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How Much Charity Care Must Hospitals Give To Stay Tax-Exempt?

Cheryl Clark, for HealthLeaders Media, July 23, 2009

If Sen. Charles Grassley has his way, nonprofit hospitals will have to prove they spend at least 5% of expenses on charity care if they are to keep their tax-exempt status. But a review of what's happened in Maryland suggests such a rule would be unrealistic and largely inappropriate.

That's the conclusion of a report, published today in the online edition of the journal Health Affairs, which found extremely wide variation in levels of all types of community benefit each hospital reported.

For example, charity care, a subset of community benefit defined generally as that care given to patients without any expectation of payment, varied from .05% to 6.33%. Only two hospitals reported contributing 5% or more.

But total community benefit, which included other categories of uncompensated care, such as health professionals' education, community health services, and "mission-driven" programs and research, varied from 1.17% to 14%.

"As charity care is now counted in its reporting system, 95% of Maryland's hospitals would not meet the standard proposed," the authors wrote. "This raises serious doubt about whether a 5% threshold is sensible, particularly because Maryland's hospitals face no deterrent to providing care other than the effort needed to determine eligibility." A state agency reimburses them an amount that includes costs for charity care and bad debt.

The report was authored by Bradford H. Gray, a senior fellow at the Urban Institute, and Mark Schlesinger, professor of epidemiology and public health at Yale University. Their review included a representative sample of 20 of Maryland's 45 acute care hospitals' disclosure reports, and interviews with hospital staff on their reporting practices.

The issue is of increasing concern this year as nonprofit hospitals prepare to comply with a new federal law requiring disclosure of all community benefit spending by 2010, the so-called Schedule H of the Internal Revenue Service's Form 990.

Many see the new rules as a response to a public demand for more accountability, and as the first step toward making all hospitals justify their tax exemption status.

But as Maryland hospital reports demonstrate, the amounts reportedly spent on both charity care, and the larger category of community benefit, vary dramatically around the state, depending on the poverty level of the population served. For example, community benefit spending ranged from 1.2% at Upper Chesapeake Hospital, a small facility in Bel Air, to 14.1% at the University of Maryland Hospital in Baltimore, where poverty levels are much higher.

Second, the authors make the argument that while Grassley and Republican members of the Senate Finance Committee want hospitals to provide at least 5% of charity care, many other types of uncompensated care certainly should qualify, although currently accepted hospital accounting practices don't consider them as such.

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