Following the release of the questionnaire responses, the Senate Finance Committee held hearings entitled " Taking the Pulse of Charitable Care and Community Benefits at Nonprofit Hospitals." In his opening statement, Senator Grassley stated, " [n]onprofit hospitals receive billions in tax breaks at the federal, state and local level. The public has a right to expect significant, measurable benefits in return. I hope the hearing will help the Finance Committee decide how we can best ensure that non-profit hospitals provide appropriate levels of benefit to the communities they serve." 6

As a result of the questionnaire responses and subsequent hearings, Senator Grassley called upon the Senate Finance Committee staff to develop a Staff Discussion Paper that included proposals for defining and measuring the community benefit standard. Senator Grassley suggested that the current practices of the Catholic Hospital Association serve as a starting point for such recommendations. In 2007 the Staff Discussion Paper 7 was released and included a recommendation that nonprofit hospitals should be required to devote a specific percentage of patient operating revenue or expense (whichever is greater) to charity care to continue to qualify for tax-exempt status. Further, the report also suggested Congress adopt a specific definition for the term "charitable care." Although none of the recommendations have been enacted to date, they remain on the table for potential legislative action. Following the Staff Discussion Paper release, Senator Grassley requested that the GAO generate a report looking at the current community benefit standard and how hospitals define and account for their community benefit activities.

GAO Report

As noted above, the GAO released its report in September 2008 8 . The GAO looked at both federal and state rules and regulations in connection with community benefit and found substantial variations in how community benefit activities were defined. In general, nonprofit hospitals use similar definitions for charity care, for the unreimbursed cost of means tested government programs (Medicaid), and numerous other activities. Nonprofit hospitals however, differ in whether they include bad debt and unreimbursed Medicare costs as community benefit. Because bad debt and unreimbursed Medicare costs represent substantial costs for nonprofit hospitals, the lack of consensus in these areas makes it difficult to standardize community benefit data.

In addition to differences in how nonprofit hospitals define community benefit, the GAO report found substantial differences in how nonprofit hospitals measure community benefit. For example, some organizations measure community benefit at the hospital level, while others do so at the health system level. While the IRS generally requires that organizations report community benefit at the employer identification number (EIN) level, a single EIN can encompass one hospital or an aggregate of hospitals. 9 In addition, consensus does not exist among industry groups as to certain accounting procedures such as how nonprofit hospitals should offset community benefit costs by Medicaid disproportionate share hospital (DSH) payments. For example, Catholic Health Association and VHA, Inc. instruct that DSH payments can be used to offset charity care or unreimbursed costs of Medicaid. The IRS instructs that DSH payments can be used to offset charity care, unreimbursed cost of Medicaid, or both depending on the purpose of the payment. If no purpose is stated, the payment should be allocated based on reasonable estimates. 10 Finally, CMS does not specify if these payments should be used as offsets to any specific costs. 11 The GAO concluded that federal and state policy makers and industry groups should continue to work for a way to generate standardized data. 12

Senator Grassley's Response to the GAO's Findings and the IRS's Activities

In response, Senator Grassley took the report as confirmation of his prior conclusions and stated that "the standard is weak, and the IRS needs a bright line test to be able to determine whether hospitals are meeting the standard necessary to maintain their tax exemption." 13 He further stated that while states have stepped in to try to fill the vacuum and define community benefit for their own purposes, such action has left inconsistent definitions from state to state. 14

Senator Grassley is not alone in his emphasis on the accountability of nonprofit hospitals as the IRS is also active in this area. The IRS recently finalized a redesigned Form 990 that will be filed by exempt organization beginning with the 2008 tax year. As part of the redesign the IRS included Schedule H, Hospitals. Schedule H asks for specific information about community benefit activities and spending and must be filed by organizations starting with the 2009 Form. In January 2009, Steven Miller, IRS Commissioner - Tax-Exempt and Governmental Entities, remarked on Schedule H before the Office of the Attorney General of Texas. Commissioner Miller, while acknowledging the existing standard may need a "tune up," believes Schedule H will allow for more consistent measurement and reporting of community benefit activities and expenditures. 15 Senator Grassley acknowledges the redesigned Form 990 may assist with the accountability he continues to seek. However, he believes that Schedule H may leave too much definitional flexibility, and Congress still may have to step in. 16

In February 2009, the IRS released the final Nonprofit Hospital Study. The study revealed the responses to a questionnaire sent to approximately 500 tax-exempt hospitals in May 2006. 17 While congratulating the IRS for its efforts, Senator Grassley expressed disappointment both with the IRS' lack of guidance in the area of community benefit and the lack of data on for-profit hospitals' level of uncompensated care and other community benefit. 18 Senator Grassley believes this information is necessary to understand the difference between for-profit and non-profit hospitals. 19


The community benefit standard has a long history of re-examination. The recent GAO Report reconfirming variations in measuring and reporting community benefit is but one small piece of a much larger discussion around the community benefit standard. As the Report points out, two national sources of information from mandatory reporting to CMS and the IRS will provide further data on community benefit activities. However, this information will not be available for several years and there is uncertainty as to whether the data will be reliable and consistently reported. In the meantime, the focus on the community benefit standard continues.

1 GAO-08-880. The report can be viewed at: http://www.gao.gov/new.items/d08880.pdf
2 Rev. Rul. 69-545
3 Senator Grassley's website: http://grassley.senate.gov/about/More-About-Grassley.cfm
4 U.S. Senate Committee on Finance, Senator Chuck Grassley, Chairman, Memorandum, "Non-Profit Hospital Responses to Finance Committee," September 12, 2006.
5 Id.
6 Opening Statement of Chairman Grassley Hearing, "Taking the Pulse of Charitable Care and Community Benefits at Nonprofit Hospitals," Sept. 13, 2006.
7 U.S. Senate Committee on Finance, minority staff, Tax-Exempt Hospitals: Discussion Draft, July 19, 2007.
8 GAO-08-880.
9 2008 Form 990, Schedule H, Instructions.
10 GAO-08-880, page 37.
11 Id.
12 GAO-08-880, page 40.
13 Senator Grassley Press Release, Grassley: GAO Report Shows Tax-exempt Hospitals Are Left to Define Community Benefit as They See Fit, October 14, 2008.
14 Fifteen states have community benefit requirements in statutes or regulations. The level of detail and scope of these requirements vary by state. For example, California requires its nonprofits to adopt and annually update a community benefit plan and a description of community benefit activities and their value. On the other hand, Alabama's regulations require that charity care constitute 15% of a hospital's business. GAO-08-880, pages 16-19.


Steve T. Miller, IRS Commissioner - Tax-Exempt and Governmental Entities, Full Text of Remarks Before the Office of the Attorney General of Texas, "Charitable Hospitals: Modern Trends, Obligations and Challenges," January 12, 2009, Available at: http://www.irs.gov/pub/irs-tege/miller_speech_011209.pdf
16 Senator Grassley Press Release, Grassley: GAO Report Shows Tax-exempt Hospitals Are Left to Define Community Benefit as They See Fit, October 14, 2008.
17 IRS Nonprofit Hospital Study - Final Report http://www.irs.gov/charities/charitable/article/0,,id=203109,00.html
18 Senator Grassley Press Release, Grassley: IRS Non-profit Hospitals Study is Helpful, Treasury Should Look at Restoring Charity Care Standards, February 12, 2009.
19 Id.

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