Juliana Sleeper. Writing Sample Re Tax Policy

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Tax Policy Seminar
Note
January, 2013
On the Verge of Extinction: Non Profit Hospitals’ Charity
Juliana Sleeper
Table of Contents
I. Introduction ........................................................................................................................................ 2
II. Non-Profit Hospital History and Origin of Tax exemption................................................ 2
III. 501(c) Requirements and Health Care Organizations ..................................................... 4
A. In General .......................................................................................................................................................4
B. Operational Exclusivity Requirement..................................................................................................4
1) Revenue Rulings and evolving the meaning of “charitable”.................................................................. 5
2) Non Exempt Activities and Commerciality Doctrine................................................................................ 6
C. Prohibition Against Private Inurement ...............................................................................................7
D. Prohibition Against Excessive Private Benefit..................................................................................7
E. Public Policy Test.........................................................................................................................................8
IV. 501(c) Criticism............................................................................................................................... 8
A. Charging the Poor Far More.....................................................................................................................9
B. Debt Collection and Bad Debt............................................................................................................... 10
C. Excessive Insider Benefit........................................................................................................................ 10
V. 501 (r) and Its Shortfall................................................................................................................11
A. Community Health Needs Assessment.............................................................................................. 11
1) Define Community ................................................................................................................................................12
2) Gather Data ..............................................................................................................................................................12
3) Refine Data and Find Strategy..........................................................................................................................12
4) Distribute Report to the Public........................................................................................................................13
B. Financial Assistance Policy.................................................................................................................... 13
C. Limitation on Charges.............................................................................................................................. 13
D. Billing and Collection Requirements................................................................................................. 14
E. Shortfall ........................................................................................................................................................ 15
VI. Proposal ...........................................................................................................................................16
A. Quantitative Standard for FAP............................................................................................................. 16
B. Sanction........................................................................................................................................................ 16
C. Board of Directors..................................................................................................................................... 16
D. Redefine “Community Benefit”............................................................................................................ 17
E. Insider Benefit............................................................................................................................................ 17
VII. Conclusion......................................................................................................................................18

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I. Introduction
United States hospitals emerged from a great tradition of charity. Peopleestablished
hospitalsto shelter and care for the sick, the poor, the diseasedand the mentally ill.1In
1736, New York City’s almshouseinstituted thefirst program that was similar to a
hospital when it createda six bedroom ward to care for the disabled and chronically
ill.2A few years later in 1751, Doctor Thomas Bond and Benjamin Franklin created the
nation’s first hospital in Pennsylvania "to care for the sick-poor and insane who were
wandering the streets of Philadelphia."3To manifest the purpose of charity, the
Pennsylvania hospital created a seal with the image of the Good Samaritan and the
inscription “Take care of him and I will repay thee”. 4
The hospitals’ role of the Good Samaritan portrayed by this hospital and the many
that followed has led the US government to give income, property, and other tax
exemptions to non-profit hospitals. In 2002 alone, tax-exempt hospitals received a total
of $12.6 billion in government tax exemptions.5Although tax exemption for a hospital’s
charity work continues, modern hospitals (thosedating from the late 20th century) have
lost their tradition of charity.6 Hospitals still charter with the purpose of charity, yet
provide little actual charity.7In fact, until recently modern hospitals charged poor
patients triple or quadruple what they charged wealthier patients with
insurance.8Inability to pay medical bills became the leading cause of bankruptcy in the
United States.9
This note will discuss the charity tax exemption fornon-profit hospitals and the lack
of proper legislation pertaining to their practices. Part II of this note offers abrief
overview of US hospital history and the origin oftax exemption for non-profits. Part III
reviews each 501(c) requirement. Part IV analyzes 501(c)’s problems. Part Vexplores
501(r) and its attempt to fix 501(c) and its shortfall. Finally Part VIadvances a tax
proposal to improve charity medical care for the medically indigent.
II. Non-Profit Hospital History and Origin ofTax exemption
In the early days of the United States, “the only source of medical assistance
available to the poor who could not afford private professional medical care” was
1History of Public Hospitals in United States, National Association of Public Hospitals
and Health Systems, http://www.naph.org/Homepage-Sections/Explore/History.aspx
(last visited Jan. 9, 2012).
2Id.
3Pennsylvania Hospital History: Stories – Nation’s First Hospital, PennMedicine,
http://www.uphs.upenn.edu/paharc/features/creation.html(last visited Jan. 9, 2012).
4Id.
5Terri L. Brooks, Billions Saved in Taxes While Millions Underserved-What Has
Happened to Charitable Hospitals?, 8 Hous. Bus. & Tax L. J. 391, 395 (2008).
6 Id.
7 Id.
8 See footnote 51: 8 Ind. Health L. Rev. 365
9Laura L. Faulkerts, Note, Do Nonprofit Hospitals Provide Community Benefit? A
Critique of the Standard for Proving Deservedness of Federal Tax Exemptions, 96 Iowa
L. Rev. 761, 763 (2009).

