Sen. Charles Grassley, R-Iowa, ranking member of the Senate Finance Committee, recently asked the Government Accountability Office (GAO) to undertake a formal study on how nonprofit hospitals meet the community benefit standard in exchange for tax-exempt status and other tax breaks. For several years, Sen. Grassley has been at the center of the examination of nonprofit hospitals and increasing pressure on nonprofit organizations to justify their tax-exemption. Many observers have been waiting to see whether his scrutiny of the nonprofit sector that was significant during his tenure as Chairman of the Senate Finance Committee would lessen as he moved to a minority role this year. This latest action indicates that 2007 will be another year of heightened scrutiny and added anxiety for nonprofit hospitals that continue to wonder whether legislation or administrative action as a result of legislative pressure remains a very real possibility for them.

In his letter to the GAO, Sen. Grassley states that the Treasury foregoes hundreds of billions of dollars of taxes every year from nonprofit groups. He remarked that "[w]e need to get a better handle on how nonprofit hospitals are fulfilling their requirement to serve the community in exchange for the generous tax breaks they receive." The uninsured were highlighted as Sen. Grassley remarked that "[w]e need to make sure tax-exempt hospitals are providing health care to those in need in keeping with their requirement to serve the public," which he notes "is especially important as policymakers talk about helping the uninsured." This comment by Sen. Grassley is particularly noteworthy as significant tax and other changes to ensure the provision of healthcare to the uninsured are currently being proposed at both the federal and state levels.

Sen. Grassley further notes that although there have been recent attempts to clarify guidance on accounting and reporting uncompensated care (including those of the Catholic Health Association), much more needs to be done in this area. As a result, the GAO was requested to study three specific issues related to community benefit:

  • The community benefit standards that states have established, in addition to those from the IRS, and any guidelines the hospital industry uses to interpret the community benefit standard.
  • The standards and policies nonprofit hospitals use to define the components of uncompensated care, charity care and bad debt, and how nonprofit hospitals interpret and report them in practice.
  • How nonprofit hospitals interpret the community benefit standard for community benefits other than uncompensated care, and how nonprofit hospitals report them in practice.

Last year the GAO conducted a study on executive compensation policies and practices at nonprofit hospitals at the request of former Congressman William M. Thomas, the former chairman of the House Ways and Means Committee. The study, along with the IRS's own executive compensation projects resulted in considerable audit activity but mixed results for nonprofit hospitals. In his letter to the GAO, Sen. Grassley expresses continued concern about nonprofit hospital executive and board member compensation, citing "lavish lifestyles" and involvement in for-profit "business ventures that enrich these individuals to the detriment of the nonprofit hospital." The GAO was, therefore, requested also to examine:

  • The level of nonprofit hospital executive and board compensation and the extent to which these individuals are involved with for-profit business ventures with the nonprofit hospital.

Sen. Grassley has requested the GAO study cover a broad range of nonprofit hospitals by size, geographic location, teaching status and the level of state legislative and regulatory requirements on charity care and other community benefits. When completed, the study will certainly be analyzed and used by Sen. Grassley and others in the debate on tax-exempt status for nonprofit hospitals.

Sen. Grassley's release and letter to the GAO can be found online at the Senate web site.

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