October 14,2008

Grassley: GAO Report Shows Tax-exempt Hospitals Are Left to Define Community Benefit as They See Fit

M E M O R A N D U M

To: Reporters and Editors
Re: GAO report on non-profit hospitals
Da: Tuesday, Oct. 14, 2008

Sen. Chuck Grassley, ranking member of the Committee on Finance, made the following
comment on the report released today from the Government Accountability Office, “Nonprofit
Hospitals/Variation in Standards and Guidance Limits Comparison of How Hospitals Meet
Community Benefit Requirements” (GAO-08-880). Grassley requested the report as part of his longtime
work on tax-exempt policy, including tax-exempt hospital policy. The report is available at
http://www.gao.gov/new.items/d08880.pdf.

“This report makes clear that tax-exempt hospitals are free to define community benefit as
they see fit. While the definition is vague, hospitals are left to fill the void. Ten different hospitals
will give 10 different answers. Sometimes the definition of community benefit includes bad debt and
care that’s not reimbursed by Medicare, yet the shortfalls created by private insurance aren’t
included in the same tally. IRS audits of non-profit hospitals from 2001 to 2006 did not examine
community benefit. This indicates to me that the standard is weak, and that the IRS needs a bright
line test to be able to determine whether hospitals are meeting the standard necessary to maintain
their tax exemption. States have stepped in to try to define community benefit for their own
purposes, which means a lot of variation from state to state.

“There’s no question about the need for fair tax policy and the need for charity care. This is
especially true with how difficult it can be for the uninsured and working poor to get needed health
care services. As long as there’s such uncertainty and inconsistency in the definition of community
benefit, it’ll be impossible to gauge whether the public is getting a fair return for the billions of tax
dollars that tax-exempt hospitals don’t pay. While the new IRS Form 990 will help, Congress may
need to fill in the blanks since hospitals still get to choose how they calculate their costs. Just like
tax-exempt colleges and universities, tax-exempt hospitals need to be accountable for rising costs
and the benefits of their special tax status.”

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