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religiously established non-profit hospitals.10The wealthy had private doctors who made
house calls when they were sick,but the poor could not afford such services.11By the end
of the19th century, hospitals served other purposes besides just curing the sick.12
Hospitals provided sanitary areas to quarantine and care for people with infectious
maladiesand allowed surgery patients easier access to anesthesia.13 People other than
the poor wanted and needed the hospitals. 14Because of lingering class division,
hospitals were still divided into two separate systems; large voluntary (non-profit)
hospitals for the poor supported by philanthropic contributions and small doctor owned
hospitals catering to wealthier individuals. 15
Between 1900 and 1930, the trend moved toward fewer proprietary hospitals and
fewer private doctors.16 By mid 1940s, voluntary hospitals significantly increased while
doctor owned hospitals declined.17 The most influential force behind the growth of
voluntary hospitals was Blue Cross Blue Shield Insurance.18 Blue Cross Blue Shield
reimbursed voluntary hospitals at a rate much exceeding that paid to proprietary
hospitals.19In 1946 congress enacted the Hill-Burton Act, which intended to subsidize
construction of non-profit and public health care facilities, allocating billions of dollars
to the construction of health care facilities.20By the end of the 20th century, the US
health care system greatly depended on hospitals, especially the non-profit hospitals. 21
The tax exemptions for non-profit hospitals started early in US history. In early
America, the corporation was the accepted legal form of charitable activities; and in
1894, when the US first adopted the federal income tax on corporations, the government
exempted from income tax those “corporation, companies, or associations organized
solely for charitable, religious…purpose.” Because voluntary hospitals were formed by
religious entities with the sole purpose of charity, they were tax-exempt.22 Since then,
legislation has evolved to demand more specific requirements to qualify an entity as a
“charity organization”.23
The current IRC 501(c)(3) applies to “organizations not organized for profit but
operated exclusively for the promotion of welfare…and the net earnings of … exclusively
10Id.at 766.
11Id.
12Nina J. Crim, Evolutionary Forces: Changes in For-Profit and Not-For-Profit Health
Care Delivery Structures; A Regeneration of Tax Exemption Standards, 37 B.C. L. Rev.
1, 10 (December, 1995).
13Id.
14Id. at 11.
15Id.
16Id. at 12.
17Id.at 13.
18Id.
19Id.
20Id.at 14.
21Id.at 26.
22Laura L. Folkerts, Note, Do Nonprofit Hospitals Provide Community Benefit? A
Critique of the Standard for Proving Deservedness of Federal Tax Exemptions, 34 J.
Corp. L. 611, 614 (2009).
23Id.

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to charitable purposes.”24Healthcare organizations have to meet IRC 501(c)(3)
requirements to be exempt them from federal income tax.25
III. 501(c) Requirements and Health Care Organizations
A. In General
Under IRC 501(c)(3), a health care organization must satisfy six requirements26: (1)
The organizational test – when creating an organizational document, the hospital must
state clearly that it organized as a not for profit corporation and its purpose is
“charity.”27Compared to the other five requirements, this is an easier requirement to
fulfill, because it requires only on the chartering document. (2) The operational
exclusivity test – it must be operated exclusively for the purpose specified in
organizational test.28 (3) The private inurement test – an insider may not inure any
portion of organization’s net earnings.29 (4) The private benefit test – any private benefit,
which is measured qualitatively and quantitatively, must be incidental to the public
benefit.30(5) Political lobbying test – the organization must comply with limits on
political lobbying and campaign activities.31 (6) Public policy test.32 Because
requirement (1) and (5) are unambiguous and without contention, this note will focus
on requirements (2),(3),(4) and (6).
B. Operational Exclusivity Requirement
The Supreme Court decided that “operational exclusivity requirement” mandated
only that an organization must serve “primarily” its tax-exempt purpose and it is
permitted to have “incidental” activities unrelated to the exempt purpose.33 Presumably,
an organization performing non exempt activities but having significant non-profit
operation will still meet this requirement. Thus, under 501(c)(3) a hospital could
operate substantially for its charitable purpose and have only incidental non-exempt
activities and pass the exclusivity requirement.34
The interpretation of “charitable” purpose and what constitutes “non exempt”
activities are ambiguous; the courts and the IRS have struggled to make them
clear.35The IRS issued revenue rulings to guide hospitals in the meaning of
“charitable”.36 The courts have adopted the Commerciality doctrine to help define “non
exempt activity.”37
24Id.
25Id.
26 37 B.C. L. Rev. 1, 33.
27Id. at 33.
28Id.at 34.
29Id.
30Id.
31Id.at 35.
32Id.
33Id.
34Id. at 36.
35Id.
36Id.at 43.
37Id. at 36.

