New Requirements for Tax-Exempt Hospitals; Just The Beginning?
By Laura Kalick, JD, LLM in Tax
The Patient Protection and Affordable Care Act added requirements for tax-exempt hospitals to qualify as charitable organizations under the Internal Revenue Code (IRC). Although the new requirements are very specific to tax-exempt hospitals, all organizations should take note that Congress views tax exemption as a privilege and not a right and that new requirements could be imposed on other organizations in exchange for the benefit of tax exemption. Senator Charles E. Grassley was very much responsible for the new hospital requirements being added to the law on the basis of requiring charitable services to be provided in return for tax exemption.
According to a 2008 Government Accountability Office (GAO) report on nonprofit hospitals called for by Senator Grassley, the value of tax exemption for nonprofit hospitals at the federal, state and local levels was $12.6 billion in 2002.
Those figures are already outdated and they only take into account hospitals. With the government looking for revenue and tax reform, Grassley has now indicated that he believes that the value of tax exemption should be looked at for all organizations, especially those that provide services for a fee. His major concern is related to organizations providing services that are in competition with for-profit entities. The question is, “what benefit is being provided for the tax subsidy?” Of course, Congress would first have to calculate how much the tax subsidy is. Although Congress calculates tax expenditures, tax exemption is not considered such an expenditure and is not calculated. The information would have to be obtained from the IRS. The IRS is currently surveying colleges and universities, which along with hospitals, constitute the two largest components of the nonprofit sector.
In order to qualify as a 501(c)(3) hospital, a facility must meet the following four requirements of the newly created IRC Section 501(r):
1. A Community Health Needs Assessment Requirement - Hospitals are required to conduct a community health needs assessment (CHNA) at least every three years and adopt a strategy to meet the community needs identified through the assessment. If an organization fails to meet the requirements, then new IRC section 4959 imposes a $50,000 excise tax for any taxable year for which there is such failure. Hospitals will have to provide the CHNA report and their audited financial statements as attachments to Form 990. The requirement to attach audited financial statements is a first for the Form 990!
2. Financial Assistance Policy Requirement - An organization will meet this requirement if it establishes a widely publicized written financial assistance policy which includes eligibility criteria for financial assistance and whether such assistance includes free or discounted care; the basis for calculating amounts charged to patients and the method for applying for financial assistance. The policy must also require that the organization will provide emergency medical care regardless of an individual’s eligibility under the financial assistance policy.
3. A Charges Requirement - The organization must have a policy that limits amounts charged for emergency or other medically necessary care. Charges provided to individuals eligible for assistance under the financial assistance policy limits them to not more than the lowest amounts charged to individuals who have insurance covering such care, and prohibits the use of the hospital’s full undiscounted charges.
4. A Billing and Collection Requirement - An organization will meet this requirement only if the organization does not engage in extraordinary collection actions before the organization has made reasonable efforts (to be defined by future regulation) to determine whether the individual is eligible for assistance under the financial assistance policy described above.
Delayed Filing of Form 990 With Schedule H
The IRS just announced that organizations operating one or more tax-exempt hospitals that would file Form 990 for the 2010 tax year before August 15, 2011, will have an automatic three-month extension of time to file the form. In addition, the announcement directs these tax-exempt hospital organizations not to file the 2010 Form 990 before July 1, 2011.
The revised Schedule H and reference to the IRS announcement can be found at: http://www.irs.gov/pub/irs-pdf/f990sh.pdf