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Tuesday, December 13, 2011

New Reporting Requirements for Tax-Exempt Hospitals are Quickly Approaching

As of 2006, almost 59% of hospitals in the U.S. were tax-exempt under IRC Section 501(c)(3) (organized and operated exclusively for “charitable” purposes).  The Patient Protection and Affordable Care Act of 2010 added IRS Code Section 501(r), addressing a charitable hospital’s fulfillment of its charitable purpose as a tax-exempt organization.

IRS Code Section 501(r) imposes four new requirements on 501(c)(3) organizations that operate one or more hospital facilities. Each 501(c)(3) hospital organization is required to meet all four general requirements on a facility-by-facility basis:

Effective for years beginning after March 23, 2010:

  • adopt and implement written financial assistance and emergency medical care policies,
  • limit charges for emergency or other medically necessary care,
  • comply with new billing and collection restrictions, and

Effective for years beginning after March 23, 2012:

  • conduct a community health needs assessment (CHNA) at least once every three years.

Community Benefit Standard
Requirements imposed on a tax-exempt hospital to show it has fulfilled its charitable purpose have evolved since the general guidelines were published in 1956.  In the 1960s the charity care standard was replaced with the broader community benefit standard.  A report issued by the U.S. Government Accountability Office in 2008 revealed how these standards varied between tax-exempt hospitals.

To meet the community benefit standard, tax-exempt hospitals fulfill the standard in a variety of ways including providing charity care, maintaining an emergency room open to all persons regardless of ability to pay, having an independent board of trustees that includes community representatives, operating with an open medical staff with privileges available to all qualifying physicians, and using surplus funds to improve the quality of patient care, expand facilities and advance medical training, education and research. 

The redesigned Form 990 was introduced in 2008 along with Schedule H requiring tax-exempt hospitals to disclose information about charity care, community benefits, Medicare and collection practices, bad debts, community building activities and health needs assessment.

Community Health Needs Assessment (CHNA)
The CHNA requires that at least once every three taxable years, tax-exempt hospitals conduct an in-depth analysis of the community’s needs and adopt an implementation strategy outlining how the hospital proposes to address those needs in the coming years.  The first CHNA is due for a taxable year beginning after March 23, 2012 and must be reported on the hospital’s Form 990 on Schedule H, Parts V and VI.

The CHNA must take into account input from persons who represent the broad interest of the community served (including those with special knowledge or expertise in public health), and must be made available to the public.  The implementation strategy describing how the hospital will meet the community’s health needs must be included, as well as a description of what the hospital has done historically to address its community needs.  Furthermore, the hospital must identify any needs that have not been met by the hospital and why these needs have not been addressed.

IRC Section 6033(b)(15)(A) provides general guidance about what a CHNA must disclose and IRS Notice 2011-52 and Form 990, Schedule H (including instructions) provide more guidance and examples.

What Happens If You Do Not Meet These New Requirements?
Failure to meet the CHNA reporting requirements may result in an annual tax penalty of $50,000 for each facility operated by a tax-exempt hospital.  Tax-exempt hospitals should make sure they are in compliance to meet these new requirements next year. Please consult with your tax advisor since State requirements may vary from Federal requirements.


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