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1) Revenue Rulings and evolving the meaning of “charitable”
The IRS issued three revenue rulings in the attempts to define “charitable.” They went
from 1956’s very narrow interpretation of the meaning to 1983’s controversially broad
interpretation. Even though the congress and the courts dealt with this controversy, the
1983 ruling still stands after thirty years.
Revenue Ruling 56-185
In 1956, the IRS issued a revenue ruling to guide hospitals in defining charitable tax
exemption.38The ruling states the IRS deemed a hospital charitable if it “operated to the
extent of its financial ability for those not able to pay for the services rendered and not
exclusively for those who are able and expected to pay.”39The ruling emphasizes that a
hospital shall not refuse service to a patient who needs care but is not able to pay. Also
the IRS describes charity as charging for services at lower rates or providing service free
of charge.40 Hence, the IRS defined narrowly the term “charity”. However the ruling
does not impose an obligation of how much charity work needs to be performed.41
Revenue Ruling 69-545
In 1969, the IRS issued another ruling for the hospitals.42It states that “promotion of
health” is, according to the charitable law of trusts, an exempt activity in and of itself;43
thus placing the hospitals in the per se exemption category.44 This ruling removed the
requirement that a hospital should provide charity care to the extent of its financial
ability.45 Instead of the financial ability standard, the IRS introduced the “community
benefit standard.”46 Under the community benefit standard, a hospital can pass the
charity requirement if it operates for the benefit of the community as a whole.47 –
Having an emergency room and offering emergency services to the poor would qualify
it.48No limits are set to how much the hospital could charge the patient who is unable to
pay but who did receive emergency service;49 so the hospital has all the rights to charge
exorbitantly and deter the poor from seeking service. Moreover besides overcharging for
the emergency services, a hospital can limit its service based on the person’s ability to
pay, as long as the benefited class of people is not so small that its relief is not of benefit
to the community. 50
Contrary to its predecessor, the 1969 revenue ruling construes “charity” very broadly
and created per-se exemptions for the hospital. Congress expressly rejected the IRS’
broad approach but did not take any effective action to dismiss the ruling.51Public
38Id.at 43.
39Id.at 44.
40Id.
41Id.
42Id.at 45.
43Id.
44Id.
458 Hous. Bus. & Tax L.J. 391, 408.
46Id.
47Id.
48Id.
49Id.
50Id.at 409.
51Id.at 410.

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attempted to challenge the ruling in court, but most were unsuccessful because of lack of
standing.52When a case came to the Supreme Court, the Court also dealtwith and
concluded the case similarly tothe ruling of the lower courts, not discussing the merits of
the ruling but instead holding the case nonjusticiable due to lack of standing.53
Furthermore, the vague community benefit standard resulted in no uniform
interpretation.54
Revenue Ruling 83-157
In 1983,the IRS published a ruling thatrepeats and amplifies the message from the
previous ruling. In this ruling the IRS abandons the emergency room requirement.55 As
long as other factors indicate that the hospital is operating exclusively for the benefit of
the community, an emergency room may deny service on the basis of ability to pay.56The
IRS realized that certain specialized hospitals, such as optometric and oncologic, might
not need emergency rooms57; instead of making it a requirement, emergency room
became one of the factors. The ruling lists other significant factors that will be
considered.58 These include “a board of directors drawnfrom the community, an open
medical staff policy, treatment of persons paying their bills with the aid of public
programs like Medicare and Medicaid, and application of any surplus to improving
facilities, equipment, patient careand medical training, education, and research.”59With
the 1983 ruling, the IRS affirms its broad interpretation of charity and acknowledges
that there is no one controlling factor that determine charity operation.60
2) Non Exempt Activities and Commerciality Doctrine
The IRS views commercial activities as non exempt purposes for 501(c)(3)
organizations.61 The courts created the commerciality doctrine to help define IRS’s view
of non exempt purposes.62 The commerciality doctrine does not provide specific
guidelines but sets forth the general idea of what the IRS views as commercial activity.63
If the activity from the perspective of the consumer cannot be differentiated from for
profit counterpart organization, the activity is considered commercial in nature and is a
non exempt activity.64The courts have listed many factors in evaluating and applying the
commerciality doctrine.65 However, in practice application of the commerciality
doctrine is rarely the reason theIRS denies the exemption of a health care
52Id.
53Id. at 411.
54Id.
55James B. Simpson and Sarah D. Strum, How Good a Samaritan? Federal Income Tax
Exemption for Charitable Hospitals Reconsidered, 14 U.Puget Sound L.Rev. 633, 653
(1991).
56 37 B.C. L. Rev. 1, 48.
57Id.
58Id.
59Id.
60Id.
61Id.at 37.
62Id.
63 Id.
64Id.
65Id.

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organization.66
C. Prohibition Against Private Inurement
Private inurement happens when the hospital provides an unjust or excessive
payment to an insider.67If violated, the hospital will lose its exempt status. Insiders
include not only the directors and officers of the hospital but also the physicians and
medical staffs.68The IRS absolutely prohibits private inurement and does not allow even
the de minimus amount.69 However the IRS interprets “unjust or excessive amount”
very leniently.
Physician compensation and incentive arrangements are the most controversial
issues in regards to private inurement.70Hospitals compete brutally to recruit and retain
the best physicians.71The competition causes US physicians to get paid double and triple
what their counter parts in other countries get paid.72 However, physicians’ high salaries
do not violate the prohibition against private inurement.73According to the IRS
guidelines anon-profit hospital can retain its tax-exempt status as long as the incentive
package or the salary for a physician furthers the hospital's exempt purpose and the
community benefits from the hiring of the physician and having the availability of the
physician to treat patients outweighs the private benefit to the physician.74
The guidelines also allow physician incentives such as the hospital’s payment of:75
aphysician’s private residence mortgage payment,moving expenses, malpractice
insurance premiums, and below market price office rentals.76The IRS’ lenient
interpretation of inurement leaves almost nothing for excessive or unjust payment.77A
few situations that IRS defined as unjust payments are:78(1) “unrestricted” income
subsidies, and (2) payment without a set obligations.79Hospitals could avoid being
penalized for unjust payment by: (1) implementing high ceiling income subsidies and (2)
specifying an obligation, such as treating certain amount of patients or giving emergency
room duty. As interpreted, the private inurement requirement has no teeth, thus it
serves no purpose in furthering charity works.
D. Prohibition Against Excessive Private Benefit
Prohibition against excessive private benefit is the same concept as private
inurement, except it applies to both insiders and outsiders.80 Under this prohibition, a
de minimus amount of private benefit is allowed as long as it is incidental to public
66Id.
67Id.at 68.
68Id.
69Id.
70Id.at 75.
71Id.
72Id.
73Id.
74Id.
75Id.
76Id.
77Id.
78Id.
79Id.
80Id.at 70

