Proposed Healthcare Legislation: Effects on Tax-Exempt Organizations

October 2, 2009

The Senate Finance Committee has completed its mark-up of the America’s Healthy Future Act of 2009 (the “Act”). The Act currently contains certain provisions that will affect some tax-exempt organizations, but there is no way to determine whether any of these provisions will be included in final legislation enacted by Congress.

Hospital Organizations

The Act would impose the following additional requirements for any tax-exempt organization described in Internal Revenue Code section 501(c)(3) that operates a hospital.

  • The organization would be required to conduct a community health needs assessment every three years; adopt a plan to meet the needs identified; and annually disclose to the IRS how it is addressing those needs. Failure to complete the assessment would result in a penalty of up to $50,000, while failure to make a disclosure would result in a penalty under the existing rules for incomplete information returns.
  • The organization would be required to adopt and publicize a financial assistance policy and a policy to provide emergency medical treatment to individuals. The financial assistance policy would need to indicate the organization’s eligibility criteria; the availability of free or discounted care; its basis for calculating discounted care; ways to apply for financial assistance; and, if not already covered by a separate policy, actions the organization would take in the event of non-payment.
  • The organization would not be permitted to bill patients who qualify for financial assistance more than the amount billed to insured patients based on the best, or average of the three best, negotiated commercial rate or Medicare rates. The organization would be required to follow Medicare law and regulations pertaining to the collection of debts, and would not be permitted to take other actions without first making reasonable attempts to inform a patient of the financial assistance policy.

The IRS would be required to review the community benefit information submitted by such organizations, and the Secretary of Health of Human Services would be required to annually report to Congress on the levels of charity care, bad debt expenses, and unreimbursed costs of government programs, as well as report every five years on the cost of community benefit activities for tax-exempt hospitals. The Act would make these changes effective for tax years beginning after the date of enactment of the legislation.

Other Provisions

Prior to the mark-up, Senator Charles Grassley (R-Iowa), Ranking Member of the Senate Finance Committee, proposed additional amendments to the Act that would also affect tax-exempt organizations.


One amendment (Grassley Amendment #F-7) would clarify that the IRS has the authority to require tax-exempt organizations to report on their governance and conflict of interest information as part of their annual reporting requirements.

Executive Compensation & Rebuttable Presumption of Reasonableness

Another amendment (Grassley Amendment #F-8) would eliminate the rebuttable presumption of reasonableness for determining the compensation of officers and directors under the excess benefit transaction rules, and would require organizations to disclose a summary of the comparable information used to determine reasonable compensation. The rebuttable presumption has the effect of shifting the burden of proving unreasonableness to the IRS. The removal of this safe harbor rule is expected to be a revenue raiser.

Cap on Itemized Deductions

Several other amendments, proposed by various senators, would cap the value of the itemized deduction for charitable donations to 33% or 35% for those taxpayers earning more than $200,000 per year, rather than allowing the deduction at a rate equal to the marginal tax bracket (brackets that will rise to 36% and 39.6%, respectively, in 2011).

Costs of Act

In the midst of consideration of the financing amendments to the Act, Senator Grassley also expressed concerns regarding the cost to the IRS and the Department of Health and Human Services of administering and enforcing the Act. On September 30, 2009, Senator Grassley submitted a letter to Secretary of the Treasury Timothy Geithner and Commissioner of Internal Revenue Douglas Shulman, asking them for an estimate of the costs to the Treasury and the IRS of implementing and enforcing the Act. Senator Grassley’s letter cites a staff working paper drafted by The Lewin Group dated December 12, 2006, that estimated the cost of administering and auditing the tax components of the Act at $2.2 billion, which is 19% of the FY 2009 budget for the IRS.


The Senate Finance Committee completed its consideration of the bill early this morning, but only a small percentage of the 564 amendments submitted were actually debated. The committee will likely vote on the bill next week, after receiving an analysis of the bill’s cost from the Congressional Budget Office. Further changes may be made in the process of combining the Finance Committee’s bill with another bill already approved by the Health, Education, Labor, and Pensions Committee, debating the bill on the Senate floor, or reconciling the bill with a bill passed by the House of Representatives.

McGuireWoods LLP routinely represents tax-exempt organizations in a variety of legal matters. If you have any questions, please do not hesitate to contact us at your convenience.

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