501(c)(3) Hospitals and the Community
Benefit Standard
Erika K. Lunder
Legislative Attorney
Edward C. Liu
Legislative Attorney
November 10, 2009
Congressional Research Service
7-5700
www.crs.gov
RL34605
CRS Report for Congress
P
repared for Members and Committees of Congress
501(c)(3) Hospitals and the Community Benefit Standard
Summary
One of the major health care bills, America’s Healthy Future Act (S. 1796, § 6007), includes a
provision that would impose requirements on hospitals with § 501(c)(3) tax-exempt status. Under
the act, hospitals would be required to regularly conduct “community health needs assessments”
and adopt implementation strategies to meet those needs. They would also be required to have
written financial assistance and emergency medical care policies that were consistent with
standards imposed by the act. Furthermore, hospitals would not be able to charge eligible
uninsured individuals more than the lowest amounts charged to insured individuals for emergency
and other medically necessary care, and they would be required to make reasonable efforts to
determine an individual’s eligibility for financial assistance before beginning extraordinary
collection actions.
The act’s requirements appear to reflect concerns that have arisen in recent years about whether
non-profit hospitals are providing adequate public benefits to justify their tax-exempt status. Non-
profit hospitals are eligible for federal tax-exempt status as charitable organizations described in §
501(c)(3) of the Internal Revenue Code (IRC). Under the “community benefit” standard
developed by the IRS, charitable hospitals are judged on whether they provide sufficient health
benefits to the community. The IRS has recently developed a new annual reporting requirement
(Schedule H of the Form 990) for hospitals to report information regarding their activities.
This report examines the standard under which hospitals qualify for tax-exempt charitable status
under federal law, recent inquiries made by Congress and the IRS into whether hospitals are
conducting sufficient activities to justify their exemption, and section 6007 of S. 1796. The
Appendix to the report discusses the new Schedule H in detail.
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501(c)(3) Hospitals and the Community Benefit Standard
Contents
Standard for § 501(c)(3) Charitable Status................................................................................... 1
Charity Care Standard ........................................................................................................... 1
Community Benefit Standard ................................................................................................ 2
Legal Challenge to the Community Benefit Standard....................................................... 3
Further Development of the Community Benefit Standard............................................... 4
Recent Controversy..................................................................................................................... 4
Recent Congressional Activity .............................................................................................. 5
Recent IRS Activity and Schedule H of Form 990 ................................................................. 6
America’s Healthy Future Act ..................................................................................................... 6
Appendixes
Appendix. Schedule H ................................................................................................................ 9
Contacts
Author Contact Information ...................................................................................................... 14
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501(c)(3) Hospitals and the Community Benefit Standard
on-profit hospitals receive billions of dollars in governmental subsidies due to their status
as charitable organizations.1 Benefits that arise from this status under federal law include
N exemption from federal income taxes, eligibility to receive tax-deductible contributions,
and authority to use tax-exempt bond financing.2 In recent years, Congress, the Internal Revenue
Service (IRS), and members of the public have questioned whether hospitals are conducting
sufficient charitable activities to justify these benefits. In the 111th Congress, one of the major
health care bills, America’s Healthy Future Act (S. 1796, § 6007), would impose additional
requirements on § 501(c)(3) hospitals.
Standard for § 501(c)(3) Charitable Status
Non-profit hospitals typically qualify for federal tax-exempt status as charitable organizations
described in § 501(c)(3) of the Internal Revenue Code (IRC).3 There is no definition in the tax
code for the term “charitable.” A regulation promulgated by the Treasury Department provides
some guidance, although it does not explicitly address the activities of hospitals. It states that
“[t]he term charitable is used in section 501(c)(3) in its generally accepted legal sense,” and
provides examples of charitable purposes, including the relief of the poor or unprivileged; the
promotion of social welfare; and the advancement of education, religion, and science.4
In the absence of explicit statutory or regulatory requirements applying the term “charitable” to
hospitals, it has been left to the IRS to determine the criteria hospitals must meet to qualify as §
501(c)(3) charitable organizations. Over the years, the IRS has developed two distinct standards:
the “charity care standard” and the “community benefit standard.”
Charity Care Standard
In 1956, the IRS issued Revenue Ruling 56-185, which addressed the requirements a hospital
needed to meet in order to qualify for § 501(c)(3) status as a charitable organization.5 One of
these requirements is known as the “charity care standard.” The standard required a hospital to
provide, to the extent of its financial ability, free or reduced-cost care to patients unable to pay for
it. A hospital that expected full payment did not, according to the ruling, provide charity care
based on the fact that some patients ultimately failed to pay. The ruling noted that publicly
supported community hospitals would normally qualify as charitable organizations because they
1 See Congressional Budget Office, NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS, Dec. 2006, at
5 (reporting the estimated value of federal and state tax exemptions provided to charitable hospitals in 2002 was $12.6
billion).