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benefit.81 To be considered as an incidental private benefit, it must pass a two prong
test:82 1) The private benefit must be insubstantial compared to the public benefit
(quantitative test) and;83 2) the private benefit must be natural and unintentional to the
activity that benefits the public (qualitative test).84 If this prohibition is violated, the
hospital will lose its exempt status.85
E. Public Policy Test
Original regulation does not use the phrase “public policy”.86 The Supreme Court
created the public policy test for the 501(c)(3) organizations in the case of Bob Jones
University v. United States (“Bob Jones”).87 In Bob Jones, the Supreme Court
disallowed religious tax exemption to a religious school that practiced racial
discrimination against its students.88 The majority opines that ifthe entity's purposes
and activities go against the fundamental public policy, the entity cannot provide public
benefit.89Since the Bob Jones, the IRS published several private letter rulings applying
the public policy tests and following the Bob Jones decision.90The IRSemphasized
compliance with the Medicare/Medicaid anti kick back rules, anti dumping rules for the
health organizations to comport with fundamental public policy.91
IV. 501(c) Criticism
Although non-profit hospitals must meet all six requirements listed in part III, the
requirements do not lead the non-profit hospitals to do more charity work than for
profit hospitals.92No consensus on what constitutes community benefit or how to
measure such benefits and no accountability for lack of charity give incentives to the
non-profit hospital to be indistinguishable from the for profit hospital.93It is also
entirely possible for the non-profit hospitals to provide less charity care than for profit
hospitals and still receive tax exemption.94 According to 2006 Congressional Budget
Office Studies, non-profit hospitals provided a mean of 4.7% of operating expenses as
uncompensated care while for profit counterparts provided 4.2%.95Although non-profits
receive $12 billion in tax-exemption, the amount of charitable care they provide is not
significantly more (0.5%) than charitable care provided by for-profit hospitals.96The
non-profit hospitals justify their lack of charity care by arguing, “push for efficiency”.
81Id.
82Id.
83Id.
84Id.
85Id.
86 IRC. 501(c)(3)
87 37 B.C. L. Rev. 1, 76.
88Id.at 78.
89Id.at 76.
90Id.at 81.
91Id.
9234 J. Corp. L. 611, 617.
93Id.
94Id.
95Id.at 619.
96Id.

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97Also, Senator Grassley’s research showed that somenon-profit hospitals provided less
care to the poor than their for profit counterparts.98While non-profits’ charity work
decreased, their physicians and medical staffs’ salaries sky rocketed, and the
hospitalsprovided more gold plated compensations and perks for their executives;99this
is a situation permitted because of the relaxed interpretation of private inurement and
private benefit.
A. Charging the Poor Far More
IRC 501(c)(3) requires non-profit hospitals to provide charity work, which is vaguely
defined as “community benefit”.100 The IRS intentionally defined the term vaguely to
meet the demands of actively changing modern hospitals.101Ahundred years ago, the
community benefit of the hospital was caring for the poor.102Caring for the poor has
been displaced by “the physician education, medical research, community health
education, child birth classes, and immunization clinics.”103Under 501(c)(3) (pre-501(r)
addition), the hospitals were not required to give free service to the poor or charge them
less.104 Hospitalswere even allowed to charge abig premium to those who couldn’t afford
insurance (This is only partially true under 2011’s 501(r), continued in part V).105 Unfair
premium charge to the indigent and uninsured happened because of the lack of
bargaining power:106
When an insurance carrier foots a hospital bill, the company “negotiates” a
price with the hospital that is usually about half the original billing price. Yet
when an individual without insurance is forced healthcare, they don't have
this bargaining power. So they end up paying the “full” rates, making up the
slack for the deals the insurance companies have gotten (as well as the
uninsured individuals who never pay their bills).107
Thus, it became reverse charity where the poor ended up paying for the rich. Also under
(pre-501(r) addition) 501(c)(3), the hospitals had no duty to inform the public about the
“charity care program.”108Many people could not take advantage of the charity care
program that existed.109Even after 2011’s 501(r) addition, most indigent patients come
out greatly indebted after a hospital visit.110The leading cause of bankruptcy is still the
inability to pay medical bills; and a bankrupt uninsured patients’ average medical bill is
twice those privately insured patients’.111
97Id.
98Id.at 620.
99Id.
10096 Iowa L. Rev 761, 768.
101Id.
102Id.
103Id.at 769.
104Id.
105Id.
106Id.
107Id.
108Id.at 770.
109Id.
110Id.
111Id.

