Congress Continues to Pressure Not-for-profit Hospitals on Tax-Exempt Status

The "community benefit standard" for hospital tax-exempt status is a rising source of controversy in Congress, fed by a steady diet of breathless examinations and research from national media,  third-party interest groups and other advocacy organizations. 

Of late, the issue has grown from occasional thought-starter to a possible enterprise risk and  reputational challenge for the leadership of not-for-profit hospitals and health systems. It  deserves the attention of every not-for-profit hospital board member. 

Earlier this month, a bipartisan group of senators sent letters to the Commissioner of the Internal  Revenue Service and to Treasury Inspector General for Tax Administration seeking greater  transparency and oversight into how not-for-profit hospitals comply with the community benefit  standard. A specific concern expressed by Sens. Grassley, Warren, Warnock and Cassidy is  whether the community benefit standard in its current format is "overly broad" and has thus  allowed some hospitals "to avoid providing essential care in the community for those who need  it most." 

The senators are asking the IRS and Treasury to look more closely at the way "community  benefit" is addressed by hospitals in Schedule H to the IRS Form 990 informational return, and  related IRS filing/reporting and enforcement activities. 

This action follows parallel inquiries from the House of Representatives, which culminated in an  April 26 hearing of the Subcommittee on Oversight of the House Ways and Means Committee  (Hearing). That Hearing was similarly focused on the community benefits provided by not-for profit hospitals and how those benefits are reported to the IRS and the greater public. 

A common contributor to the interest of both the Senate and the House has been the critical  media coverage over the past year on not-for-profit health systems and their alleged failure to  meet the needs of vulnerable members of their communities. Indeed, many of the 34 footnotes  contained in the senators' letters were to unfavorable media stories and reports from advocacy  organizations such as the Lown Institute. 

Given the bicameral nature of Congress' focus and the likelihood of additional critical media  coverage (e.g., The New York Times' "Profits Over Patients" series), this renewed focus on tax exemption standards for not-for-profit hospitals will not abate anytime soon. 

In this environment, it is increasingly important for corporate leadership to revisit, confirm and  possibly refine how their organization's mission-related commitments are described to the  public–and to regulators. It may also be time for those organizations to review their investments,  operations and mission-related commitments to ensure they, indeed, reflect the intended mission. To ensure that the organization has, in fact, a good story to tell. 

The board of directors is not excepted from this effort. They owe their fiduciary obligations to  the charitable healthcare mission of the organization, as expressed in its articles of incorporation. 

A lack of familiarity with the community benefit debate could expose the board to legitimate  criticism should the IRS, state charity officials or the media look more closely at the relationship  of governance to mission. 

This can be a sensitive issue, as mission-related concerns often fall into the "gray area" between  the responsibilities of governance and that of management. But the charity laws of some states  specifically task boards with a "duty of loyalty to mission," while other states do so implicitly. Either way, the Congressional inquiries are an invitation for boards to become more involved in  the discussion. 

As representatives of the community their organization serves, not-for-profit board members  have a unique obligation and exposure in this continued scrutiny of whether not-for-profit  hospitals are specifically fulfilling the expectation of a "community benefit standard" and, more  broadly, their mission. 

Importantly, the letter to the IRS was not written in isolation. It is a flashpoint in an expanding  national conversation on the delivery of healthcare services – the cost of it, the funding of it, the  profits made through it, equity of access to it and more. Public dissatisfaction is high, trust is low  and related Congressional action is a possibility. 

While successful health systems have long been protected from the vagaries of shifting political  winds, that security is fading. If they ever did, boards can no longer assume that the strength of  their local brands, the size of their workforce and the good services they so often perform are  enough to buffer their systems from regulatory and reputational concerns. 

In this environment, every system needs advocates. The essential role of board members is not  only to govern well and attentively, but to help advance the issues important to the health system  and its goal in the community, working closely with executive leadership. As the game on the  field moves forward, board members ought not stay on the sidelines. 

The media, advocates and others are raising important questions about the delivery of care, and it's doubtful that any public-oriented organization will be shielded from the spotlight. Without  balancing voices – acting as translators, context-setters and supporters – the conversation can  become unbalanced and the consequences damaging. Boards should know their health system's story well and tell it often. 

There has rarely been a more important time for not-for-profit hospital board members to be  actively engaged in the organizations to which they are entrusted. 

None of this is to suggest that the sky is falling in terms of loss of tax-exempt status. Yet. But the  clouds appear to be gathering. 

A read of the climate points to a continued public focus on the community benefit standard, and  the possibility of its ultimate revision. Neither development would be positive for tax-exempt hospitals; the latter could be truly significant. And those prospects should have boards leaning in  more closely with management on the positive message their healthcare system can send  regarding the care for the community they provide.

Michael Peregrine is a partner in McDermott Will & Emery. David Jarrard is Chairman,  Jarrard Inc. Executive Committee.

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