WASHINGTON -- Rep. Brian J. Donnelly plans to revise his bill setting up a charity care standard for private nonprofit hospitals to address some of the concerns raised by the Treasury Department at a recent House Ways and Means Committee hearing, an aide said yesterday.

The Massachusetts Democrat expects to modify a section of the bill, criticized by the Treasury as too rigid, that had required private non profit hospitals to meet one of five specific criteria to maintain their tax-exempt status, the aide said.

He also plans to propose giving the Internal Revenue Service authority to impose monetary penalties on hospitals that fail to meet the standards, with revocation of the hospitals' tax-exempt status to be used as a last resort.

Under the legislation Mr. Donnelly introduced last March, the only way the IRS could punish a 501(c)(3) hospital that failed to treat enough indigent patients would be to revoke its tax-exempt status, and with it thye hospital's ability to issue 501(c)(3) bonds. The outstanding bonds of such a hospital would remain tax-exempt under the bill.

Rep. Donnelly now plans to revise the penalties in his bill because revoking a hospital's tax-exempt status "is such a harsh penalty that they [IRS officials] never do it," the aide said. "We want to give them the tools so they can penalize" hospitals that do not perform enough charity care, he said.

The new version of the bill will direct the IRS to revoke tax exemption only when there has been a "gross and flagrant" violation of the bill's charity care standards, the aide said.

But even with the addition of monetary penalties, the Treasury Department is still concerned about the whole idea of requiring private nonprofit hospitals to meet specific charity care standards to keep their 501(c)(3) tax-exempt status -- exactly what both Rep. Donnelly's bill and a measure by Rep. Edward R. Roybal, D-Calif., would do.

"The administration continues to believe that community benefit is a more appropriate standard for evaluating the tax-exempt status of hospitals thant he proposed charity care standards," Michael Graetz, the Treasury's deputy assistant secretary for tax policy, told the House last week. Specific charity care standards, he said, may force hospitals to provide the care that best protects their tax-exempt status, even if the result is detrimental to the community.

For example, he said, a hospital might spend more money to provide hospital care to low-income people, rather than for less costly forms of care, other patients, preventive care, research, teaching, or new equipment.

He also said the administration does "not ... believe that a temporary loss of tax-exempt status is a viable alternative sanction in any circumstance," because too many complex tax issues arise when an organization changes its status from tax-exempt to taxable and vice versa.

"Any intermediate sanction for tax-exempt organizations should be modeled on the private foundation excise tax provisions and impose a monetary penalty on the organization or perhaps its responsible officers," he said in his testimony. But the penalty "should be imposed only in response to conduct by the organization that is readily determinable on audit," he said, because a penalty based on the amount of charity care provided may be too difficult to administer.

Mr. Graetz said the administration generally is not opposed to two requirements in Mr. Donnelly's bill, both of which he said could be viewed as codifications of existing federal law. One requirement is that a hospital operate an emergency room to treat all members of the community, regardless of their ability to pay. This could be waived for specialty hospitals.

The other requirement is that a hospital be prohibited from discriminating against patients with Medicaid. Mr. Graetz said he was concerned, however, that the bill calls for a hospital to be certified as a Medicare provider. This might not be appropriate in some staes, such as those that contract with others for certain Medicaid services.

The administration does, however, oppose the bill's requirement that a hospital meet one of five specific criteria, two of which call for hospitals to meet spending levels for charity care or "qualified" community services. Mr. Graetz said these criteria "would impose an undesirable rigidity in determining which hospitals qualify for tax-exemption" and that it would be difficult to define "charity care" or "qualified services."

The administration is opposed to Rep. Edward Roybal's H.R. 790, he said, because it would replace the current community benefit standard with specific charity care requirements under a system that would be extremely difficult to administer.

Under Rep. Roybal's bill, a hospital would not be tax-exempt under Section 501 of the tax code unless it had an open-door policy toward Medicare and Medicaid patients, served a reasonable number of such patients in a nondiscriminatory manner, and provided specified amounts of 'qualified charity care" and "qualified community benefits."

The bill would require that a hospital's unreimbursed qualified charity care costs be at least 50% of the value of its tax-exempt status for the year. Its unreimbursed community benefits would have to be at least 35% of the value of its tax-exempt status for the year. It would impose a 100% exercise tax on a hospital that has a charity care or community benefit shortfall in a year and would revoke a hospital's tax-exempt status only in the most egregious case.

Mr. Graetz said Rep. Roybal's bill would force some hospitals to spend more on "qualified charity care" than the value of their tax benefits. He also was concerned the bill would require annual evaluations for each tax-exempt 501(c)(3) hospital.

An aide to Rep. Roybal said the congressman does not plan to modify his bill. "We can't do a lot more at this point," the aid said. The Ways and Means Committee probably will give more weight to Rep. Donnelly's bill because he is a member of that committee, she said. But she questioned whether the committee would ultimately support any such measure.

"Ways and Means will have a lot of authority over this because it's a tax bill," said the aide. "But most of the committee members have large hospitals in their districts that aren't too excited about seeing legislation enacted. So I don't know if anything will happen or not."

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