2 See IRC §§ 501(a), 170(c)(2), 145.
3 IRC § 501(c)(3) describes entities “organized and operated exclusively for religious, charitable, scientific, testing for
public safety, literary, or educational purposes, or to foster national or international amateur sports competition ... or for
the prevention of cruelty to children or animals ….” Among other criteria, “no part of the [organization’s] net earnings
… [may] inure[] to the benefit of any private shareholder or individual.” Some hospitals may qualify to be § 501(c)(3)
educational or scientific organizations. See Rev. Rul. 56-185; 1956-1 C.B. 202. Non-profit hospitals might also be able
to qualify for exemption as § 501(c)(4) social welfare organizations.
4 Treas. Reg. § 1.501(c)(3)-1(d)(2).
5 Rev. Rul. 56-185, 1956-1 C.B. 202.
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serve the entire community, and a low level of charity care would not affect a hospital’s exempt
status if it was due to the surrounding community’s lack of charitable demands.
Community Benefit Standard
In 1969, the IRS issued Revenue Ruling 69-545, which eliminated from Revenue Ruling 56-185
the requirement that a hospital provide free or reduced cost care.6 Under the standard developed
in Revenue Ruling 69-545, which is known as the “community benefit standard,” hospitals are
judged on whether they promote the health of a broad class of individuals in the community.
The ruling involved a hospital that only admitted individuals who could pay for the services (by
themselves, private insurance, or public programs such as Medicare), but operated a full-time
emergency room that was open to everyone. The IRS ruled that the hospital qualified as a
charitable organization because it promoted the health of people in its community. The IRS
reasoned that because the promotion of health was a charitable purpose according to the general
law of charity, it fell within the “generally accepted legal sense” of the term “charitable,” as
required by Treasury regulation.7 Expanding on this point, the ruling stated that
The promotion of health, like the relief of poverty and the advancement of education and
religion, is one of the purposes in the general law of charity that is deemed beneficial to the
community as a whole even though the class of beneficiaries eligible to receive a direct
benefit from its activities does not include all members of the community, such as indigent
members of the community, provided that the class is not so small that its relief is not of
benefit to the community.8
The IRS concluded that the hospital was “promoting the health of a class of persons that is broad
enough to benefit the community” because its emergency room was open to all and it provided
care to everyone who could pay, whether directly or through third-party reimbursement.9 Other
characteristics of the hospital that the IRS highlighted included: its surplus funds were used to
improve patient care, expand hospital facilities, and advance medical training, education, and
research; it was controlled by a board of trustees that consisted of independent civic leaders; and
hospital privileges were available to all qualified physicians.
It appears the community benefit standard was adopted partly in response to the enactment in
1965 of Medicare and Medicaid, which some thought would reduce the need for hospitals to
provide charity care.10 Its adoption by the IRS may also have been a response to concerns about
the charity care standard. These concerns were evidenced in a legislative proposal, introduced in
the same year Revenue Ruling 69-545 was issued, that would have created an explicit category in
6 Rev. Rul. 69-545, 1969-2 C.B. 117.
7 Id. (citing to Restatement (Second), Trusts, §§ 368, 372; IV Scott on Trusts (3rd ed. 1967), §§ 368, 372).
8 Id. (citing to Restatement (Second), Trusts, § 368, comment (b); § 372, comments (b), (c); IV Scott on Trusts (3rd ed.
1967), §§ 368, 372).
9 Id.
10 See STAFF OF S. COMM. ON FINANCE, 91ST CONG., MEDICARE AND MEDICAID: PROBLEMS, ISSUES, AND ALTERNATIVES,
at 56 (Comm. Print 1970) [hereinafter Staff Report].
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IRC § 501(c)(3) for hospitals.11 The House Report accompanying the bill expressed concern with
how the charity care standard was applied in practice:
In a number of cases internal revenue agents have challenged the exempt status of hospitals
on the sole ground that the hospitals are accepting insufficient numbers of patients at no
charge or at rates substantially below cost. This has resulted in significant uncertainty as to
the extent to which a hospital must accept patients who are unable to pay, in order to retain
its exempt status.12
Shortly after the House Report was released, the IRS issued Revenue Ruling 69-545. The Senate
Finance Committee then removed the hospital provision from the bill, noting the existence of the
new ruling and stating it would look at the issue when it addressed pending Medicare and
Medicaid legislation.13 A subsequent Finance Committee staff document on Medicare and
Medicaid issues advocated that the ruling be revoked and the charity care standard be reimposed
until Congress could address the situation.14
Legal Challenge to the Community Benefit Standard
After the release of Revenue Ruling 69-545, several indigents and organizations with indigent
members filed a class action suit challenging the IRS’s authority to implement the community
benefit standard, which they argued was inconsistent with the term “charitable” in IRC §
501(c)(3) because it did not require treatment of the poor. The Supreme Court ordered the district
court to dismiss the case because the plaintiffs lacked the constitutionally required standing to
bring suit.15 To have standing, “[a] plaintiff must allege personal injury fairly traceable to the
defendant’s allegedly unlawful conduct and likely to be redressed by the requested relief.”16 The
plaintiffs’ alleged injury was that the adoption of the community benefit standard had encouraged
hospitals to not provide necessary medical care to the indigents. The Court, in holding the
plaintiffs lacked standing, reasoned that it was “purely speculative” as to whether the hospitals
had denied treatment because of the new ruling and not for other reasons and whether the
11 Tax Reform Act of 1969, H.R. 13270, 91st Cong. (1969) (enacted into law, P.L. 91-172, without the hospital
provision).
