1. Legal/Regulatory Overview: Community Benefit Judith Kindell, Senior Technical Advisor, Exempt Organizations, Internal Revenue Service (202) 283-8964 December 10, 2007 1:15 – 1:45 p.m.

2. Tax Exemption for Hospitals Neither Code nor Regulations explicitly provide for exemption of hospitals Original IRS interpretation of charitable: relief of the poor Rev. Rul. 56-185 – exemption for hospitals that accepted patients without ability to pay to the extent of their financial ability

3. Factors Leading to Change In 1959, new IRS regulation provided “charitable” interpreted in generally accepted legal sense – not limited to relief of poor In 1965, Medicare and Medicaid established – many believed would eliminate need for indigent care “Financial Ability” standard of Rev. Rul. 56-185 criticized IRS study of hospital industry

4. Promotion of Health Recognized as charitable purpose under general law of charity Beneficial to community even though not all directly benefit – provided class is not so small that there is no benefit to the community Hospital must benefit class broad enough to benefit community and be operated for public rather than private interests to be exempt

5. Revenue Ruling 69-545 Community Board Open medical staff Emergency room open to all regardless of ability to pay Hospital otherwise admits patients able to pay, either themselves or through insurance, Medicare or Medicaid Excess funds applied to facilities, patient care, medical training, education & research

6. Community Benefit Standard Rev. Rul. 69-545 modified, but did not revoke, Rev. Rul. 56-185 – charity care can still be used to show community benefit Rev. Rul. 83-157 modified Rev. Rul. 69-545 to illustrate situations where no emergency room required Research and innovation, medical education, care for low-income patients, community services and quality of care

7. Community Benefit Standard Community benefit standard allows flexibility in determining charitable status Changes in industry made specific factors in Rev. Rul. 69-545 less relevant Anecdotal evidence only of community benefit activities

8. Hospital Compliance Project Objective To determine both whether and how nonprofit hospitals demonstrate their qualification for exemption as organizations described in section 501(c)(3) under the “community benefit” standard articulated in Revenue Ruling 69-545

10. Hospital Questionnaire Addresses both community benefit and compensation practices Sent to approximately 500 hospitals Gather data to determine how hospitals benefit the community Opportunity for hospitals to tell their story Response Rate: 98%

11. Hospital Questionnaire Patients Emergency Room Board of Directors Medical Staff Privileges Medical Research Professional Medical Education and Training Uncompensated Care Billing Practices Community Programs

12. Interim Report Released July 2007 Summarizes responses to Community Benefit questions In aggregate, uncompensated care accounted for 56% of community benefit Significant variations found in how hospitals report uncompensated care Other community benefit: medical education and training (23%), research (15%) and community programs (6%)

13. Next Steps Analyze data to determine whether differences in reporting may be isolated and adjusted to allow more meaningful comparisons Obtain additional research and analyze differences in community benefit expenditures and types to take into account varying demographics Test community benefit amount and types

15. Form 990 Redesign Interim Hospital Compliance Project Report recommended separate schedule for community benefit reporting Redesign of Form 990 released June 2007 Proposed Schedule H for hospitals includes section on community benefit Numerous comments received from hospital community

16. For More Information IRS Charities & Nonprofits Website: www.irs.gov/eo www.irs.gov/eo TE/GE Customer Account Services: (877) 829-5500 (toll-free) P.O. Box 2508 Cincinnati, OH 45201 Subscribe to EO Update: eo-update-subscribe@lists.qai.irs.gov