WASHINGTON – New York Democrats leaped on congressional Republicans yesterday for questioning the justification for exempting nonprofit hospitals – a mainstay of health care in the state – from having to pay federal taxes.

Rep. Charles Rangel, a Democrat of Harlem, yesterday accused congressional Republicans of “picking on hospitals” by launching hearings into the justification for their tax-exempt status and calling for greater accountability in the sector.

The loss of hospitals’ tax-exempt status would be “devastating” to the state, said an upstate Democrat, Rep. Michael McNulty, adding that all but two of the state’s full-service hospitals are operated on a not-for-profit basis.

The chairman of the powerful House Ways and Means Committee, Rep. Bill Thomas, a Republican of California, said the generous tax benefits received by hospitals – possibly as high as $50 billion nationwide – have not been reviewed by Congress in 25 years.

The public service conditions that hospitals must meet to avoid taxes have become so loose and vague in recent years that there is little difference between for-profit and nonprofit hospitals, he said.

“Over time, less and less has been required for hospitals to maintain tax-exempt status,” Mr. Thomas said.

In a parallel investigation, the chairman of the Senate Finance Committee, Senator Grassley, a Republican of Iowa, on Wednesday asked 10 hospitals, including New York-Presbyterian, to provide his committee with a long list of information relating to their charitable activities and finances.

While the senator did not allege any wrongdoing by the city’s largest hospital and private-sector employer, Mr. Rangel said yesterday he was concerned that the probes could leave the impression that something was amiss.

The investigations could hurt the “morale” of people “who are not only not doing harm, but are doing good,” Mr. Rangel said at yesterday’s hearing.

“My question is: Why are they picking on hospitals?” he asked. “Where do we go from here? Universities? Churches? Synagogues? Mosques? YMCAs?”

Hospitals are facing scrutiny because they account for 60% of the tax-exempt sector, said Mr. Thomas, who has been investigating various abuses by charities and foundations. “That’s where the money is,” he told Mr. Rangel.

The chairman’s central concern appeared to be that the legal requirements on hospitals that receive tax breaks have become increasingly flexible over time.

In 1969, the IRS eliminated a requirement that hospitals provide free “charitable care” to the poor in order to avoid paying taxes. In 1983, a requirement that hospitals maintain emergency rooms was also eliminated. Meanwhile, nonprofit hospitals received ever more federal funding to pay for low-income patients through Medicaid, and for the elderly through Medicare. Hospitals also received additional federal subsidies for training physicians and locating in rural areas.

Mr. Thomas questioned whether the tax breaks continue to serve their original purpose of encouraging and compensating nonprofit hospitals for providing charitable care in light of the direct payments from the government for those services. He also cited studies showing that nonprofit hospitals provide about the same amount of this care as their for-profit counterparts, which pay taxes.

“We really can’t tell the difference all that much between a for-profit and a not-for-profit hospital,” said Mr. Thomas, adding that this is “not sufficient to justify a tax exemption.”

The commissioner of the Internal Revenue Service, Mark Everson, testified that the IRS would increase its scrutiny of tax-exempt hospitals, which he said are “increasingly difficult to differentiate” from for-profit hospitals.

“Our audit rates are too low,” said Mr. Everson. The audit rate for non-profit hospitals has fallen to 0.5%, he said.

The head of the Government Accountability Office, David Walker, said Congress could enact clearer and stricter requirements on hospitals to act in the public good.

“The question is not whether we should have a tax exemption, clearly we should,” said Mr. Walker. “The question is on what criteria [the exemption should be based] and how do we evaluate whether people are meeting it.”

The total elimination of the tax exemption would result in “serious adverse effects” for health care in the nation, he said. “I don’t think anyone is talking about doing away with the tax exemption,” Mr. Walker added.

The American Hospital Association argued that the tax exemption for nonprofit hospitals is “essential” to the provision of health care for the 45 million Americans who have no health insurance coverage.

Tax exemptions and federal funding are already insufficient “in the face of soaring demand for hospital services as America ages and gets sicker,” stated the association’s written testimony.

To qualify for a tax exemption, a nonprofit hospital must meet the IRS’s “community benefit standard.”

In applying the standard, the IRS requires that the hospital has a governing board that represents the community, and considers whether the hospital operates an emergency room that is open to all regardless of ability to pay, accepts Medicare and Medicaid patients, and conducts medical research or public education, among other things.

A tax law professor at the University of Illinois College of Law, John Colombo, called the IRS standard “an unmitigated disaster.”