12 H.Rept. 91-413, pt. 1, at 43 (1969).
13 S.Rept. 91-552, at 61 (1969).
14 See Staff Report, supra note 10, at 56 (“The staff strongly recommends revocation of Revenue Ruling 69-545 in light
of the recent legislative history and continuation of the prior position of the Service until such time as Congress can
devise an alternative approach establishing reasonable yardsticks of charitable service related to the financial capacity
of a hospital. Such action by the Service would assist in protecting the availability of necessary hospital care to
Medicare, Medicaid, and other poor patients”).
15 Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26 (1976). The plaintiffs had prevailed before the district court,
which had voided Revenue Ruling 69-545 as being “improperly promulgated” since there was insufficient justification
for the “clear change of previously administered policy.” E. Ky. Welfare Rights Org. v. Shultz, 370 F. Supp. 325, 336-
38 (D.D.C. 1973). The D.C. Circuit Court of Appeals reversed, finding the IRS interpretation of “charitable” was
permissible because the term’s definition “has never been static and has been broadened in recent years” and “is thus
capable of a definition far broader than merely the relief of the poor.” E. Ky. Welfare Rights Org. v. Simon, 506 F.2d
1278, 1286-90 (D.C. Cir. 1974). The court reasoned that limiting the term to relief of the poor “fails to recognize the
changing economic, social and technological precepts and values of contemporary society.” Id. at. 1288.
16 Allen v. Wright, 468 U.S. 737, 751 (1984).
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plaintiffs’ success would result in care being provided since hospitals could choose to give up
their tax-exempt status if the cost was too high.17
Further Development of the Community Benefit Standard
The IRS continues to use and develop the community benefit standard. In 1983, the IRS issued
Revenue Ruling 83-157, which clarifies the requirement that a hospital operate an emergency
room that is open to the public.18 While an important factor in Revenue Ruling 69-545 was that
the hospital operated an emergency room open to everyone, Revenue Ruling 83-157 states that a
hospital without an emergency room may still qualify for exempt status if other conditions are
met. The ruling recognized there are circumstances in which hospitals may not need to operate
emergency rooms, such as when a state agency has determined that its operation would be
duplicative or when a hospital is in a specialized field that is unlikely to require emergency care.
In these situations, a hospital may still qualify as a charitable organization if it shows other
evidence that it provides benefits to the community by promoting the health of a broad class of
persons. The ruling listed examples of factors that may be used as evidence: a board of directors
chosen from members of the community; an open medical staff policy; treatment of patients using
public programs (e.g., Medicare and Medicaid); and using surplus funds for improving patient
care, facilities, equipment, and medical training, education, and research.
Recent Controversy
In the past several years, questions have arisen as to whether non-profit hospitals deserve the
benefits they receive as § 501(c)(3) charitable organizations.19 Areas of controversy include the
prices charged to low-income uninsured patients for medical care in comparison to those charged
patients paying through insurance; the methods used by hospitals to collect payment from patients
and the classification of bad debt as a community benefit; an increasing number of partnerships
between tax-exempt hospitals and for-profit entities; and the amount of compensation paid to
high-level employees. Additionally, some have questioned whether the community benefit
standard is correct, or whether tax-exempt hospitals should categorically be required to provide a
certain level of charity care.
In 2004 and 2005, class action lawsuits were filed in at least 25 states challenging the treatment
and billing practices of § 501(c)(3) hospitals with respect to low-income uninsured individuals.20
One claim made by the plaintiffs was that IRC § 501(c)(3) created a contract between the federal
government and hospitals or a charitable trust for the public’s benefit, either of which required
17 E. Ky. Welfare Rights Org., 426 U.S. at 42, 43.
18 Rev. Rul. 83-157, 1983-2 C.B. 94.
19 See, e.g., John Carreyrou and Barbara Martinez, Nonprofit Hospitals, Once For the Poor, Strike It Rich; With Tax
Breaks, They Outperform For-Profit Rivals, WALL ST. J., Apr 4, 2008, at A.1.
20 See, e.g., McCoy v. E. Tex. Med. Ctr. Reg’l Healthcare Sys., 388 F. Supp. 2d 760 (E.D. Tex. 2005); Valencia v.
Miss. Baptist Med. Ctr., Inc., 363 F. Supp. 2d 867 (S.D. Miss. 2005); Amato v. UPMC, 371 F. Supp. 2d 752 (W.D.
Penn. 2004); Ferguson v. Centura Health Corp., 358 F. Supp. 2d 1014 (D. Colo. 2004); Quinn v. BJC Health Sys., 364
F. Supp. 2d 1046 (E.D. Mo. 2005). The Judicial Panel for Multidistrict Litigation denied a motion to consolidate the
cases. See In re Not-for-Profit Hospitals/Uninsured Patients Litigation, 341 F. Supp. 2d 1354 (J.P.M.L. Oct. 19, 2004).
