Hospitals get IRS checkupCharity-care quiz raises non-profits' worst fear: tax status on life support
Monday, July 24, 2006
Crain's Chicago Business
Non-profit hospitals, already under fire from Illinois' attorney general over their charity care practices, now face an even scarier inquisitor: the Internal Revenue Service.
Special tax forms have appeared in the mailboxes of some Illinois hospitals since May, seeking information about free care for poor people, among other things. The IRS says 500 questionnaires were randomly sent to hospitals nationwide to see if they're doing enough to justify their federal tax exemption. Evanston Northwestern Healthcare and Resurrection Health Care are among the local systems on the IRS mailing list.
It's another sign that non-profit hospitals are in the crosshairs in both Illinois and Washington, D.C. — a point hammered home by Senate Finance Committee Chairman Charles Grassley during a hearing earlier this month. "The end result should be real changes to the requirements of charity hospitals," said Sen. Grassley, R-Iowa.
In Illinois, hospitals are fending off a related threat from Attorney General Lisa Madigan, who is pressing to force hospitals to spend more on charity care. Sen. Grassley's tough talk signals that a tightening of the federal tax-exemption rules — once seen as a remote risk — could be imminent.
"It sounds like he wants to take this to a whole new level," says Linda Moroney, a health care lawyer at Gardner Carton & Douglas LLP in Milwaukee.
The IRS is asking hospitals to answer questions such as these, with explanations and dollar amounts.
How many individuals received uncompensated care from your hospital?
How much did your hospital spend on uncompensated care?
Did your hospital treat bad debts as uncompensated care?
Did your hospital refer all past-due bills to collection agencies?
Federal non-profit status shields hospitals from paying tax on their income and makes the interest on their bonds tax-free to investors. To qualify as non-profit, they must meet a "community benefit standard," which does not specify a level of free care they must provide. Sen. Grassley has asked the IRS to re-examine that rule and wants to set a measurable standard for tax exemption, an aide says.
"Hospitals could wake up to find out that . . . if they want to retain their tax exemption, they have to increase charity care," says Gerald Griffith, a health care lawyer in Chicago for law firm Jones Day.
A failed bill pushed by Ms. Madigan this spring would have required Illinois hospitals to earmark 8% of their operating budgets for free care. Hospitals say critics give short shrift to community benefits they bring, such as free health screenings or immunization drives.
Mr. Griffith says hospitals can shield themselves from scrutiny by trumpeting those programs. Illinois hospitals already have been doing that thanks to a new state law requiring them to file community benefit reports with the attorney general's office.
But some are taking it a step further. Evanston Northwestern Healthcare last week mailed glossy, color versions of its community benefit report to 1,200 local leaders — everyone from fire chiefs to Rotary clubs.
The report pegs Evanston Northwestern's total community benefit value for 2005 at $141 million — 58% of which came from the shortfall in government
payments for Medicaid and Medicare patients, an item critics say shouldn't count.
The IRS won't say which hospitals got the forms (Evanston Northwestern, Resurrection in Chicago and Condell Medical Center in Libertyville confirm they've received them).
An Evanston Northwestern spokeswoman says of the forms: "We view it as an opportunity to tell (our) story about our community benefits."
A Resurrection spokesman says three of the Chicago system's hospitals returned their completed forms this month. "These are serious questions and we're happy to help the IRS and Sen. Grassley address them," he says.
Some are filling them out as if performing a delicate surgical procedure. Condell has at least 10 staffers working on its response.
"We want to make sure we do a complete job," says Chief Financial Officer Van Hanover. "Because I think (the IRS) is probably going to use this for how they approach tax-exempt hospitals in the future."