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Ernst & Young Report to IRS Reveals Tax-Exempt Hospitals' Community Benefits Justify Their Tax Exemptions


In a November 27, 2006 report commissioned by the American Hospital Association and sent to the Internal Revenue Service, Ernst & Young determined that 132 tax-exempt hospitals that had previously responded to a May, 2006 IRS survey each met the community benefit standards set forth in Revenue Ruling 69-545.  That ruling requires tax-exempt hospitals to provide services that benefit enough members of the community to justify their tax exemptions.

In the last few years, tax-exempt hospitals have come under increasing fire – from Congress, the IRS, state tax commissioners and private plaintiffs alike – for failing to provide a sufficient amount of charity care and other community benefits that would warrant the continuance of the hospitals’ various tax exemptions.

However, the Ernst & Young report specifically found that, of the 132 hospitals responding:

  • Each general and medical hospital operates an emergency room 24 hours a day, 365 days a year, and provides emergency services to all comers, regardless of ability to pay.

  • Each hospital charges the same price to every patient, regardless of ability to pay.

  • Each hospital has drafted an uncompensated care policy, most of which are based on an income test utilizing the federal poverty level as a benchmark (e.g., increasing discounts as patients move from 300% to 150% of the federal poverty level), but some of which also utilize an asset test.

  • The average hospital provides uncompensated care, on an annual basis, to 12% of its patients.

  • The average hospital provides $14 million of annual, uncompensated care.

  • Each hospital provides community programs, such as medical screenings and immunization and educational programs, in addition to the provision of charity care.

The take-away theme of the Ernst & Young report, however, was that the IRS’ original survey may not have been fairly structured. Among the “lessons learned” from Ernst & Young’s review of the hospitals’ responses to the IRS survey: 1) “hospitals [must be able to] tell their community benefit story, in more than just yes/no or simple number responses”; and 2) “[t]ransparency is important, but uniformity, clarity, and most importantly, asking the right questions are key to sound policymaking.”

© 2006 Crowell & Moring LLP. ALL RIGHTS RESERVED
This material was prepared by Crowell & Moring LLP attorneys. It is made available on the Crowell & Moring website for information purposes only, and should not be relied upon to resolve specific legal questions. For more information please contact John T. Brennan, David Florin, or your regular Crowell & Moring contact.

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