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B. Debt Collection and Bad Debt
Generally hospitals ask a patient to sign payment agreement forms before the patient
can receive treatment.112The payment agreement forms are no different from blank
checks, because neither the patient nor the hospitals know how much the bill is going to
be.113Even if the patient trieshis best to make payments, he as many do may not be able
to even pay the interest owed.114As the patient makes payments for years to come, his
bill continues to increase due to accumulating interest.115When the patient can no longer
make payments, the hospital hires debt collectors to harass the patient with threats, and
if the patient still does not pay, the hospital sues the patient in court.116
North Carolina’s Medical Center Mercy, a non-profit hospital, has sued 12,000
patients since 2007.117 Many patients could not afford to make payments;118at least
4000 of the patients could have qualified for charity program, had they been informed
of the program.119If a hospital is unable to collect the debt, the hospital writes it off as
bad debt and includes the write off as part of its “community benefit”.120The vague
community benefit standard allows the hospital great latitude in what is considered
charity works. In many hospitals, charitable works includes bad debt write offs after the
hospital threatens and bankrupts indigents who should have qualified for the charity
program.121 Such practice seems contrary to fundamental public policy, the sixth
requirement of 501(c)(3), yet the IRS exempts the hospitals despite such practice.
C. Excessive Insider Benefit
The median Chief Executive Officer (“CEO”) salary in US is $732,744.122Out of the
top ten highly paid non-profit executives, five executives worked for the non-profit
hospitals.123In 2010, one member of the board of the trustees of New York Presbyterian
Hospital received $4.3 million.124While the general public finds such compensation
outrageous and per se excessive, the IRS accepts the non-profit hospitals’
1128 hous. Bus. & Tax L.J. 391, 417.
113Id.
114Id.
115Id.
116Id.
117Alicia Caramenico, Hospital Sues Thousands of Patients Who Can’t Pay Bill, Fierce
Healthcare, (April, 24. 2012), http://www.fiercehealthcare.com/story/carolinas-
healthcare-hospital-sues-thousands-patients-who-cant-pay-bill/2012-04-24
118Id.
119Id.
1208 hous. Bus. & Tax L.J. 391, 417.
121Id.
122Chief Executive Officer Salary, Salary.com, http://www1.salary.com/Chief-Executive-
Officer-Salary.html(last visited Jan. 9, 2012).
123Bob Herman, Becker’s Hospital Review, (Sept, 18. 2012),
http://www.beckershospitalreview.com/compensation-issues/hospital-ceos-rank-
among-highest-compensated-at-major-non-profits.html.
124Id.

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justification.The hospitals justify this lavish payment by explaining that these CEOs
generate much more benefit to the community than their salary costs the institution.125
Critics highly scrutinize physicians’ soaring salary as well.126 In 2012, Fortune 100
announced that the highest “salaried employees” in the US are the physicians at the
Southern Ohio Non-profit Medical Center (“SONPMC”).127 SONPMC pays the
physicians on average $490,647.128The range of the average doctor’s salary in US is
$156,000 - $315,000. 129
V. 501 (r) and Its Shortfall
In March 2010, Congress enacted major health care reform measures by signing the
Patient Protection and Affordable Care Act.130One of these measures is IRC
501(r).131Section 501(r) imposes four additional operational requirements fornon-profit
hospitals:132 Community health needs assessment, financial assistance policies,
limitation on charges, and billing and collection requirement.133 If a hospital does not
satisfy the 501(r) requirements, the hospital will lose its exempt status and could also be
liable for a $50,000 penalty.134
A. Community Health Needs Assessment
Under the new IRC 501(r), hospitals must conduct a community health needs
assessment (“CHNA”) every three years.135The IRS considers a CHNA conducted when
the CHNA report is made available to the public.136Hospitals can execute a CHNA
requirement in four steps:137 1) Define community, 2) Gather data, 3) Refine data and
find strategy, 4) Distribute report to the public138
125HuffingtonPost, “Ten Nonprofit CEOs Who Earn $1 Million or More: Chronicle of
Philanthropy,” at http://www.huffingtonpost.com/2012/09/20/10-nonprofit-ceos-
millionaire_n_1899904.html.
126 37 B.C. L. Rev. 1, 75.
127 100 Best Companies to Work for 2012 –Compensation, Salaried – from Fortune,
CNN Money, http://money.cnn.com/magazines/fortune/best-companies/2012/pay/
(last visited Jan. 9, 2012).
128Id.
129 Time-Health and Family, “Doctors’ Salaries: Who Earns the Most and the Least,” at
http://healthland.time.com/2012/04/27/doctors-salaries-who-earns-the-most-and-
the-least.
130M. Paige Gerich, Applying the Section 501(r) Rules to Governmental Hospitals, 22
txnexempt 03, 3 (2011).
131Id.
132Id.
133Id.
134Id.
135 IRC 501(r)(1)(A)
136Notice 2011-52, IRB 30 (July 25, 2011).
137Kurt Bennion, New Section 501(r) Reporting Requirements for Non Profit Hospitals,
www.cliftonlarsonallen.com/WorkArea/DownloadAsset.aspx?id=423 (last visited Jan, 9.
2012.) at 7.
138Id.

