What Is Left of Charity Care after Health Reform?

The passage of the Patient Protection and Affordable Care Act on March 23, 2010, significantly changes the health care landscape. But even with the considerable expansion of insurance, many people will still lack coverage. When fully implemented, the act is designed only to cover about thirty-two million of the forty-six million uninsured Americans. Illegal aliens are specifically excluded. For others, implementation is not immediate; the so-called individual mandate, for example, does not take effect until 2014, and there are exceptions for people for whom available policies are still too expensive, or who have religious objections. Once in effect, the mandate has limited penalties, and some people will choose not to purchase coverage despite the legal requirements. Who will provide care for the remaining twenty million or more people who will still be uninsured?

Nonprofit hospitals have long functioned as the “safety-net” in our health system, but the requirements for charity care seem to be evolving.¹ A 2007 Internal Revenue Service report stated that about half of nonprofit hospitals spent 3 percent or less of revenues on charity care. Nowadays, hospitals are bringing in large amounts of money, paying their CEOs record amounts of compensation, and engaging in aggressive debt recovery actions. Richard Scruggs, the high-profile attorney who spearheaded the litigation against the tobacco companies, has filed a class action lawsuit against nonprofit hospitals for their billing and collection practices. The Financial Accounting Standards Board announced in April 2010 that it was interested in comments on current practices of measuring charity care for accounting disclosure purposes. Senator Charles Grassley has proposed federal legislation to establish minimum charity care standards for hospitals. The Illinois Supreme Court recently upheld the revocation of Provena Hospitals’ state property tax exemption in Urbana, on the basis that the property in question was not put to a sufficiently “charitable use” under Illinois law. With many other state and local tax authorities scrutinizing nonprofit hospitals, this question has moved to the forefront of health law debates. What obligations should nonprofit hospitals have to provide charity care?

According to the current “community benefit standard,” nonprofit hospitals must meet certain requirements in order to maintain their federal tax-exempt status. The requirements, set out in Internal Revenue Ruling 69–545 (1969), do not speak directly to the need for charity care, but rather highlight a series of criteria such as operating a full-time emergency room, providing nonemergency services to all who are able to pay, participating in Medicare and Medicaid, having a representative governing board, allowing staff privileges to all qualified applicants, and reinvesting surplus funds in operations. Interestingly, IRR 69–545 replaced the old “best of financial ability standard,” which required hospitals to provide charity care to the best of their financial ability precisely because of hospitals’ concern that the then-new federal health programs (that is, Medicare and Medicaid) would obviate the need for charitable services. The community benefit standard was designed to broaden the types of activities that would suffice for tax-exempt status. Ironically, hospitals and regulators have focused primarily on charity care expenditures in applying the standard over the last four decades.

The new health reform legislation addresses some of the charity care issues. It states that hospitals can charge patients qualifying for financial assistance “not more than the amounts generally billed to insured patients.” This is to address the concern that uninsured patients might be charged amounts significantly above the rates paid by insured patients so as to make the amount of charity care provided by the hospital seem as high as possible. It limits the use of “extraordinary collection actions” until a hospital has made reasonable efforts to determine whether the patient in question is eligible for financial assistance. It also requires hospitals to have an appropriate financial assistance policy, which includes eligibility criteria, a basis for calculating charges, a method for applying for financial assistance, actions the hospital may take in the event of nonpayment, and measures to publicize the policy widely. These are important first steps, although they do little to really change the charity care framework. But the act also...