Senate Committee Discusses Change in Treatment of Hospitals’ Tax Status

The two top members of the Senate Finance Committee have released what they call policy options for revamping the nation’s health-care system that include a change in how the tax-exempt status of nonprofit hospitals would be handled under federal law.

Under the proposal, “nonprofit hospitals would be required to maintain a minimal level of charitable activity, limit charges to uninsured, indigent patients, and limit aggressive collection actions. Hospitals that do not meet those requirements would be subject to an excise tax.”

Sen. Max Baucus, the Montana Democrat who chairs the finance committee, and Sen. Charles E. Grassley, the Iowa Republican who is the most senior member of his party on the committee, said the committee would begin to draft legislation to change the country’s health-care system next month.

The Internal Revenue Service currently uses a “community benefit” standard to determine a hospital’s eligibility for nonprofit status.

Under a 40-year-old IRS ruling, nonprofit hospitals must show that they provide benefits to the people and neighborhoods in the region they serve. The ruling listed five ways that hospitals can show they qualify. Among them: They can make a full-time emergency room open to all people regardless of their ability to pay. Or they can use surplus revenue to improve patient care and for medical training.

The ruling said that a hospital need not use all five methods and that its tax-exempt status would be determined by an analysis of all “facts and circumstances” involved.

Before its 1969 ruling, the IRS required that nonprofit hospitals provide charity care: free or discounted care to people who cannot afford to pay. Today, IRS officials say that while hospitals do not have to provide charity care, doing so is considered a form of community benefit.

Mr. Grassley has said the community-benefit standard is “weak” and that the IRS needs a “bright-line test” to be able to determine whether hospitals are doing enough to earn nonprofit status. Members of Mr. Grassley’s staff in the past have suggested in a background paper that a nonprofit hospital should generally be required to dedicate “a minimum of 5 percent of its annual patient operating expenses or revenues to charity care, whichever is greater.”