Tax-Exempt Hospitals to Undergo Community Benefit Review

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[authors: Geoffrey L. Gunnerson and Craig R. McPike]

While speaking at an American Health Lawyers Association conference on October 16, 2012, an Internal Revenue Service (IRS) official confirmed that the IRS has identified 3,377 tax-exempt hospitals whose community benefit activities will be reviewed to determine if they are meeting the requirements for tax exemption.  Each hospital will be reviewed in one of three annual phases.  While some reviews began as early as April 2011, others have yet to begin.  The reviews have been referred to as “stealth reviews” because hospitals are not notified that they are being reviewed and will not know when the reviews begin or end.

The Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)) (the Affordable Care Act), enacted section 501(r) of the Internal Revenue Code of 1986 (the Code), as amended, which added new requirements for tax-exempt hospitals.  These new requirements generally require hospitals to conduct community health needs assessments, to establish a financial assistance policy, to implement certain limitations on charges and to avoid certain billing and collections actions. Failure to comply with these new requirements can lead to enhanced penalties or loss of tax exemption.

In general, the IRS reviews five factors in determining whether a tax-exempt hospital meets the community benefit standard:  (i) whether the hospital has a community board; (ii) whether the hospital has an accessible and open medical staff; (iii) whether the hospital has a full-time emergency room open to all regardless of ability to pay; (iv) whether the hospital admits all types of patients including those able to pay for care either themselves or through third-party payers; and (v) how the hospital’s excess funds are used, such as for expansion and replacement of existing facilities and equipment, medical training, education, and research.  Under the Affordable Care Act, the IRS is required to review the community benefit provided by tax-exempt hospitals at least once every three years.

On June 22, 2012, the IRS issued proposed regulations that provide information on the requirements for tax-exempt hospitals relating to financial assistance and emergency medical care policies, charges for emergency or medically necessary care provided to individuals eligible for financial assistance and billing and collection practices.  In addition, IRS Form 990, Schedule H, has been revised to include Part V, Section B, to gather information on a hospital’s compliance with certain of the new requirements and on related policies and practices. At the American Health Lawyers Association conference, an IRS official indicated that the IRS will be looking at a hospital’s IRS Form 990 and Schedule H, public records and other returns in the IRS’s possession to assess the relevance of the hospital’s activities.

Accordingly, it is important for tax-exempt hospitals to carefully scrutinize whether they are complying with the new requirements of section 501(r) of the Code and for those hospitals undertaking their first “community health needs assessment,” required after March 23, 2012, to be mindful of the community benefit aspects of that report.