Tax-Exempt Hospitals & Charity Care: A Mixed Bag

Health Affairs just published (and re-published) a few articles on this topic. Their titles pretty much tell the whole story (but here are links so you can read them yourself):

• US Nonprofit Hospitals Have Widely Varying Criteria To Decide Who Qualifies For Free And Discounted Charity Care, Luke Messac et al. (current issue)
• Nonprofit Hospitals: Profits And Cash Reserves Grow, Charity Care Does Not, Derek Jenkins and Vivian Ho (June 2023)
• Analysis Suggests Government And Nonprofit Hospitals’ Charity Care Is Not Aligned With Their Favorable Tax Treatment, Ge Bai et al. (April 2021)
• In California, Not-For-Profit Hospitals Spent More Operating Expenses On Charity Care Than For-Profit Hospitals Spent, Erica Valdovinos et al. (August 2015)

Although some commentators insist that the provision of charity care is a requirement for obtaining and maintaining federal tax-exempt status, I think that's a serious misreading of § 501(r) of the Internal Revenue Code, which was added to the Code by the Affordable Care Act in 2010. Yes, the Code now requires tax-exempt hospitals to formulate, adopt, and widely publicize a financial assistance policy ("FAP"). But the minimum requirements for the FAP merely include the following: "Eligibility criteria for financial assistance, and whether such assistance includes free or discounted care" (emphasis added). 

1. It is at technically correct that an FAP may not provide for free or discounted care. A wise hospital administrator should probably avoid this option, but it is available. Charity care is still an audit item, even if it is not required, and it's an important part of a hospital's connection to the community it serves.
2. The FAP's eligibility criteria my be written in such a manner that little or no financial assistance is actually provided. Failure to meet the community need for health care requires an explanation, but it does not appear to be a basis for the revocation of tax-exempt status.
3. Discounted care alone would also satisfy the requirements of the FAP. So, presumably, would be a low- or no-interest loan program. Again, § 501(r) does not require the provision of any level of charity care; prudence does, but not the IRC. 
4. The IRS's 63-page final rule to implement the ACA's Community Health Needs Assessment mention charity care in exactly one paragraph of the rule's preamble, and it's in the discussion of the administrative burden on hospitals that have to implement the final rule's requirements. 

None of this is to say that the governing legal standard for federal tax-exempt status ("community benefit") doesn't include charity care. It does; it's just not required. The requisite level of "community benefit" can be satisfied without it, as long as other forms of community benefit (education, training, research, etc.) are deemed to be adequate. 

Many if not most communities in this country have some level of need for charity care. Section 501(r) requires that the level of need be documented along with an exempt hospital's efforts to meet that need. Unfortunately, reporting does not mean the same as providing. Maybe someday it will, but not yet.