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1) Define Community
In order to assess community health needs, the hospital must first define their
community.139The IRS requires a CHNA report to include the description of the
community and how the community was defined.140The hospital must consider its
stated mission, purpose, geographic area, principal special care, and target
population.141 The community must be defined broadly and not exclude a certain
demographic intentionally.142If the community is defined too narrowly, the IRS can
conclude that a CHNA was done improperly.143
2) Gather Data
Once the community is defined, the hospital can gather data. A properly conducted
CHNA includes input from people who represent broad interests in the community
served by the hospital.144These include: Persons with special knowledge or expertise in
public health, government departments and agencies with current data or other
information relevant to the health needs of the community, leaders, representatives or
members of specific populations such as medically underserved, persons with low
incomes, and minorities.145The law does not specify how many people must be
interviewed or surveyed.146Likewise, the law does not designate what method to use
when gathering information.147 However, the law requires hospitals to gather
information not only from people who usethe hospital’sservicesbut also from those who
do not.148 A hospital must include in the report the process and methods used to
conduct the assessment, sources of dates and data used, and names of those who
represent specific populations.149
3) Refine Data and Find Strategy
Section 6033(b)(15) requires that the hospital specifically address each identified
community health need and implement a strategy to meet the need regardless of its
significance.150 To identify the health need, the hospital must first refine all the data
compiled and find general consensus that indicates the community need.151 Once the
data is refined and community needs are identified, the hospital must address strategies
meeting community need.152 The strategy will include how it intends to meet the needs
or an explanation if it does not intend to meet a certain need.153The IRS considers
139Id.at 5.
140Id.
141Id.
142Id.
143Id.
144IRC § 501(r)(3)(B)(i).
145Bennion, at 5.
146Id.
147Id.
148Id.
149Notice 2011-52, IRB 30 (July 25, 2011).
150Bennion, at 8.
151Id.
152Id.
153Id.

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implementation of strategy complete when it is officially approved by the hospital’s
governing body, or any other authorized party.154
4) Distribute Report to the Public
The hospital must make a CHNA report widely available to the public.155The IRS
considers the report widely available if it is on the hospital’s or its parent’s website and if
the reader is clearly informed that the report is available.156 The hospital must provide
the report free of charge and allow the public to download the report from the
website.157
B. Financial Assistance Policy
Under the new IRC 501(r)(4), hospitals are required to establish and write out their
financial assistance policies.158However, the section does not mandate any specific
financial assistance criteria, threshold, or other amounts;159 each hospital’s assistance
policy may be tailored to its financial condition and market demographic.160 Thus, it is
entirely possible for a hospital to have a very minimal financial assistance program.161
But the hospital must have some sort of written financial assistance policy, and the
written policy must include: eligibility criteria, whether the service includes free or
discounted care, the basis for calculating amounts charged, the methods for applying for
financial assistance and the hospital’s collection policy.162If the hospital has an
emergency department, the written policy must also inform the patient that the hospital
provides emergency medical care without discrimination and regardless of individual’s
eligibility under the financial assistance policy.163 Furthermore, the hospital must widely
publicize the written policy to the community it serves.164 Hospitals must do more than
just post their financial policies around their premises.165 The section does not specify
methods but requires community outreach.166
C. Limitation on Charges
IRC 501(r)(5) requires the hospital to limit the amount it charges for emergency or
other medically necessary care provided to patients eligible for financial assistance to no
more than the lowest amounts charged to insured patients.167 This limitation precludes
other patients who do not qualify for financial assistance.168 Thus, an uninsured patient
who is not poor enough to be eligible for financial assistance might still have to pay a
154Id.
155Id.
156Id.
157Id.
158IRC § 501(r)(4).
159Douglas M. Mancino and Robert C. Louthian III, Requirements for Section 501©(3)
Hospitals Under New Section 501(r), 22 Txnexempt 3, 10 (2010).
160Id.
161Id.
162Id.
163Id.
164Id.
165Id.
166Id.
167IRC § 501(r)(5).
168Id.

