Advisory

Hospitals: Keep Your Exemption Intact

Recent reform measures impose several additional operational requirements on hospitals that will result in loss of tax exemption if not satisfied. Hospitals generally must submit information on community benefit on their annual information returns filed with IRS. Hospitals that fail to satisfy the community benefit standard may have their tax-exempt status revoked.

To enforce the provisions imposed by the new law, the IRS has revised Schedule H on the 2010 Form 990. The new questions and disclosures required on Part V, Section B of the revised Schedule H are optional for 2010, giving hospitals additional time before having to report on the new requirements.

A charitable hospital organization must meet the new requirements related to:

• community health needs assessments,
• a financial assistance policy,
• limits on charges,
• billing and collection, and
• information reporting requirements.

Community Health Needs Assessment: 

For tax years beginning after March 23, 2012,a charitable hospital organization will meet the community health needs assessments requirement for a tax year only if the organization (a) conducts a community health needs assessment (that meets the requirements set out below) during the tax year or in either of the two tax years immediately preceding the tax year, and (b) has adopted an implementation strategy to meet the community health needs identified through the assessment.

Community health needs assessments (CHNAs) will have to take into account input from persons who represent the broad interests of the community served by the hospital facility, including those with special knowledge of, or expertise in, public health. Further, the assessment will have to be made widely available to the public. CHNAs may be based on current information collected by a public health agency or non-profit organizations, and may be conducted together with one or more other organizations, including related organizations.

The CHNA requirement is the most significant of the reform measures.  Violations can result in penalties of $50,000 or more.  Please contact Barb McGuan for additional guidance regarding CHNAs.

Financial Assistance Policy:

1. A charitable hospital organization meets the financial assistance policy requirements if it establishes:
   1. A written financial assistance policy that includes:
   2. Eligibility criteria for financial assistance, and whether such assistance includes free or discounted care;
   3. The basis for calculating amounts charged to patients;
   4. The method for applying for financial assistance;
   5. In the case of an organization which does not have a separate billing and collections policy, the actions the organization may take in the event of non-payment, including collections action and reporting to credit agencies;
   6. Measures to widely publicize the policy within the community to be served by the organization;
2. A written policy relating to emergency medical care. This policy must require the organization to provide, without discrimination, care for emergency medical conditions to individuals regardless of their eligibility under the organization's financial assistance policy described above.

Limitation on Charges: 

A charitable hospital organization meets the requirements for limits on charges if the amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the organization's financial assistance policy are limited to no more than the amounts generally billed to individuals who have insurance covering such care. A hospital facility may not use gross charges (i.e., "charge-master" rates) when billing individuals who qualify for financial assistance. It is intended that amounts billed to those who qualify for financial assistance may be based on either the lowest, or an average of the three lowest, negotiated commercial rates, or Medicare rates.

Billing and Collection:

A charitable hospital organization meets the collection limitation requirement only if the organization does not engage in extraordinary collection actions before making reasonable efforts to determine whether the individual who receives the care that is the subject of the collection actions is eligible for assistance under the organization's financial assistance policy. Extraordinary collection actions include lawsuits, liens on residences, arrests, body attachments, or other similar collection processes.

For this purpose, "reasonable efforts" include the hospital notifying the patient of its financial assistance policy upon the patient's admission, prior to discharge, and in written and oral communications with the patient regarding the patient's bill, including invoices and telephone calls, before beginning collection actions or reporting to credit rating agencies. Files should contain written documentation of the determination of whether a patient who applied for financial assistance under the financial assistance policy qualified for financial assistance.

Information Reporting Requirements:

Charitable hospital organizations that are subject to the new regulations must provide the following additional information to the IRS for the tax year:

1. A description of how the organization is addressing the needs identified in each community health needs assessment, and a description of any community health needs that are not being addressed, together with the reasons why these needs are not being addressed, and
2. Its audited financial statements (or, if its financial statements are included in a consolidated financial statement with other organizations, the consolidated financial statement).

The new provisions are effective for tax years beginning after March 23, 2010, except for the community health needs assessment requirements which are effective for tax years beginning after March 23, 2012.  For more information contact Barb McGuan at bmcguan@berrydunn.com.

Any tax advice contained in this article is based upon our understanding of relevant facts and the tax law and governmental rulings that were in effect at the time the advice was given. Furthermore, in accordance with IRS rules, we hereby advise you that any tax advice contained in this correspondence or attachments is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service.