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hospitals to provide emergency treatment to patients regardless of their ability to pay, charge
affordable and fair prices, and not engage in abusive collection practices. Courts disagreed,
finding that the statute clearly neither creates a contract or charitable trust, nor provides third-
party beneficiaries with a private cause of action.21
Recent Congressional Activity
Over the past several years, the activities of § 501(c)(3) hospitals have received congressional
attention. For example, in the 109th Congress, the House Ways and Means and Senate Finance
Committees held hearings on tax-exempt hospitals.22 Additionally, then-Chairman Thomas of the
Ways and Means Committee introduced the Tax Exempt Hospitals Responsibility Act of 2006
(H.R. 6420, 109th Cong.). Under the bill, a hospital would have only been eligible for § 501(c)(3)
status if it (1) adopted policies and procedures, consistent with requirements imposed by the act,
for providing and charging for medically necessary care to low-income uninsured individuals,
and (2) normally operated in a manner consistent with those policies and procedures. No action
was taken on the bill.
In the 110th Congress, the minority staff on the Senate Finance Committee released a discussion
draft of possible tax-exempt hospital reforms and invited public comment on them.23 Among the
proposals put forth in the discussion draft were a requirement that each hospital maintain and
publicize a charity care program and provide minimum amounts of charity care measured as a
percentage of that hospital’s total operating expenses. At the request of Senator Grassley, the
Government Accountability Office (GAO) issued a report that examined how the discretion
afforded hospitals under federal law in determining their community benefit activities and the
wide variety in state community benefit requirements have led to inconsistencies in the way
community benefits are defined and measured.24
21 See, e.g., Kolari v. New York-Presbyterian Hosp., 382 F. Supp. 2d 562, 565-56 (S.D.N.Y. Mar. 29, 2005), vacated,
in part, and remanded, 455 F.3d 118 (2d Cir. 2006) (“Plaintiffs here have lost their way; they need to consult a map or
a compass or a Constitution because Plaintiffs have come to the judicial branch for relief that may only be granted by
the legislative branch.”).
22 Hearing on the Tax-Exempt Hospital Sector before the House Committee on Ways and Means, 109th Cong. (2005),
available at http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=415; Taking the Pulse of
Charitable Care and Community Benefits at Nonprofit Hospitals: Hearing before the Senate Committee on Finance,
109th Cong. (2006), available at http://finance.senate.gov/sitepages/hearing091306.htm.
23 Senate Finance Committee Minority Staff, Tax-Exempt Hospitals: Discussion Draft (2007), available at
http://finance.senate.gov/press/Gpress/2007/prg071907a.pdf.
24 U.S. Government Accountability Office, Nonprofit Hospitals: Variation in Standards and Guidance Limits
Comparison of How Hospitals Meet Community Benefit Requirements, GAO-08-880, Sept. 2008. Some states have
adopted charity care or community benefit requirements as a condition imposed to receive state tax exemption or for
regulatory purposes. See id., see also Community Catalyst, Inc., Health Care Community Benefits: A Compendium of
State Laws, available at
http://www.communitycatalyst.org/doc_store/publications/community_benefits_compendium_2007.pdf.
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Recent IRS Activity and Schedule H of Form 990
In 2006, the IRS sent questionnaires to approximately 600 large hospitals to collect information
on how hospitals operated (e.g., billing practices, emergency room availability, and
compensation) and what types of community benefits they provided.25 Amid concerns about
“whether there [were] differences between for-profit and tax-exempt hospitals,”26 the IRS
announced that hospitals would be required to provide additional information specific to their
industry on a new Schedule H of the redesigned Form 990 (the annual information return filed by
tax-exempt organizations).27 Schedule H was drafted to “combat the lack of transparency
surrounding the activities of tax-exempt organizations that provide hospital or medical care.”28
Schedule H contains six parts, which are discussed in detail in the Appendix. Part I requests
details about a hospital’s charity care program and attempts to quantify charity care expenditures.
Part II quantifies the hospital’s community building activities. Part III quantifies the costs due to
Medicare shortfalls and bad debts owed to the organization. Part IV requires disclosure of any
joint ventures in which a hospital participates. Part V requests information about the entity’s
health care facilities. Part VI provides an area in which to discuss, in a narrative fashion, other
charitable activities that may be difficult to quantify. For tax year 2008, the only portion of
Schedule H that was required was the disclosure and description of the hospital facilities operated
by the filing entity. The entire Schedule is mandatory beginning with tax year 2009.
America’s Healthy Future Act
America’s Healthy Future Act (S. 1796, § 6007) would impose additional requirements on
hospitals in order to qualify for § 501(c)(3) status. The requirements would apply to
organizations operating a facility that must be licensed, registered, or similarly recognized as a
hospital under state law and any other organization determined by the Treasury Secretary to have
the provision of hospital care as its principal § 501(c)(3) tax-exempt function or purpose. An
organization with multiple facilities would not be treated as a § 501(c)(3) organization with
respect to any facility for which the requirements were not met.