14. 14
premium for care.169
IRC 501(r)(5) contains a few ambiguities. The IRS did not clearly explain “lowest
amount charged to insured patients.”170 It is unclear whether the lowest rates would be
those payable under an individual insurance policy, a small group policy, or a large
group policy.171 Hospitals are confused about whether or not they should also count the
deductible as a form of payment.172 Likewise, the section does not explain much about
“medically necessary care.”173 Medically necessary care (“MNC”) widely varies per
individual and per circumstance.174However if narrowly construed, MNC could just be
lists of things that doctors generally agree as MNC.175For example, if Jane Doe were
admitted unconscious as an inpatient after having been stabilized in the emergency
room, her rate for inpatient care is debatable.176 Her care could be deemed medically
necessary because she was unconscious when admitted and had to stay in the hospital,
but her care as an inpatient may not be considered MNC under the narrow definition.177
The IRS should clarify whether the definition of MNCis to be broadly construed or
narrowly defined.
The IRS proposed two methods to deal with the “lowest amount” ambiguity, the
prospective method and look back method.178 The look back method examines past
Medicare only claims or Medicare and private insurance claims paid to the hospital to
determine the amount generally paid.179The prospective method requires the hospital to
estimate how much Medicare would pay for a particular service and if the financially
assisted patient were a Medicare patient.180
D. Billing and Collection Requirements
IRC 501(r)(6) prohibits non-profit hospitals from performing extraordinary
collection actions before the hospital has made reasonable efforts to determine if the
individual qualifies for the financial assistance policy program.181 Extraordinary
collections include lawsuits, liens on residences or human body parts (a concern
stemming from a notorious Chicago case), arrests or other similar acts.182“Reasonable
169New501(r) Requirements for Tax Exempt Hospitals, Huron Consulting Group,
http://www.huronconsultinggroup.com/library/Huron%20Healthcare_New%20501(r)
%20Requirements%20for%20Tax%20Exempt%20Hospitals.pdf (last visited Jan, 9.
2012.)
170 22 Txnexempt 3, 11.
171Id.
172Id.
173Id.
174Id.
175Id.
176Id.
177Id.
178Prop. Treas. Reg. § 1.501(r)-5(b)(1), 77 Fed. Reg. 38147, 38165 (June 26, 2012)
179Id.
180Id.
181IRC § 501(r)(6).
182 22 Txnexempt 3, 11.

15. 15
effort” is not yet defined.183 As such, hospitals are challenged to define these efforts.184
Proposed regulation defines “reasonable efforts” to entail notifying relevant
individuals about the financial assistance policy, providing sufficient information for the
applicant in completing the financial assistance policy application, and documenting the
determination process regarding whether the applicant is financial assistance policy-
eligible.185Under proposed regulation, reasonable effort should be conducted for at least
120 days after issuance of the first bill.186 If by the end of 120days, the patient has not
submitted a financial assistance policy application, the hospital may engage in
extraordinary collection.187Moreover, the proposed regulation requires the hospital to
process the application within 240days after issuing the first bill to the patient.188
E. Shortfall
Although 501(r) greatly improves transparency in hospital billing and collection
policies and standardizes community benefit reports, it still does not address all the
critical problems of 501(c). 501(r)(4) requires hospitals to establish a Financial
Assistance Policy (“FAP”), but does not specify how many potential patients FAP should
assist. Thus, the hospitals may form an exclusive FAP that benefits only a few patients.
If a hospital has an exclusive FAP, it also affects numbers of people who could
receive the benefit and/or protection under section 501(r)(5) and (r)(6). For instance,
under section (r)(5)a hospital has tolimit its charges but only for FAP eligible patients. If
the hospital has a veryexclusive FAP, most of the hospital’suninsured patients would
still have the same old problems as 501(c), where they have to pay far more than insured
patients. Even if a hospital has aninclusive FAP, the poor will encounter another
problem. The few uninsured poor not qualified for FAP will be liable for the discounts to
insured patients and FAP eligible patients; with even fewer people to make up for lower
revenues because ofinsurance pricing, the charges to uninsured will be much higher
than pre-501(r). Whether FAP is inclusive or exclusive, it does not rescue the poor;
exclusive program will help too few and aninclusive program will still leave some facing
guaranteed bankruptcy due to higher surcharge.
Under section (r)(6), the hospitals are prohibited from using extraordinary collection
measures for FAP eligible patients. People who have delinquent accounts and who are
not FAP eligible can still be harassed and taken to court, and liens can be put on their
body parts. Even FAP eligible patients will be the victims of extraordinary collection
measure after a certain period of time.
Section 501(r) does not discuss bad debt or insider benefit. Therefore, bad debt and
excessive insider benefit issues are left unresolved.
183Id.
184Id.
185Edward K Lunder and Edward C. Liu,Cong. Research Serv., R42634,501(c)(3)
Hospitals: Proposed IRS Rules under § 9007 of the Affordable Care Act,7 (July 27,2012).
186Id.
187Id.
18877 Fed. Reg. 38147, 38156 June 26, 2012.

