By Peter Panepento

Washington

Nonprofit hospitals would be required to allocate at least 5 percent of their annual budgets to providing charity care or lose their tax-exempt status, under a proposal released today by Republican staff members of the Senate Finance Committee.

The proposal is the latest in a series of efforts by lawmakers and consumer advocates to make sure nonprofit hospitals do more to serve the uninsured and to justify the estimated $40-billion the federal government loses each year by offering hospitals tax-exempt status.

The recommendations were released on the same day that the Internal Revenue Service made public the preliminary results of a sweeping survey of the practices of nearly 500 nonprofit hospitals, which shows that many nonprofit hospitals do not provide that amount of charity care.

The IRS survey, which will be used to help gauge whether nonprofit hospitals are meeting current requirements for tax-exempt status found that nonprofit hospitals spend about $9.3-billion annually on services that benefit their communities. Of that total, about $5.2-billion is spent on providing free care to needy people.

Based on those figures, the IRS survey found that the median nonprofit hospital spent just less than 4 percent of its annual revenue on free care. More than one in five hospitals — 22 percent — reported spending less than 1 percent of their revenue on such care.

The report also found that nonprofit hospitals spent more than 3 percent of their revenue on immunization clinics, medical screenings, educational programs, and other programs to benefit the region they serve.

Sen. Charles Grassley of Iowa, one of the leading critics of the performance of nonprofit hospitals, said the IRS report shows many hospitals are falling well short in their efforts to serve their communities.

“We need to change business as usual at many of our nation’s nonprofit hospitals,” said Iowa’s Mr. Grassley, who is the senior Republican on the Finance Committee. “These are self-reported numbers and often include inflated costs or bad debt. It’s troubling that even the overly broad figures paint a bad picture of a significant number of nonprofit hospitals doing very little charity care.”

Nonprofit hospitals have been facing increased scrutiny from lawmakers, consumer watchdogs and the IRS, based on allegations that some hospitals were falling short in their efforts to fulfill their missions of serving the communities. That scrutiny has come in the wake of complaints that some nonprofit hospitals were turning away poor patients who needed care or were pushing some needy patients into bankruptcy because they were unable to pay their bills.

Based on those criticisms, Senator Grassley directed his staff last September to put together proposals that would serve as a possible starting point for legislation aimed at tightening the rules for nonprofit hospitals.

Those proposals, released by his staff today, are expected to lead to more discussion about whether the federal government should rewrite the laws that govern the operations of tax-exempt hospitals.

Among the other proposals spelled out by Finance Committee aides:

Each hospital would be required to develop and promote a written policy for providing charity care. Hospitals could not charge needy patients who lack insurance more than the hospital spent on treatment and care. Each hospital would be required to conduct an assessment of local needs every three years to determine whether its services are reaching vulnerable populations. Less than 25 percent of the members of a hospital’s board of directors could be employed by the hospital or benefit financially either directly or indirectly from its activities. Government would provide greater oversight of what happens to an institution’s assets when nonprofit hospitals transfer those assets to for-profit entities.

But the most substantial — and controversial — requirement would be the 5 percent threshold for charity care.

Today, nonprofit hospitals do not have to prove they have dedicated a specific percentage of their budgets to charity care. Many hospitals say they serve their communities in other ways that go beyond the amount of charity care they provide — and that they deserve their tax-exempt status because they provide other types of benefits, such as emergency care and health education.

The proposal would also prohibit hospitals from including so-called “bad debt” when they are calculating how much charity care they provide. Some nonprofit hospitals currently bill patients for care and, when payment is not received, reclassify that debt as charity care.

Of the hospitals surveyed by the IRS, 44 percent reported that they include bad debt in their uncompensated care totals.

Such a measure does not have the support of hospital leaders, who say the long-standing community-benefit standard is already working.

The American Hospital Association in Washington, which represents about 4,800 hospitals, said the recent effort to require more-detailed financial disclosure from nonprofit hospitals on the Form 990 informational tax return is the logical next step in making sure hospitals are fulfilling their missions.

The changes, which would require hospitals to more clearly spell out their expenditures for charity care, bad debt, and issues like Medicaid and Medicare shortfalls, will help the government and the public get a better understanding of how nonprofit hospitals are earning their tax breaks, said Mindy Hatton, general counsel of the American Hospital Association.

““Until the communities start looking at this in a uniform format and policymakers start looking at it in a uniform format, it’s preemptive to suggest any particular policy or to suggest that the community benefit standard is anything other than a wild success,”” Ms. Hatton said.

Ms. Hatton said the results of the IRS report show that hospitals are providing important services to their communities.

““People are getting care. ‘Community benefit’ in the report was underreported in the first place,”” she said. ““Nonprofit hospitals are doing the best they can to help people who can’t afford care to get care. The situation is very different that it was even a few years ago.””

However, some consumer activists said the ideas promoted by the Senate aides were important changes.

Laurie Sobel, a senior staff attorney at the Consumers Union in San Francisco, said establishing the 5-percent threshold is a necessary step in making sure nonprofit hospitals are serving the public good.

“That’s a percentage that we have supported,” Ms. Sobel says. “This proposal is on the right track for providing more accountability for nonprofit hospitals and, from the community’s standpoint, in providing access to health care.”

The IRS, meanwhile, plans to conduct a deeper analysis of how hospitals calculate the amount of free care they provide with the goal of finding out whether nonprofit hospitals are complying with the law.

“The lack of consistency or uniformity in classifying and reporting uncompensated care and various types of community benefit often makes it difficult to assess whether a hospital is in compliance with current law,” said Lois G. Lerner, director of the IRS’s Exempt Organizations division, in a written statement . “That’s one reason more analysis is needed.”