The act would impose four new requirements. First, hospitals would be required to conduct a
“community health needs assessment” in the current taxable year or within the past two years and
adopt an implementation strategy to meet those needs.29 The assessment would need to take into
account input from persons representing the broad interests of the community, including those
with public health knowledge or expertise. An organization that failed to meet the assessment
25 The questionnaire is available on the IRS website at http://www.irs.gov/pub/irs-tege/exhibit_1__form13790.pdf. The
IRS’s final report on the compliance project is available at http://www.irs.gov/pub/irs-tege/frepthospproj.pdf.
26 IRS, Draft Form 990 Redesign Project - Schedule H: Instructions, at 1, June 14, 2007, available at
http://www.irs.gov/pub/irs-tege/draftform990redesign_schh_instr.pdf [hereinafter June 14 Draft Comments].
27 IRS, Press Release, IRS Releases Final 2008 Form 990 for Tax-Exempt Organizations, Adjusts Filing Threshold to
Provide Transition Relief, Dec. 20, 2007, available at http://www.irs.gov/newsroom/article/0,,id=176722,00.html. The
new Schedule H is part of a significant redesign of the entire Form 990.
28 June 14 Draft Comments, supra note 26, at 1.
29 S. 1796, § 6007(a) (creating IRC § 501(r)(3)).
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requirement for the taxable year would be subject to a new excise tax equal to $50,000.30
Hospitals would be required, on the Form 990, to describe how the needs identified in the
assessment were being met and explain why any identified needs were not being addressed.31
Second, hospitals would be required to have written financial assistance and emergency medical
care policies.32 The financial assistance policy would have to address eligibility for financial
assistance, the application process, and whether the assistance includes free or discounted care.
Other issues that would have to be addressed include the basis for calculating amounts charged to
patients and the actions that could be taken for nonpayment (e.g., collection actions and reporting
to credit agencies).33 The emergency medical care policy would have to require the hospital to
provide, “without discrimination,” care for emergency medical conditions34 and other medically
necessary care to individuals regardless of their eligibility for financial assistance.
Third, with respect to emergency and other medically necessary care, hospitals could not charge
individuals eligible under the financial assistance policy more than the lowest amounts charged to
those with insurance coverage.35 Hospitals would also be prohibited from using gross charges.
Fourth, hospitals would have to make reasonable efforts to determine whether an individual was
eligible for financial assistance before beginning extraordinary collection actions.36
The Treasury Secretary would be required to review, at least once every three years, the
community benefit activities of hospitals subject to the new requirements.37 Additionally, he or
she, in consultation with the Secretary of Health and Human Services (HHS), would be required
to annually provide Congress with information on the charity care, bad debt expenses, and
unreimbursed costs for services provided under means and non-means tested government
programs of private tax-exempt, taxable, and government-owned hospitals, in addition to the
costs of community benefit activities by private tax-exempt hospitals.38 Furthermore, within 5
30 S. 1796, § 6007(b) (creating IRC § 4959).
31 S. 1796, § 6007(d) (amending IRC § 6033). Hospitals would also be required to provide audited financial statements
with the Form 990 and disclose amounts paid under the new excise tax.
32 S. 1796, § 6007 (creating IRC § 501(r)(4)).
33 This information would only be required if the hospital did not have a separate billing and collections policy.
34 Emergency medical conditions would be defined with reference to § 1867 of the Social Security Act (42 U.S.C. §
1395dd) also known as the Emergency Medical Treatment and Active Labor Act (EMTALA). EMTALA currently
defines emergency medical conditions as any situation in which the absence of immediate medical care would
jeopardize the patients health or lead to serious bodily impairment or dysfunction. This definition also explicitly
includes women in labor where there is insufficient time to safely transfer the mother to another facility. 42 U.S.C. §
1395dd(e)(1). Under EMTALA, all Medicare participating hospitals that operate an emergency room, whether tax-
exempt or not, are required to screen all incoming patients and stabilize emergency medical conditions regardless of
ability to pay. For more information, see CRS Report RS22738, EMTALA: Access to Emergency Medical Care, by
Edward C. Liu.
35 S. 1796, § 6007(a) (creating IRC § 501(r)(5)).
36 S. 1796, § 6007(a) (creating IRC § 501(r)(6)).
37 S. 1796, § 6007(c), (e).
38 S. 1796, § 6007(e). The annual reports would go to the House Committees on Ways and Means, Education and
Labor, and Energy and Commerce, and the Senate Committees on Finance and Health, Education, Labor, and Pensions.
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years of the Act’s enactment, the Treasury Secretary, in consultation with the HHS Secretary,
would be required to report to Congress on trends in this information.
