Grassley and Warren Seek More Enforcement and New Guidance on Nonprofit Hospitals

Liz and Chuck sent a well-footnoted letter to the Commish Tuesday seeking greater oversight and enforcement of nonprofit hospital charity care obligations.  The letter contains some detailed recommendations.  Here are excerpts:

Dear Commissioner Werfel:

Medical debt is a burden that weighs heavily on the lives of one out of every three adults in the United States. It accounts for 58 percent of all debts in collections, and medical debt disproportionately affects Black and low-income Americans. Unpaid hospital bills account for a significant portion of medical debt in the United States. However, while roughly 73 percent of U.S. adults with medical debt owe money to hospitals, nearly 3,000 nonprofit hospitals – more  than half of all community hospitals in the United States – qualify for tax-exempt status as “charitable” organizations.

Under longstanding IRS rules, charitable institutions like nonprofit hospitals must be organized and operated exclusively for an exempt purpose. While the promotion of health is an exempt purpose, not every entity that promotes health is entitled to a tax emption. Instead, to qualify for a federal tax exemption based on the promotion of health, an organization must “primarily benefit the community.” We are concerned that some nonprofit hospitals may fall short on this measure.

. . . 

To ensure that nonprofit hospitals uphold their charitable missions, we further urge the IRS to strengthen and enforce  regulations under Section 501(c)(3) and 501(r) of the tax code that pertain to nonprofit hospitals. To that end, we recommend the following:

1. Increase oversight of tax-exempt hospitals: The IRS’s oversight of nonprofit hospitals’ community benefit activities has historically fallen short despite growing evidence that some nonprofit hospitals are failing to provide sufficient community benefits and in fact, actively harm their patients through aggressive collection actions, and the IRS has only revoked a hospital’s tax-exempt status once over the past decade due to noncompliance with Section 501(r) requirements. To address this problem, the IRS should enforce existing requirements and enhance its enforcement mechanisms to ensure consequences for negligent noncompliance. This could include increasing the number of audits and reviews of hospitals with regular compliance issues, imposing penalties, or reevaluating the tax-exempt status for hospitals that do not offer sufficient financial assistance, hinder access to financial assistance, or engage in aggressive collection actions. Further, the IRS should issue reports examining problems with nonprofit compliance and partner with other state and federal enforcement agencies when audits identify potential violations of other state and federal laws.

2. Clarify requirements for financial assistance policies: Currently, the IRS requires nonprofit hospitals to “establish a written financial assistance policy” that “must be widely publicized.” However, public reports suggest that some hospitals have erected barriers that often prevent patients from accessing this assistance. For example, nearly 15 percent of nonprofit hospitals do not prequalify low-income patients for charity care and some hospitals even train staff to only mention financial assistance as a last resort. Further, 45 percent of nonprofit hospitals regularly bill patients whose incomes are low enough to qualify for free or discounted care. The IRS should establish clear standards for nonprofit hospitals’ financial assistance policies and practices. A standardized approach would facilitate consistent protection for patients and transparency in the hospital billing and collections process, ensuring that patients who qualify for financial assistance under existing hospital policies receive it.

3. Prohibit nonprofit hospitals from using aggressive collections practices: The IRS should require that nonprofit hospitals make comprehensive efforts to determine patient eligibility for financial assistance before initiating collections proceedings while also conducting outreach to eligible patients in a clear and reasonable manner. For instance, nonprofit hospitals should be required to screen patients for eligibility for financial assistance prior to initiating Extraordinary Collection Actions. Additionally, the IRS should prohibit harmful practices, as well as the delaying or denying of medically necessary care due to outstanding medical bills.

4. Issue a new Revenue Ruling: The IRS should reinstate its previous guidance requiring that nonprofit hospitals provide charity care to the extent of their financial ability. The IRS rescinded this requirement in 1969 based on lobbying from the hospital industry and the faulty assumption that charity care would no longer be necessary after the enactment of Medicare and Medicaid. The current medical debt crisis in this country – the majority of which is owed to hospitals – shows that this assumption was incorrect, and there is a significant need for charity care from nonprofit hospitals. In addition to reinstating this previous requirement for charity care, the IRS should issue guidance on when charity care is appropriate, e.g., when hospitals should assume that patients are unable to pay.

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darryll k. jones