This article originally published in the November 2017 edition of The Receivables Report For America’s Health Care Financial Managers, a monthly newsletter from Wolters Kluwer Legal and Regulatory, U.S.
By Wolters Kluwer Editorial Staff
In an unexpected move, the Internal Revenue Service (IRS) recently revoked a "small rural hospital’s" nonprofit status for failure to meet the community health needs assessment requirements under section 9007 of the Affordable Care Act (ACA) (P.L. 111-148). The IRS tax status letter is dated February 14, 2017, but was released on the IRS website in early August. The name of the hospital is redacted from the text of the IRS’ tax status letter, and an IRS spokeswoman also declined to name the hospital, according to an article from the Healthcare Financial Management Association (HFMA).
According to the letter, the IRS deemed the hospital "egregious" for its failure to meet the requirements, concluding that it had "neither the will, the resources, nor the staff to follow through" with them. The reason for the revocation, according to the IRS, is that the hospital did not make its community health needs assessment widely available to the public online, though it offered physical copies on request. The unnamed hospital lost its tax-exempt status after it failed to conduct a community needs assessment, develop an implementation strategy, and make the assessment available to the public. Medicare considered the hospital to be a Disproportionate Share Hospital and critical care access facility.
The unnamed hospital lost its tax-exempt status after it failed to conduct a community needs assessment, develop an implementation strategy, and make the assessment available to the public.
Hospital Rejects 501(r)
The hospital apparently told the IRS that as a small rural facility, it "had neither the financial wherewithal nor the staffing to devote to the specific requirements of Treasury Regulation 501(r)-3 for conducting a proper Community Health Needs Assessment every three years."
Additionally, the hospital stated that it "really did not need, actually have any use for, or want their tax-exempt status." Hospital representatives claimed that maintaining nonprofit status interfered with Medicare reimbursement and other payment arrangements. The hospital stated that it only maintained tax-exempt status "in case any liabilities arose relating to the prior management company who had originally obtained this status from the Internal Revenue Service."
For many in the health care industry, this is the first time they have seen the IRS take away an organization's tax-exempt designation rather than levy a tax penalty. In other instances, hospitals have been assessed the $50,000 excise tax penalty resulting from failing to comply with the rules.
As we have reported in The Receivables Report over the months, under the ACA, the federal government added four new requirements related to community benefits, which hospitals must meet to earn nonprofit tax-exempt status. The additional requirements are:
- Conducting a community health needs assessment and an associated implementation strategy;
- Creating a written financial assistance policy for medically necessary and emergency care;
- Complying with limitations on hospital charges for certain individuals who qualify for financial assistance; and
- Meeting specific billing and collection requirements.
Nonprofit hospitals must perform the needs assessment every three years and establish a plan to meet any needs identified. The assessment must cover how the hospital plans to alleviate care barriers, including financial challenges, as well as strategies for preventing disease, improving nutrition, and addressing behavioral, social, and environmental issues.
The community health needs assessment also must address how the hospital identified specific issues within their region. That includes ensuring the hospital spoke with underserved and minority populations. Additionally, nonprofits must write a report detailing its plans and publish that report to the public. Failure to comply with community health needs assessments requirements could result in a $50,000 excise tax penalty or the loss of tax exempt status, such as what happened in the instance described here.
To ensure nonprofit hospitals follow IRS regulations, accounting and advisory firm Baker Tilly recently advised nonprofit hospitals to review reporting compliance during the mid-cycle, which is about halfway through the three-year process for community health needs assessments.
"While tax years 2017 and 2018 are mid-cycle for most hospitals’ CHNA [community health needs assessment] reporting requirements, hospitals are required to annually disclose on their Form 990s how they are addressing the significant health needs identified through their CHNAs," the Baker Tilly emailed tax alert stated. "Now is an excellent time to review implementation plan strategies to ensure you are appropriately capturing outcomes to report on Schedule H and in the next CHNA."
Nonprofit hospitals also should consider mid-cycle reviews because of state and local level investigations of hospital community benefit reporting.
"A number of high profile cases have demonstrated that local property tax exemption can be revoked if hospitals cannot satisfactorily demonstrate their community benefit," the consultants explained.
Five Action Steps to Avoid Trouble
The revocation should serve as a wake-up call with respect to the IRS's intent to enforce the requirements of 501(r), says Winston-Salem, NC-based law firm Womble, Carlyle, Sandridge & Rice, PLLC. Most nonprofit hospitals rely on the financial benefits of tax-exempt status, including exemption from income, property, sales and use taxes, as well as the ability to issue tax-exempt bonds. Further, tax-exempt status encourages charitable contributions to a hospital by making such donations tax-deductible. Accordingly, the attorneys recommend, nonprofit hospitals should ensure their continued qualification for tax-exempt status by taking the following actions:
- conduct a comprehensive, written CHNA with respect to each hospital facility every three years;
- formally adopt an implementation strategy to meet the community needs identified through the CHNA;
- make the CHNA report widely available to the public through the hospital website and on paper for public inspection upon request at the hospital facility;
- review the hospital's financial assistance and emergency medical care policies for compliance with 501(r); and
- review the hospital's billing and collection practices for compliance with 501(r).
Attorneys: (Womble, Carlyle, Sandridge & Rice, PLLC).
Companies: Baker Tilly Virchow Krause, LLP
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