These provisions would generally be effective to taxable years beginning after the act’s date of
enactment, although the community health needs assessment requirement would apply to taxable
years beginning two years after the act’s enactment.39
39 S. 1796, § 6007(e).
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Appendix. Schedule H
As discussed in this report, hospitals with tax-exempt status are now required to provide
information specific to their industry on the new Schedule H of the recently redesigned Form 990
(the annual information return filed by tax-exempt organizations).40 The IRS released a draft
Schedule H in June 2007 and, after seeking public comment on the draft, issued the final version
in December 2007. Drawn heavily from, but not identical to, the community benefit reporting
model used by the Catholic Health Association of the United States (CHA), Schedule H was
drafted to “combat the lack of transparency surrounding the activities of tax-exempt organizations
that provide hospital or medical care.”41
Comments on the draft expressed immediate concerns about the technical and procedural
implications of the addition. For example, comments reflected uncertainty over what constituted a
hospital and whether multiple iterations of the Schedule were required for entities operating more
than one hospital facility. In response, the IRS indicated that it intended to defer to state law for
the definition of hospitals and that only one Schedule H would be required for an entity with a
single employer identification number, regardless of the number of hospitals run by it.42
Schedule H contains six parts, each of which will be discussed in detail below. Part I requests
details about a hospital’s charity care program and attempts to quantify charity care expenditures.
Part II quantifies the hospital’s community building activities. Part III quantifies the costs due to
Medicare shortfalls and bad debts owed to the organization. Part IV requires disclosure of any
joint ventures in which a hospital participates. Part V requests information about the entity’s
health care facilities. Part VI provides an area in which to discuss, in a narrative fashion, other
charitable activities that may be difficult to quantify.
Part I: Quantifying the “Community Benefit” Standard
Part I attempts to quantify the amount of community benefit provided by hospitals on an annual
basis. The metric the IRS has chosen to quantify community benefit is dollars spent. Qualifying
expenses include free care, unreimbursed Medicaid, unreimbursed costs from other means tested
government programs,43 community health improvement services,44 health professions
40The Schedule H for 2008 is available at http://www.irs.gov/pub/irs-pdf/f990sh.pdf (hereinafter 2008 Schedule H). For
tax year 2008, the only portion of Schedule H that was required was the disclosure and description of the hospital
facilities operated by the filing entity. The entire Schedule is mandatory beginning with tax year 2009.
41 June 14 Draft Comments, supra note 26, at 1.
42 IRS, Form 990 Redesign for Tax Year 2008 Schedule H, Hospitals—Highlights, at 2, Dec. 20, 2007, available at
http://www.irs.gov/pub/irs-tege/highlights_schedule_h.pdf [hereinafter Dec. 20 Draft Highlights]. See also IRS, 2008
Schedule H (Form 990) Instructions, at 1, Dec. 19, 2008, available http://www.irs.gov/pub/irs-pdf/i990sh.pdf
[hereinafter 2008 Schedule H Instructions].
43 Other means tested programs includes SCHIP and other federal, state, or local health care programs where
“eligibility depends on the recipient’s income or asset level.” 2008 Schedule H Instructions, supra note 42, at 9.
44 Community health improvement services must be supported by a documented “community need.” Id. at 10.
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education,45 subsidized health services,46 research,47 and contributions to other community
groups.48
Aside from concerns about the technical aspects of the new Schedule H, several substantive
criticisms also emerged from the public comments. For the most part, these criticisms stemmed
from the perception that the categories of charity care and community benefit envisioned by the
IRS were underinclusive.49 The agency had explicitly stated in its comments accompanying the
initial draft of Schedule H that the Schedule was an attempt to “quantify, in an objective manner,
the community benefit standard applicable to tax-exempt hospitals.”50 While the IRS did not
suggest a minimum level of expenditures that would be required in order to justify tax-exemption,
it is probable that some hospitals were concerned that the exclusion of certain expenditures would
make themselves appear, on paper, undeserving of tax-exempt status. By and large, these
criticisms focused on three specific omissions: community building expenditures, Medicare
shortfalls, and bad debt.
Part II: Community Building
The final draft of Schedule H includes an area, Part II, in which to report community building
expenditures. Although the definition of “community building” may not be obvious at first
glance, it is generally understood to refer to programs that are intended to have a beneficial
impact upon the health of a community but that do not provide medical care.51 Examples of
community building taken from the final draft of Schedule H are housing improvements,
economic development, community support, environmental improvements, leadership
development, coalition building, community health improvement advocacy, and workforce
development.52
The initial draft of Schedule H did not include community building activities in its calculation of
community benefit. In comments on the initial draft, the CHA strongly opposed their exclusion.
The CHA argued that “there is clear consensus in the public health community that social and
environmental factors are strong determinants of health for vulnerable populations,” citing
45 Costs for medical residents and interns may be included as health professions education costs. Id. at 11.
46 Subsidized health services must be supported by a documented “community need.” Id. at 13.
47 Research funded by tax-exempt or government sources, including internally funded research, may be reported here.
Research funded by other entities may not be reported as community benefit, but can be listed under Part VI of
Schedule H. Id. at 14.
48 2008 Schedule H, supra note 40, at Part I.
