Hospitals’ community benefit under pressure

Editor: Rochelle Hodes, J.D., LL.M.

Tax–exempt hospitals are facing increasing scrutiny regarding whether the community benefit they provide is sufficient to justify continued exemption under Sec. 501(c)(3). At the same time, hospitals are finding it more difficult to maintain and demonstrate community benefit in a manner that satisfies regulators, lawmakers, and outside critics because of rising uncompensated care (including charity care and uncollectible debt) and ongoing financial pressures.

Hospitals are discovering that their community benefit reporting is being evaluated in ways that extend beyond traditional compliance with Form 990, Return of Organization Exempt From Income Tax. In some cases, external organizations and policymakers have compared hospitals’ reported community benefit to the estimated value of their tax exemptions, further intensifying the debate regarding whether nonprofit hospitals provide sufficient community benefit to justify tax–exempt status. Against this backdrop, greater attention is being paid to questions involving charity care and bad debt; the reporting of Medicaid shortfall (the unreimbursed cost a hospital incurs when Medicaid payments for services provided to Medicaid beneficiaries are less than the hospital’s cost of providing those services) and subsidized health services on Form 990, Schedule H, Hospitals; and compliance with Sec. 501(r).

The community benefit standard and Sec. 501(r)

Tax–exempt hospital organizations described in Sec. 501(c)(3) must demonstrate that they operate to promote the health of the communities they serve rather than for private benefit. Since the issuance of Rev. Rul. 69–545, the IRS has evaluated hospitals under the community benefit standard rather than requiring a specific level of free care. Accordingly, federal tax law does not establish a fixed, quantitative threshold for community benefit, although a 5% community benefit benchmark is often cited in industry discussions, policy analyses, and external benchmarking. Rev. Rul. 69–545 emphasized factors such as the operation of an emergency room open to all regardless of ability to pay, community board participation, and the reinvestment of surplus funds for charitable purposes. Subsequent IRS guidance recognized that hospitals not operating emergency rooms nevertheless may satisfy the community benefit standard based on the totality of the facts and circumstances. Rev. Rul. 69–545 also replaced the earlier “charitable financial aid” standard of Rev. Rul. 56–185, which focused more heavily on the provision of free or below–cost care.

The ACA added Sec. 501(r), which imposes additional procedural and operational requirements on tax–exempt hospital organizations, including financial assistance policies (FAPs), community health needs assessments (CHNAs), billing and collection limitations, and restrictions on charges to financial–assistance–eligible patients. Failure to comply with Sec. 501(r) may result in significant consequences, including a $50,000 excise tax under Sec. 4959 for certain CHNA failures; taxation of hospital facility income; or, in more serious cases, revocation of tax–exempt status.

Schedule H now serves as one of the primary reporting mechanisms through which hospitals demonstrate both community benefit activities and compliance with Sec. 501(r). In addition to quantitative community benefit reporting, Schedule H includes narrative disclosures regarding community benefit activities, CHNAs, and other information relevant to supporting a hospital’s tax exemption.

As a result, Sec. 501(r) compliance and Schedule H reporting are closely interconnected, and Schedule H has become a primary vehicle through which hospitals communicate their community benefit activities and support their tax–exempt status. In some states, hospitals also must provide Schedule H information to state regulators or taxing authorities, further increasing the significance of the schedule as a central reporting document for community benefit and tax–exempt compliance.

Schedule H provides a standardized reporting framework that may not fully reflect the operational and market–specific differences among hospitals. However, it remains one of the primary tools used to evaluate whether nonprofit hospitals provide sufficient community benefit to justify their tax exemption. Accordingly, hospitals should ensure qualifying community benefit activities are consistently identified, appropriately supported, and accurately reported.

Increased scrutiny of tax-exempt hospitals

Heightened scrutiny regarding whether nonprofit hospitals provide sufficient community benefit to justify their tax exemptions is reflected in congressional hearings (e.g., “Nonprofit Hospitals, Tax Benefits, and Charity Care,” In Focus, Congressional Research Service (March 30, 2026)); external benchmarking analyses (e.g., Fairless, Kocaj, and Lenivy, “The Lown Institute 2025 Fair Share Spending Report: Making the Hospital Tax Exemption Work for Communities,” Insights, Crowe (May 8, 2025)); and recent IRS examination activity involving Sec. 501(r) compliance. Over the years, in fact, Congress has had a continuing interest in the tax benefits provided by nonprofit hospitals, as indicated in a Senate Finance Committee investigation in 2005, a U.S. Government Accountability Office study in 2020, and a hearing by the House Ways and Means Subcommittee on Oversight in 2025. A consistent focus is whether nonprofit hospitals offer sufficient community benefits, with a specific emphasis on providing charity care, to justify their tax–exempt status.

At the same time, changes in insurance coverage, Medicaid eligibility, and other healthcare policy developments are expected to increase uncompensated care and financial pressure across the hospital sector. These pressures have created what many hospitals view as a “perfect storm”: increasing demand for financial assistance combined with heightened scrutiny regarding whether the reported community benefit is sufficient to support a continued tax exemption.

Charity care vs. bad debt

Hospitals may understate qualifying community benefit when financial assistance identification, reimbursement, operational, and reporting functions are not closely coordinated. One area in which this frequently arises involves the distinction between charity care and bad debt.

