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Chairman of the Senate Finance Committee, Senator Chuck Grassley, sent a letter on February 19 to the Internal Revenue Service (IRS) asking questions regarding IRS efforts to enforce Section 501(r) as it applies to tax-exempt hospitals. Section 501(r) requires a hospital to meet the following requirements in order to be tax-exempt: (1) conduct a community health assessment; (2) establish a financial assistance policy; (3) have limitations on charges for emergency or necessary medical care provided to individuals covered under a financial assistance policy; and (4) not engage in extraordinary billing and collection actions before determining if someone qualifies for its financial assistance policy. Mr. Grassley cited as reason for his concerns of noncompliance a 2017 article with statistics that large tax-exempt hospitals have decreased amounts of free charity care, while increasing total revenue.

Mr. Grassley’s letter does not consider explanations for these statistics besides “noncompliance.” For example, now that more people are insured under the Affordable Care Act (ACA), more people can pay their bills, thereby increasing hospital revenue and decreasing the need for free care. The letter also does not consider that nonprofit hospital revenue growth is a result of multiple factors, including a mix of ACA coverage expansion, acquisitions, and other strategic investments—all factors cited in the 2017 article.

Mr. Grassley authored a similar letter almost one year ago asking initial questions to the IRS concerning Section 501(r) enforcement. Acting Commissioner David Kautter responded in April 2018 that the IRS reviews one-third of the approximately 3,000 tax-exempt hospitals by looking at their Forms 990, hospital websites, and other information to identify potential noncompliance. The IRS then assigns either a compliance check or examination to those hospitals most at risk of noncompliance. The IRS also indicated that it issued 99 written advisories to tax-exempt hospitals about potential noncompliance.

This recent letter from Mr. Grassley serves to follow up the April 2018 IRS response with additional questions, such as:

  • How many additional hospitals has the IRS reviewed since April 2018, and what were the results of the reviews (e.g., closed, followed up with a compliance check or an examination, and what were those results)?
  • Based on IRS review, how many hospitals engage in debt-collection practices involving patients eligible for financial assistance policies, and do hospitals make efforts to determine if the patient is qualified to participate in its financial assistance program before taking collection actions?
  • Has the IRS followed up on the 99 written advisories regarding potential noncompliance?
  • Is the trend of unreimbursed Medicaid expenses increasing over time while charity-care expenses decrease over the same time continuing, and what explains the trend?

Mr. Grassley included this letter in his Chairman’s News report and stated that this is a renewal of his “probe” of tax-exempt hospitals. The IRS is asked to respond by April 1, 2019.

Morgan Lewis partner Alexander Reid was quoted in a March 1 Tax Notes article criticizing the fact that Congress has raised taxes on the nonprofit sector, increased the cost of tax-exempt bond financing, and simultaneously reduced incentives for charitable giving. “The best way to increase charitable activity, including the promotion of health and the provision of charity care, would be to craft tax policies that help rather than harm charities,” Mr. Reid said.