Hospital Charity Care and Related Reporting Requirements Under Medicare and the Internal Revenue Code
June 28, 2018
Hospital Charity Care and Related Reporting Requirements
Under Medicare and the Internal Revenue Code
Charity care is commonly understood to be, generally, an
thresholds for serving a disproportionate number of low-
unrecovered cost written off by providers that results from
income patients. The Patient Protection and Affordable
providing care to individuals who are uninsured or who are
Care Act (ACA; P.L. 111-148, as amended) modified
otherwise unable to pay for the health care services they
Medicare DSH payments by, among other things, splitting
receive. To help offset the costs of hospital-provided
Medicare DSH payments into two payments—DSH and
charity care, Medicare and the Internal Revenue Code
uncompensated care payments.
(IRC) convey payment and tax benefits, respectively, to
qualifying hospitals. For example, under Medicare, charity
The Medicare Provider Reimbursement Manual instructions
care is used as one element in determining hospital
for the S-10 worksheet define charity care as resulting
eligibility for Medicare uncompensated care payments,
“from a hospital’s policy to provide all or a portion of
which account for certain unrecovered costs such as charity
services free of charge to patients who meet the hospital’s
care. For federal income-tax purposes, the degree of charity
charity care policy or financial assistance policy (FAP).”
care provided by a hospital is a factor that may be used by
This includes full or partial discounts. Therefore, what
the Internal Revenue Service (IRS) when determining
constitutes charity care under Medicare is largely
whether that hospital qualifies for tax-exempt status under
determined by an individual hospital’s charity care policy
IRC Section 501(c)(3).
or FAP.
The amount of charity care provided by hospitals is
A nonprofit hospital applying for, or seeking to maintain,
sometimes discussed as a potential metric to determine a
tax-exempt status as a “charitable” organization under IRC
hospital’s eligibility for various payments or programs.
Section 501(c)(3) must meet a “community benefit
Given this interest, what follows is a summary of the ways
standard” developed by the IRS. Generally, this standard
in which Medicare and the IRC rules address hospital
requires the hospital to show that it has provided benefits
charity care differently. Specifically, although similar
that promote the health of a broad class of persons to the
conceptions of hospital charity care underlie the two sets of
community. (Some nonprofit hospitals may qualify under
rules, charity care’s definition, its purpose, the nature and
Section 501(c)(3) as educational organizations, rather than
extent of data reporting, and public availability of
charitable organizations.) One way hospitals may
information vary depending upon which context (Medicare
demonstrate that they have met the community benefit
or tax-exempt status) is being discussed.
standard is by providing charity care.
Charity Care Definitions and Reporting
Section 501(c)(3) tax-exempt hospitals report various
Requirements
information about their activities—including charity care—
Hospitals that receive Medicare reimbursement are required
on IRS Form 990 Schedule H. On IRS Form 990 Schedule
to submit annually to the Centers for Medicare & Medicaid
H (and accompanying instructions) charity care is referred
Services (CMS) a cost report that details the hospital’s costs
to as “financial assistance,” which is defined in the
of health care services delivered to Medicare beneficiaries.
instructions as “free or discounted health services provided
(The cost report is used by CMS to “settle” or reconcile
to” people who meet the hospital’s financial assistance
Medicare’s payments with the hospital’s actual costs after
criteria and are unable to pay for the services. In addition,
the end of the fiscal year.) Specifically, hospitals paid under
nonprofit hospitals applying for, or seeking to maintain,
the Medicare inpatient prospective payment system (IPPS)
Section 501(c)(3) tax-exempt status also must comply with
and critical access hospitals (CAHs) must use the cost
ACA requirements. One such ACA requirement is that the
report’s Worksheet S-10 - Hospital Uncompensated and
hospitals have an FAP.
Indigent Care Data to report information about the
hospital’s charity care.
Use of Charity Care Information
In FY2018, CMS began to use information submitted by
Under the Medicare IPPS, charity care is one component of
hospitals on the S-10 to determine a DSH-eligible hospital’s
a broader concept: uncompensated care. Medicare adjusts
Medicare uncompensated care payment. Through notice
per-discharge IPPS payments to account for the amount of
and comment, CMS proposed using S-10 information to
uncompensated care that an eligible hospital provides
calculate uncompensated care payments beginning in
relative to all eligible hospitals that provide uncompensated
FY2014. However, CMS did not finalize its proposal,
care. A hospital must qualify to receive Medicare
postponing use of the S-10 due to a number of factors.
disproportionate share hospital (DSH) payments as a
These factors included (1) the relative newness of the S-10,
prerequisite for Medicare uncompensated care payments.
which had gone into effect May 1, 2010; (2) concerns about
To qualify for DSH payments, hospitals must meet certain
data standardization and completeness; and (3) the fact that
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Hospital Charity Care and Related Reporting Requirements Under Medicare and the Internal Revenue Code
the most relevant data elements historically had not been
When filing the Form 990, hospitals must submit a copy of
publicly available or subject to audit.