49 See, e.g., American Hospital Association, Comments on Draft Schedule H, at 2-4, Aug. 21, 2007 [hereinafter AHA
Comments]; Catholic Health Association of the United States, Comments Related to Schedule H, at 4, Sept. 12, 2007,
[hereinafter CHA Comments]; Health Law and Taxation Sections of the American Bar Association, Comments
Concerning Discussion Draft of Redesigned Form 990 for Tax-exempt Organizations, at 66-69, Oct. 4, 2007
[hereinafter ABA Comments].
50 June 14 Draft Comments, supra note 26, at 1.
51 See, e.g., AHA Comments, supra note 49, at 7; CHA Comments, supra note 49, at 8; ABA Comments, supra note
49, at 69.
52 2008 Schedule H, supra note 40, at Part II.
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publications from the Centers for Disease Control and Prevention and other scholarly articles.53
Additionally, the CHA noted that “every community building activity would qualify for
exemption on a stand-alone basis.”54
Despite the inclusion of community building metrics in the final draft of Schedule H, these
numbers are still separate from the reporting of charity care and community benefit expenditures
in Part I. The IRS commentary on the final draft reflected the view that the link between
community building and health was still tenuous and that the reporting tools in Schedule H are
intended to operate, in part, as data collection methods for the IRS to discern what links exist.55
Part III: Medicare Shortfalls
Hospitals incur costs when treating all patients, including patients who are covered by Medicare.
Medicare, however, may not reimburse a provider for the total cost of services received by a
patient. The difference between the Medicare reimbursement rates and the costs incurred by a
hospital are called shortfalls.
Some commentators expressed a belief that a hospital should be allowed to include the aggregate
amount of these shortfalls in any calculation of the total community benefit provided by that
hospital. For example, comments from the Health Law and Taxation Sections of the American
Bar Association (ABA) reasoned that “the entire amount of any ‘Medicare shortfall’ should count
as ‘charity care,’ because the elderly constitute a clearly-recognized charitable class.”56
Additionally, the American Hospital Association (AHA) commented that “many Medicare
beneficiaries, like their Medicaid counterparts, are poor,” and would have qualified for a
hospital’s charity care program or Medicaid in addition to Medicare.57 If these patients had been
treated as charity care, the entire cost of medical care would have been considered community
benefit under Part I. Additionally, any shortfall in Medicaid reimbursement would similarly have
been included in community benefit.
Others, however, argued that Medicare shortfalls are not a useful metric for determining
community benefit. The Catholic Health Association, opposing inclusion, noted that “many for-
profit hospitals compete aggressively for these [Medicare] patients.”58 In its view, measuring
Medicare shortfalls would not usefully distinguish for-profit hospitals from those seeking tax
exemption, and creating distinctions between these two groups is necessary to ensure that tax
exemption retains its credibility with policy makers. Notwithstanding these arguments, the CHA
noted that “if, at some point, access problems emerge for Medicare patients, the rationale for
including Medicare services as community benefit increases.”59
53 CHA comments, supra note 49, at 9.
54 Id. at 10.
55 Dec. 20 Draft Highlights, supra note 42, at 4.
56 ABA Comments, supra note 49, at 66 (citing Rev. Rul. 1972-124, 1972-1 C.B. 145).
57 AHA Comments, supra note 49, at 5.
58 CHA Comments, supra note 49, at 14. The discussion of Medicare shortfalls may also raise the question whether
shortfalls in reimbursement from for-profit insurers should also be counted as uncompensated care.
59 Id.
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In the final draft of Schedule H, the IRS provided a dedicated area in Schedule H in which to
report Medicare shortfalls. Despite the addition of Part III, the IRS does not treat Medicare
shortfalls as a direct measure of community benefit, in and of themselves. Instead, hospitals are
asked to “[d]escribe ... the extent to which any shortfall reported in [this part] should be
considered as community benefit.”60
Part III (continued): Bad Debt
Hospitals regularly engage in billing and collection practices in order to recoup co-pays,
deductibles, and other expenses from patients. During the collection process, there may occur a
point at which it becomes apparent that a debt owed to the hospital has little or no potential of
repayment. In accordance with sound accounting practices, it is customary to “write off” these
debts as “bad debt.”
Because bad debts, by definition, represent services hospitals have provided without
compensation, some believe that the aggregate amount of bad debt should be included in any
calculation of community benefit. Community benefit in the context of the provision of health
care services normally refers to means-tested eligibility programs, but the ABA noted that
“hospitals continue to have difficulty separating traditional uncompensated care from true bad
debt” due to “issues associated with identifying individuals who qualify for uncompensated
care.”61 Some portion of bad debt, therefore, appears to include the provision of care to
individuals who would have been eligible for charity care.62 Proponents argue that it is unfair to
penalize a hospital with a reduced community benefit calculation simply because the charity care
program did not accurately classify these individuals.63
Support for inclusion of bad debt was not universal among the comments submitted. The Catholic
Health Association noted that bad debt is a “‘cost of doing business’ that affects taxable and tax-
exempt organizations.”64 In CHA’s opinion, reporting bad debt does not create meaningful
distinctions between for-profit and non-profit entities that would justify tax exemption.65 CHA did
not necessarily dispute the theory that bad debt includes some patient charges that should be
considered charity care. Rather, CHA argued that hospitals should improve their charity care
programs to identify these patients at the onset of treatment, rather than using bad debt to
approximate the impact of these patients after the fact.66 In support of this argument, CHA also
noted that “many Catholic hospitals have changed their policies and improved their ability to
identify patients eligible for financial assistance.”67 Some patient advocates have also noted the
60 2008 Schedule H, supra note 40, at Part III (emphasis added).
