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.”

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