Sweeping reforms implemented by the IRS and Treasury in 2009 have pulled back the veil surrounding the community benefit investments required of all nonprofit hospitals seeking federal tax exempt status. Will this new transparency, in combination with important tax law reforms enacted by Congress as part of the Affordable Care Act, lead to greater hospital investment in community health?
The Evolution Of Community Benefit Law
Since the 1950s, federal tax law has recognized that in order to qualify for tax-exempt status, nonprofit hospitals owe certain duties to the communities they serve. IRS Revenue Ruling 56-185 (1956) established a “financial ability” standard that required charitable hospitals to be “operated to the extent of [their] financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay.” In 1969, this early ruling was amended by Revenue Ruling 69-545, which substituted a more amorphous “community benefit” standard that has essentially survived into the present time, although with important modifications under the Affordable Care Act.
As noted by the Joint Committee on Taxation, the express purpose of Revenue Ruling 69-545 was to eliminate any enforceable obligation on the part of tax-exempt hospitals to furnish financial assistance to indigent inpatients. Following an unsuccessful legal challenge to the validity of the ruling (Eastern Kentucky Welfare Rights Organization v Simon, 370 F. Supp. 325, 338 (D.D.C. 1973), rev’d, 506 F.2d 1278 (D.C. Cir. 1974), vacated on other grounds, 426 U.S. 26 (1976)), the community benefit standard remained moribund and essentially went unexplored for decades.
Read the rest of this entry »