Charity Case Standards are Key Issue on Senator Charles Grassley’s 2009 Health Care Agenda

December 29, 2008

Senator Grassley has been a long-time advocate of increased scrutiny for charity care provided by non-profit hospitals. Recent statements attributed to Senator Grassley and his staff suggest that the issue may be one of the top items on his 2009 legislative agenda.

Non-profit hospitals must satisfy a community benefit standard in order to obtain and maintain tax-exempt status. Hospitals typically fulfill this standard by providing charity care to patients within the community. Currently, from a federal standpoint, wide latitude is given to hospitals with regard to what types of services qualify as charity care and what amount of charity care provided on an annual basis is sufficient to satisfy the community benefit standard.

Charity care standards were not always so lax. Specific charity care requirements existed decades ago. Under these former requirements, the IRS laid out several detailed rules describing how and to what extent a hospital must provide charity care to obtain or maintain tax-exempt status. These specific charity care requirements were retracted by the IRS in 1969 through Rev. Rul. 69-545, and replaced with today’s community benefit standard.

Senator Grassley indicated that his primary goal will be to reinstate these former requirements initially set forth in Rev. Rul. 56-185. If efforts to reinstate Rev. Rul. 56-185 are unsuccessful, Senator Grassley will seek to introduce new legislation that will likely impose specific charity care financial requirements on hospitals that would like to obtain or maintain their status as a tax-exempt organization.

Senator Grassley and his staff released a document entitled “Tax-Exempt Hospitals: Discussion Draft” (the “Discussion Draft”) on June 20, 2007. His staff confirmed last week that the ideas contained in this Discussion Draft are still considered viable by the Senator.

The Discussion Draft contained specific provisions that the Senator and his staff believe would ameliorate the current ambiguities in the community benefit standard. Such provisions include:

  1. Establishing a charity care policy and wide publication of that policy;
  2. Quantitative standards for charity care;
  3. Requirements for joint ventures between nonprofit hospitals and for-profit entities;
  4. Board composition and other governance requirements and executive compensation;
  5. Limiting charges billed to the uninsured;
  6. Placing restrictions on conversions;
  7. Curtailing unfair billing and collection practices;
  8. Transparency and accountability requirements; and,
  9. Sanctions for failure to comply with applicable requirements for a 501(c)(3) or 501(c)(4) hospital.

If Senator Grassley’s efforts to reinstate the former IRS charity care rules fail, it is likely that he will pursue at least some of the ideas contained in the Discussion Draft.

One of the most significant provisions contained in this draft is that which calls for quantitative charity care standards. Specifically, this Discussion Draft calls for a tax-exempt hospital to provide at least five percent of its annual patient operating expenses or revenues to the community in the form of charity care. Enactment of a percentage-requirement such as this would greatly impact the way most tax-exempt hospitals satisfy the community benefit standard.

While it is too soon to determine how much Congressional support Senator Grassley will receive for these efforts, he has already had discussions with Senator Jeff Bingaman on the issue who may be willing to serve as co-sponsor for the initiative.

If you have any questions regarding the current community benefit standard or the proposed charity care requirements, please contact one of the authors or another member of the McGuireWoods Health Care industry group.