16. 16
VI. Proposal
A. Quantitative Standard for FAP
Congress should impose strict quantitative standards for FAP.189Strict quantitative
standards for FAP will encourage hospitals to assist the maximum number of
indigent.190Before setting such standards, Congress must gather enough data to
determine an appropriate minimum requirement.191An unattainable standard will lead
some hospitals to abandon their non-profit status;192 consequently there will be less
charity medical service for the poor.193Each hospital has different financial conditions
and market demographics. Thus the standard should be adjustable for different
situations. However, the hospitals must not have extensive control over the standard
amount deemed adequate for indigent care. For instance, if the standard is 5% of a
hospital’s profit, the hospital could increase its expenses and make zero profit
(accordingly 0 for FAP). Likewise, if the standard is 5% of the revenue, the hospital will
use various accounting methods to decrease its revenue (accordingly decreasing the FAP
amount significantly). Instead if the standard is 5% of the hospital’stax-exempt amount,
the hospital is less likely to attempt to reduce the tax-exempt amount (becausenon-
profit hospitals strive to maximize their tax-exempt amount) thus the hospital will have
less control over the FAP amount. Congress should allow at least three years grace
period for the hospitals to meet the new requirement.
B. Sanction
Congress should impose a penalty on the hospitals that fail to meet the quantitative
standard.194The penalty should be high enough to deter the hospitals from strategically
failing.195 For instance, if the FAP amount is $200,000 per year and the penalty is
$50,000, the hospital will decide to pay the penalty rather than abide by quantitative
standard. Additionally, if the hospital fails to meet the standard repeatedly (for example:
for three consecutive years), the IRS must revoke the hospital’s non-profit status. Once
revoked, the hospital will have to wait a certain period of time to reapply for non-profit
status. Such sanctions will encourage hospitals to comply with the quantitative FAP
standard.
C. Board of Directors
Congress should require the hospitals to retain board members who represent the
broad interests of the public, such as advocates of the medically indigent or the
medically indigent themselves.196Therepresenting members (“representatives”) must
have enough voting power tovoice their broad interest. Additionally, the representatives
should be required to hold two annual meetings where the public has the opportunity to
join and discuss the public’s concern about their local non-profit hospital; these
meetings must be recorded and summarized in a written report and be shared with the
hospital’s other board members. Furthermore the representatives should file a yearly
18934 J. Corp. L. 611,637
190Id.
191Id.
192Id.
193Id.
19434 J. Corp. L. 611, 637.
195Id. at 638.
196Id.at 636.

17. 17
public report of what they accomplished as board members and howthe board members
responded to the public’s semi annual meeting.
Congress should also require more transparency from all of the board members.
Board members must provide in their annual public report about their compensation,
doctors’ salaries, hospitals’ operating expenses, revenues, the total amount of financial
assistance provided, and how many people benefited.197 Such transparency from the
board will ensure compliance with the laws, inform local communities, encourage more
charity works, and provide more information for future legislation.198
D. Redefine “Community Benefit”
Congress should redefine the term “community benefit” to aid consistent
enforcement by the IRS.199 Congress could redefine it as: “explicitly addresses a
documented need or health status problem, such as (A) improving access to health
series for vulnerable people… [;] (B) enhancing public or community health; advancing
knowledge (through educating health professionals or supporting research that benefits
the public).”200Such a definition is flexible enough for the hospitals to remain tax-
exempt.201 Also, it would allow the IRS to receive more detailed reports, which would
help measure the community benefit the hospitals provide.202
Congress should clearly preclude bad debt from the “community benefit”
definition.Catholic hospitals have long excluded bad debt from their community benefit
calculation and have flawlessly maintained their tax-exempt status;203 this shows that
excluding bad debt would not negatively impact a hospitals’ operation.204However, ifbad
debt is no longer considered community benefit or charitable care, most likely the
hospitals will hound the medically indigent more aggressively. If hospitals can’t take
advantage of bad debt to receive more tax exemption, they will try to maximize
collection, including more aggressive collection of bills owed by the medically
indigent.Hence, the Congress should pass additional legislation forbidding hospitals
from using any aggressive collection method or selling their debt to aggressive collection
agencies. Aggressive collection method, as differentiated from 501(r)’s extraordinary
method, includes but are not limited to: “A) charging excessive interest during short
period of time, B) not providing at least 6 months of grace period, C) violating patient
and his/her family’s privacy …” Congress should add more specifics to the list after
requesting public comment on the proposed legislation.
E. Insider Benefit
Congress should require that hospitals provide a report with the estimate of
quantified benefit brought to the hospital by their key insiders such as the CEO, CFO
and the top twenty-five percent highest salaried doctors (“Top Doctors”). If the benefit is
substantially less than the salary paid to key insiders, the key insiders have three years
197Id.at 623.
198Id.
199Id. at 638.
200Id.
201Id.
202Id.
203Bobby A. Courtney, Hospital Tax-Exemption and the Community Benefit Standard:
Considerations for Future Policymaking, 8 Ind. Health L. Rev. 365, 382 (2011).
204Id.

18. 18
grace period to improve or face pay downgrades. If a certain benefit cannot be
quantified (even as a good will amount), the hospital must still include in the report how
it benefited the hospital or the community. Additionally Congress should require that
the Top Doctors give uncompensated care to at least few medically indigent patients
who could really use the Top Doctors’ treatment.The Top Doctors receive high salaries
but most likely focus on wealthier insuredpopulation who can afford the expensive
treatment. They are less likely to treat poor patients with complicated medical issues. If
the Top Doctors in a non profit hospital serve only the wealthy, in this respect the
hospital is no different from the for profit hospital and the hospital should not receive
tax-exempt status. A poor cancer patient,who can’t receive a Top Doctor’s service at a
for-profit, should at least have a chance at a non-profit charity organization, which is
required by law to serve him.
VII. Conclusion
Unlike their historical counterparts, which acted as charitable institutions, most
non-profit hospitals do not operate charitably today but, like businesses, put profit
before charity. Vaguely defined requirements in the Internal Revenue Code 501(c)(3)
and 501(r) givenon-profit hospitals incentivesavoid traditional charity work, such as
caring for the poor. Recent legislation, 501(r), is a step in the right direction to
returncharity to the work of non-profits. However the Congress should improve 501(r)
so that the non-profit hospitals actually deserve their exemptions.