On October 30, 2007, the Senate Finance Committee held a roundtable discussion regarding a list of reforms that would require, among other things, that nonprofit hospitals spend at least 5 percent of their annual revenues or expenses on charity care to maintain tax exemption under Internal Revenue Code Section 501(c)(3). Hospital groups, such as the American Hospital Association in Washington, say reforms are not necessary and have pointed to proposed changes to the Form 990 informational tax return as sufficient to provide a clearer picture of the community benefits provided by nonprofit hospitals. Conversely, patient advocates believe that such a requirement would force hospitals to help the poor and ensure fair billing practices.

Senate Finance staff suggested alternatives to reform hospital federal taxexemption. These alternatives would implement an exemption structure with different requirements, depending on whether an organization is exempt under either 501(c)(3) or 501(c)(4). Although both 501(c)(3) and (c)(4) organizations are exempt from Federal income tax, only (c)(3) organizations issue tax-exempt bonds and receive tax deductible contributions. The Senate staff proposes more stringent requirements for (c)(3) status than under (c)(4) to justify the additional benefits. These additional rules would include: (i) establishing a “charity care” policy and wide publication of that policy; (ii) quantitative standards for charity care; (iii) more requirements for ventures between nonprofit hospitals and for-profit entities; (iv) board composition and other requirements for governance and executive compensation; (v) limitation of charges billed to the uninsured; (vi) restrictions on nonprofit to for-profit conversions; (vii) curtailment of “unfair billing and collection practices”; (viii) “transparency and accountability” requirements; and (ix) sanctions for failure to comply with 501(c)(3) or (c)(4) requirements.

The Committee staff knows of no hospital that is now a 501(c)(4). Yet the staff proposals recommend setting standards for hospitals that seek exemption under 501(c)(4) to include: (i) a quantitative amount of annual community benefits; (ii) limitation of charges billed to the uninsured; (iii) governance reforms; (iv) restrictions on conversions; (v) curtailment of unfair billing and collection practices; (vi) heightened transparency; and, (vii) sanctions for failure to comply with (c)(4) requirements. The staff discussion draft appears at http://finance.senate.gov/press/Gpress/2007/prg071907a.pdf.

These proposals would apply in addition to existing legal requirements generally applicable to exempt organizations, such as the private inurement prohibition.

Many nonprofit hospitals that hold exemption under 501(c)(3) already have wellestablished charity care policies and utilize some of the other transparency and accountability practices suggested by Senate Finance. However, a “5% of revenue for charity care” requirement, as proposed, would have a major impact on all nonprofit hospitals. “Bad debt” would not be included in the calculation of “charity care.”

Opponents to the proposed reforms warn that they do not take into consideration a hospital’s payer mix or differences between state initiatives. They also argue that “charity care” should not be prioritized over “community benefit.” Rather, hospitals need flexibility to determine the requirements of individual communities. Moreover, hospitals urge for time to measure the impact of the new changes to Form 990 to determine if the current IRS community benefit standard is working.

The General Accountability will undertake further studies of the hospital sect. It is unclear what course the Senate will take. Hospitals should nevertheless begin considering the potential impact of the proposed rules on their business structures and craft contingency plans, if the need arises, to restructure in the future.