61 ABA Comments, supra note 49, at 66.
62 Uninsured or under-insured patients that cannot afford to pay are nevertheless charged, and that inevitably leads to
bad debt precisely because they cannot afford to pay.
63 One alternative put forth by the ABA is to include some percentage of bad debt, in proportion to the amount of bad
debt universally in a given region, as community benefit. ABA Comments, supra note 49, at 67.
64 CHA comments, supra note 49, at 15.
65 Id.
66 Id. at 14-15.
67 Id. at 15.
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perceived inequity in allowing hospitals to benefit from bad debt after instituting potentially
aggressive and damaging collection practices against patients.68
The final version of Schedule H allows hospitals to report bad debt in Part III alongside Medicare
shortfalls, but “bad debt expense is not to be reported on the [charity care and community benefit]
table under any circumstances.”69 As with Medicare shortfalls, filing hospitals will have to
explain what portion of bad debt should be considered community benefit.70 The IRS comments
accompanying the final draft indicated that it does not intend to automatically consider any
portion of bad debt a community benefit, citing a lack of consensus regarding bad debt policies
among hospitals.71
Part IV: Management Companies and Joint Ventures
Part IV of Schedule H asks tax-exempt entities that operate hospitals to list the joint ventures they
participate in. Joint ventures can be problematic in the non-profit healthcare context for a variety
of reasons. If physicians with staff privileges at the hospital also have a proprietary interest in the
joint venture, referrals to that joint venture may violate federal prohibitions against self-referrals
or kickbacks.72 If directors or trustees of the hospital have a proprietary interest in that joint
venture, the non-profit status of the hospital could be jeopardized by any benefit that they receive
as a result of their interest in the venture.73 Similarly, in St. David’s Health Care System v. United
States, the Fifth Circuit held that a joint venture’s profit motive could undermine a non-profit
partner’s status as a charitable organization.74
For the most part, these issues are common to all tax-exempt organizations. The majority of
comments addressing this issue noted that the IRS already receives information on joint ventures
in the redesigned Form 990, and that only organizations that operate hospitals are burdened with
this extra reporting requirement in Schedule H.75 In response, the IRS noted that the “unique
relationship between hospitals and physicians resulting from their special status of having
medical staff privileges without regard to employment appears to have no clear analogy in other
exempt organization contexts.”76 The IRS did limit this reporting requirement to those joint
ventures where directors, trustees, and physicians with staff privileges together owned at least
10% of the joint venture.
68 See, e.g., Lucette Lagnado, Twenty Years and Still Paying: Jeanette White is Long Dead But Her Hospital Bill Lives
On, WALL ST. J., Mar. 13, 2003, at B1.
69 2008 Schedule H, supra note 40, at Part III; Schedule H Instructions, supra note 42, at 2.
70 2008 Schedule H, supra note 40, at Part III.
71 Dec. 20 Draft Highlights, supra note 42, at 3.
72 For a more detailed discussion of physician self-referral and federal law, see CRS Report RL32494, Medicare:
Physician Self-Referral (“Stark I and II”), by Jennifer O'Sullivan.
73 Under IRC § 501(c)(3), the net earnings of a charitable organization may not flow to the benefit of any private
shareholder or individual.
74 St. David’s Health Care System v. United States, 349 F.3d 232, 237 (5th Cir. 2003).
75 See, e.g., AHA Comments, supra note 49, at 8-9; CHA Comments, supra note 49, at 12-13; ABA Comments, supra
note 49, at 73.
76 Dec. 20 Draft Highlights, supra note 42 at 5.
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Part V: Facility Information
Organizations are asked, in Part V of Schedule H, to identify all hospital or medical care facilities
and to indicate the types of medical services provided by each. The definition of hospital or
medical care does not include assisted living services, vocational training for the disabled, or
medical education and research.77
Part VI: Supplemental Information
Part VI of Schedule H provides an area in which to provide narrative information regarding the
amount of community benefit provided. The IRS stated that this area could be used to explain
why some portion of Medicare shortfall or bad debt reported in other areas of the Schedule should
be considered community benefit.78 In addition, hospitals may provide details about other
community benefits they provide that are not easily quantifiable.79
Author Contact Information
Erika K. Lunder
Edward C. Liu
Legislative Attorney
Legislative Attorney
elunder@crs.loc.gov, 7-4538
eliu@crs.loc.gov, 7-9166
77 June 14 Draft Comments, supra note 26, at 8.
78 Dec. 20 Draft Highlights, supra note 42, at 5.
79 Id.; See also 2008 Schedule H, supra note 40, at Part III.
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