For Schedule H purposes, charity care generally includes free or discounted care provided to patients eligible under a hospital’s FAP, while bad debt generally does not qualify as a community benefit. As hospitals experience higher levels of uncompensated care, financial assistance identification processes become more important because hospitals may provide substantial uncompensated care while reporting relatively modest levels of charity care if eligible patients are not identified under the hospital’s policy.

Hospitals are placing greater emphasis on financial assistance screening and presumptive eligibility methodologies. IRS guidance encourages, but does not require, the use of presumptive eligibility for FAP determinations. Presumptive eligibility programs use financial data, demographic information, or third–party tools to identify patients who are likely eligible for assistance, even if they do not complete a traditional financial assistance application. When implemented and documented appropriately, these methodologies can improve access to financial assistance, support more accurate classification of uncompensated care, and increase the amount of qualifying charity care reported on Schedule H.

Hospitals also must consider the reimbursement and operational implications of classifying accounts as charity care rather than bad debt. In certain circumstances, Medicare may provide limited reimbursement for qualifying bad debt amounts, while charity care generally is not reimbursed. FAPs should be developed with consideration of the hospital’s reimbursement environment, operational realities, and community benefit objectives. Once established, those policies should be applied consistently and appropriately.

Presumptive eligibility methodologies and related financial assistance processes should be reasonable, consistently applied, and properly documented. The goal is not to achieve a particular reporting outcome but to ensure that eligible patients are appropriately identified and that qualifying community benefit activities are accurately reflected in Schedule H reporting. Weak or inconsistently applied processes may create operational and tax compliance risk, particularly where hospitals report limited levels of charity care.

Measuring community benefit and Schedule H reporting

The composition of reported community benefit also is becoming more significant. Historically, financial assistance and Medicaid shortfall represented a substantial amount of the community benefit reported, reducing pressure to comprehensively identify and report other qualifying community benefit activities. However, as the Medicaid shortfall has declined and scrutiny increasingly focuses on the overall mix of reported community benefit activities, hospitals face greater pressure to ensure that all qualifying activities — including subsidized health services, research, and community health improvement activities — are consistently identified, supported, and appropriately reported on Schedule H.

Some community benefit categories require significantly more professional judgment than others. Unlike financial assistance and Medicaid shortfall, which are generally more readily identifiable, activities such as subsidized health services often require hospitals to evaluate service–line profitability, allocation methodologies, community need assessments, and operational support in determining whether they qualify for reporting purposes.

Because IRS guidance in certain areas remains limited, many hospitals look to guidance developed by the Catholic Health Association (CHA) when evaluating community benefit activities. Schedule H community benefit reporting was influenced by reporting models developed by the CHA, which have long been used by hospitals to identify and quantify community benefit activities. Although CHA guidance remains an important industry resource, hospitals must evaluate community benefit activities based on applicable law, IRS guidance, and the specific facts and circumstances of their organization. While CHA guidance provides a widely accepted framework for identifying and reporting community benefit, it is not authoritative tax guidance. Hospitals ultimately must evaluate community benefit activities based on the specific facts and circumstances of their organization, the intent of Schedule H reporting, and applicable IRS guidance.

Practical considerations for community benefit strategy and reporting

As greater attention is directed toward the composition of reported community benefit, hospitals may benefit from a more integrated approach involving tax, community benefit, finance, revenue cycle, legal, and executive leadership functions.

Hospitals are at different stages in developing coordinated community benefit strategies. Some organizations have implemented systemwide community benefit policies, reporting guidelines, and governance structures, while others continue to operate under more fragmented processes developed over time. When tax, community benefit, reimbursement, and operational functions are not closely aligned, organizations may struggle to consistently identify, document, support, and report qualifying community benefit activities.

Greater coordination across these functions may help hospitals:

• Identify qualifying community benefit activities that may not currently be captured or consistently reported on Schedule H;
• Improve documentation and support for financial assistance, subsidized health services, and other reported community benefit activities; and
• Better coordinate FAPs, reimbursement considerations, operational practices, and community benefit reporting across the organization.

Hospitals also may benefit from periodically reassessing long–standing assumptions regarding community benefit reporting, particularly in areas where IRS guidance is limited and the appropriate reporting treatment requires significant professional judgment.

Consistency and coordination

Tax–exempt hospitals are operating in an environment marked by financial pressure, rising uncompensated care, and heightened scrutiny regarding whether the community benefit they provide is sufficient to justify a continued tax exemption. Against this backdrop, community benefit reporting now carries implications that extend beyond traditional Form 990 compliance and affect regulatory scrutiny, public perception, and the broader evaluation of tax–exempt status.

As greater attention is directed toward the composition of reported community benefit, hospitals may face increased pressure to ensure qualifying activities are consistently identified, appropriately supported, and accurately reported. This may require organizations to periodically reassess long–standing assumptions, methodologies, and reporting practices, particularly in areas that involve significant professional judgment.

Hospitals that adopt a coordinated community benefit strategy supported by appropriate policies, governance, and documentation will be better positioned to support and defend their tax–exempt status amid evolving expectations and continued scrutiny.

Editor

Rochelle Hodes, J.D., LL.M., is principal with Washington National Tax, Crowe LLP, in Washington, DC.

For additional information about these items, contact Hodes at Rochelle.Hodes@crowe.com.

Unless otherwise noted, contributors are members of or associated with Crowe LLP.