their audited financial statements (i.e., the financial
statements audited by a public accounting firm). For
Since then, CMS has undertaken a number of steps to
purposes of enforcement of federal tax laws, the IRS audits
address these limitations, including clarifying and
a relatively small proportion of tax returns, including those
standardizing the S-10 instructions. Based on these actions,
provided by tax-exempt organizations. For example,
CMS finalized through notice comment a two-year
according to IRS data on enforcement activities, during
(FY2018 and FY2019) transition to using S-10 data to
FY2017, the IRS audited approximately 0.2% of all tax-
calculate a DSH-eligible hospital’s Medicare
exempt organization returns filed in tax year 2016.
uncompensated care payments. During the transition, CMS
is to use a blend of S-10 data and proxy data (addressed
Public Availability of Charity Care
below). Beginning FY2020, CMS is to use only S-10 data
Information
for determining Medicare uncompensated care payments.
Medicare cost report information, including charity care
data, is publicly available on CMS’s “Research, Statistics,
Prior to FY2018, CMS allocated uncompensated care
and Data & Systems” web page. Downloading and using
payments based solely on a proxy for uncompensated care
the data involves some level of technical proficiency with
that consisted of data related to certain insured low-income
software such as Oracle, SAS, SPSS Statistical Package, or
patients. Specifically, CMS used hospital services provided
Microsoft SQL Server.
to Medicare beneficiaries who also receive Supplemental
Security Income (SSI) and to Medicaid recipients.
There is approximately a two- to three-year lag on cost
report data public availability. For example, FY2016 cost
Analyses have concluded that Medicare uncompensated
report data for most, if not all, hospitals is posted on the
care payments should be based on S-10 data. For example,
CMS cost report web page by mid- to late FY2018. Based
in a 2016 report to Congress, the Medicare Payment
on CRS analysis of publicly available Medicare cost report
Advisory Commission concluded that despite the
data, of the 6,056 hospital cost reports available for
imperfections at the time, S-10 data are a better predictor of
FY2016, 4,327 (or 71.45%) reported charity care costs.
uncompensated care costs than low-income insured proxies
such as Medicare-SSI and Medicaid.
Under the IRC, the Form 990s filed by a 501(c)(3) hospitals
are open to public inspection. The law requires that both the
As previously discussed, a hospital with 501(c)(3) status as
IRS and the hospital make the documents publicly
a “charitable” organization must meet the community
available. The hospital must allow the public to inspect the
benefit standard. Providing charity care is one way a
documents and must provide copies upon request. Datasets
501(c)(3) hospital can meet that standard. In addition, all
of the entire population of Schedule H returns are available
501(c)(3) hospitals must comply with requirements
via the IRS’s “SOI Tax Stats – Charities and Other Tax-
imposed by the ACA, including having an FAP. There are
Exempt Organizations Statistics” web page. Currently, only
no bright-line numerical thresholds for determining whether
the populations of tax years 2011 through 2014 are
a hospital meets the legal requirements for 501(c)(3) status
available, as well as e-filed Schedule Hs for tax years 2009
(e.g., there is no requirement that 501(c)(3) hospitals
and 2010. The SOI Schedule H population datasets are
provide a specified amount of charity care or financial
published in ASCII microdata files. These files must be
assistance). Thus, no specific amount reported on the Form
read into a statistical software package, such as Stata or
990 Schedule H is, by itself, sufficient evidence of
SAS with user-generated data dictionaries.
compliance with the requirements. Further, the data on the
Schedule H are not the basis for any calculations by the IRS
There are limitations to the microdata files stemming from
with respect to assessing tax-exempt status or federal tax
lack of uniformity in data entry on Schedule H. For
liability.
example, filers must indicate what percentage of the federal
poverty guidelines is used for determining eligibility for
Audits of Charity Care Information
free care. In the dataset, observations include such outliers
The Medicare Financial Management Manual states that
as 1% or 18,500%. Presumably, these entries should have
cost reports are subject to audit, although not all cost
been recorded as 100% and 185%, respectively. Similar
reports are audited. However, all cost reports are reviewed
discrepancies occur across the entire dataset. In addition,
for “adequacy, completeness, and accuracy and
not all data fields on the form are complete in the
reasonableness of the data.” The Worksheet S-10 is also
population data set.
subject to audit. Through the FY2019 IPPS proposed rule,
CMS has stated that although S-10 audit protocols are
Marco A. Villagrana, Analyst in Health Care Financing
confidential, it will review and identify hospitals that have
Edward C. Liu, Legislative Attorney
high uncompensated care costs relative to total operating
Margot L. Crandall-Hollick, Specialist in Public Finance
costs for purposes of determining Medicare uncompensated
Joseph S. Hughes, Research Assistant
care payments in FY2019. As noted previously, charity care
is one of three components of uncompensated care.
IF10918
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Hospital Charity Care and Related Reporting Requirements Under Medicare and the Internal Revenue Code
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