Nonprofit hospitals play a crucial role in the American healthcare system, but there are mounting questions about how effectively they give back to the communities that grant them millions in tax breaks each year. Research from the Lown Institute, for example, shows that these hospitals took in $26 billion more in tax breaks than they gave back in meaningful community benefits in 2021.
Following reports like ours and increasing pressure from lawmakers, including a 2023 letter from several U.S. senators urging a review of hospitals’ community benefit spending, the IRS has announced it will audit 35 hospitals with a focus on community benefit compliance.
What are hospitals required to do?
To maintain their 501c3 status, the IRS requires nonprofit hospitals to provide benefits “to a class of persons that is broad enough to benefit the community, and that they operate “to serve a public rather than a private interest.”
That’s a pretty vague mandate. The IRS lists certain factors that “demonstrate community benefit”—such as operating an emergency room open to all and using surplus funds to improve patient care—but there’s a lot of flexibility. The IRS writes that “no one factor is determinative in considering whether a nonprofit hospital meets the community benefit standard” and “the IRS weighs all the relevant facts and circumstances in evaluating these factors.”
The IRS also requires that hospitals fill out Schedule H of Form 990, which includes various types of community benefit spending. Yet there is no minimum amount hospitals are required to spend. Likewise, hospitals are required to have a written financial assistance policy and make it available to patients; however, there are no required eligibility standards or amount they have to spend on free care for low-income patients.
The lack of clarity in the community benefit standard make it difficult for the IRS to enforce, but these audits are a good sign that the IRS is taking its oversight role more seriously.
Misaligned Spending and Unmet Health Needs
This audit is an important step to ensure accountability for hospital community benefit spending. While nonprofit hospitals receive billions of dollars in tax exemptions in exchange for community investments, there is no minimum amount hospitals have to spend, and much of reported spending fails to directly address the actual health needs of their communities.
Due to limited regulations, there is a significant variation among hospitals in how much they spend on their communities. The Lown Institute report from earlier this year found that hospitals spend 3.87% of their budgets on meaningful community investments on average. However, this rate varies widely. For example, the Hospital of the University of Pennsylvania allocated just 0.25% of their budget to community investments, while North Shore University Hospital allocated 8.84% of the budget to community benefit. Note that both hospitals are recognized by U.S. News on its short list of “best hospitals.”
The lack of regulation results in most hospitals spending less on meaningful community benefit than they receive in tax breaks—what we call a “fair share deficit.”
Who’s Being Audited?
Which hospitals are under the microscope? As of now, we don’t know. However, hospitals failing to report any community benefit spending may be prime candidates for these audits. A 2020 Government Accountability Office (GAO) report identified 30 hospitals that reported no spending at all on community benefits. Furthermore, a Lown Institute review of 990 forms found that at least 50 hospitals didn’t report any spending on financial assistance in 2021, which is a key category of community benefit spending.
Focus on Financial Assistance and Collection Practices
The IRS might also be investigating nonprofit hospitals that engage in aggressive collection actions without proper screening of patient eligibility for financial assistance. For example, some hospitals have been found to sue patients for unpaid medical bills, even when those patients could qualify for financial assistance. These aggressive collection practices have come under fire lately and are a subject of focus in a Lown study of billing practices across 2,500 U.S. hospitals that is currently underway.
A Key Step Toward Better Regulation
To address the urgent need to improve health outcomes and reduce chronic disease rates, as well as tackle the growing medical debt crisis, hospitals need stronger incentives to fulfill their nonprofit missions. With significant inconsistencies in how hospitals report their community benefit spending, IRS audits are an important step toward ensuring that tax-exempt status is warranted and that hospitals genuinely meet the health needs of their communities. In addition to increased enforcement, there are opportunities to strengthen the guidelines and provide greater clarity to hospitals in the future.