Looking at Hospitals through the Internal Revenue Service’s Magnifying Glass - ABA Health eSource February 2011
February 2011 Volume 7 Number 6

Looking at Hospitals through the Internal Revenue Service’s Magnifying Glass:
New Section 501(r) Requirements Affect Tax Return Requirements for Exempt Hospitals

By Alex Grashkina-Hristov, Tax Senior Associate, Wolf and Company P.C., Boston, MA

Patient Protection and Affordable Care Act: A Brief Background

The Patient Protection and Affordable Care Act (PPACA)1 imposes new requirements on tax-exempt hospitals which they will need to comply with in order to maintain their tax-exempt status.  The changes are effective for tax years beginning after March 23, 2010, which is the date of the enactment of PPACA, so effective dates for hospitals will vary based on the tax year end.  This means that the earliest effective date would be the year beginning April 1, 2010 for hospitals with a March 31, 2011 year end.

New Internal Revenue Code Section 501(r)

PPACA creates a new Internal Revenue Code Section 501(r) which imposes a requirement for hospitals to conduct a community health-needs assessment at least once for every three-year period.  Failure to conduct the assessment and report on Form 990 (Return of Organization Exempt from Income Tax) how needs identified by the report are being met will subject the tax-exempt hospital to an excise tax. In addition, the audited financial statements of the hospital or the consolidated financial statements, if the hospital is included in consolidated financial statements with other organizations, should be included with the Form 990 annually.2 In the past, the Form 990 required reporting the cost of certain existing charitable programs but did not require a community needs assessment to accompany this costs analysis. Also, hospitals were not required to attach their audited financial statements to the return.

Section 501(r) also mandates that hospitals institute specific eligibility standards and application requirements, as well as a written policy and procedures for patients applying for the hospital's financial assistance programs. The written financial assistance policy must include the following: (1) eligibility criteria, (2) the basis for calculating amounts charged, (3) application instructions, (4) steps taken in the event of non-payment, (5) methods to publicize said policy.  Further, h ospitals are required to provide emergency care on an equal basis regardless of a patient’s eligibility under the financial assistance program. The provision of emergency care regardless of financial assistance eligibility should be part of the hospital’s Emergency Treatment Policy. There are also new limitations on charges that can be made to patients who meet the criteria to receive financial assistance. 3

Last, Section 501(r) requires hospitals to take “reasonable action” to determine whether a debtor is eligible under the financial assistance policy before the hospital can engage in “extraordinary” collection activities such as lawsuits, arrests, liens and other similar actions.4

Reactions of Tax Exempt Hospitals and Tax Practitioners to the New Section 501(r)

PPACA requires the Treasury Department to issue regulations and guidance as necessary to implement Section 501(r). In Notice 2010-39, the IRS requested comments regarding the application of Section 501(r) requirements to hospitals subject to the new rules5. The comment period ended on July 22, 2010 and the IRS received hundreds of comments from hospitals as well as from tax practitioners. T he IRS is reviewing the comments submitted and will consider what regulatory or other type of guidance may be issued, but has not announced a specific time frame as to when any regulatory guidance would be issued. As many of the comments point out, determining whether a hospital has complied with these new requirements may pose difficulty because some of the terms of the new Section 501(r) are not precisely defined.6 For example, the key term “community need” remains broad and open to interpretation not only depending on the demographics, location and other characteristics of each community, but also from the standpoint of different types of hospitals (for example, a rural hospital may set different goals for improving the health of the community than a research or teaching hospital). “Extraordinary collection practices” and “reasonable action” with respect to determining financial assistance eligibility are also broadly defined. Because of this lack of specific definitions, hospitals may not know to what extent they are currently meeting all requirements until their 2010 Forms 990 are complete and reviewed by the IRS, which would allow the IRS to compare where different institutions stand.

On one hand, many hospitals may already have procedures and policies for emergency care, financial assistance and collection activities. One the other hand, in order for the policies to function in practice, hospitals should make their standards for financial assistance visible and make procedures for applying them transparent to patients and the public. For example, many patients do not consider applying for financial assistance until they complete treatment and receive a bill in the mail. Therefore, they may react too late to avail themselves of any financial assistance or may even remain uninformed of the hospital's existing policies. The new Section 501(r) does mandate that financial assistance policies include methods to publicize the availability of financial assistance and charity care but does not provide further guidance as to what types of “methods to publicize” would result in a more informed patient population.

Despite the lack of clarity regarding some of the requirements, there is no transition relief period, so hospitals should take immediate action in order to comply with them. At the same time, all tax exempt hospitals must be certain that their 501(r) compliance efforts are integrated into the tax return reporting requirements under Schedule H (Hospitals) of the Form 990 – Return of Organization Exempt from Income Taxes.

IRS Revisions to Form 990: Even More Detail Required

In response to PPACA, the IRS will be making extensive revisions to Schedule H. Although some of the revisions are still to be made during 2011, the 2010 Schedule H already includes a new section allowing facility-by-facility reporting. This new section is necessary to satisfy the PPACA requirements. Section 501(r) requires reporting on a hospital facility-by-hospital facility basis, not on an EIN-by-EIN basis, which is the norm for the Form 990. Thus, each hospital facility operated by a Section 501(c)(3) organization must meet the requirements regarding financial assistance, community health needs assessments, billings and collections.  If hospital's tax year began on or before March 23, 2010, it will not be required to complete the facility-by-facility section of Schedule H. If it began after March 23, 2010, it will be required to complete this new section and list every facility in its system.7 Completing the Schedule H on a facility by facility basis will require a substantial level of detail and a hard look into each facility’s operations in order to quantify expenditures for charity care, including expenses for community health improvement, health professions education, subsidized health services, research, cash and in-kind contributions, and other expenditure items.

The changes to Sc hedule H for hospitals represent yet another important step in the IRS's ongoing efforts to increase transparency and to provide a standardized format for reporting the benefits that hospitals provide to the communities they serve. Because the Form 990 is available to the general public, these changes mean that community needs assessments and hospital financial statements will now also become accessible to anyone who wishes to view the organization's tax return, whether by downloading it from Guidestar.org8 or by requesting a copy from the hospital.

Increased Reporting Burden: Is More Better?

These efforts to increase transparency hold hospitals to a greater standard of accountability, which would hopefully result in adequate patient protection and affordability of healthcare, the ultimate goals of PPACA. However, some hospitals and practitioners may feel that the compliance and reporting burden on hospitals has increased unduly. In contrast to hospitals, other types of tax exempt entities, including colleges and universities, which charge substantial tuition fees, are not required to attach to their audited financial statements to the Form 990, to perform an assessment of the needs of the community or to report how much financial assistance they provide. Still other exempt organizations, such as churches, do not complete a tax return at all, and do not face the task of trying to quantify, on an annual basis, how much benefit they actually provide to the community.

How the new PPACA requirements will transform the tax exempt world remains to be seen. Once the IRS receives the first fully completed Schedules H, the Form 990 will likely undergo additional revisions. Perhaps these new changes will bring much needed clarifications.


1Pub. Law No. 111-148 (hereinafter “PPACA”).
2I.R.C. § 501(r).
5Internal Revenue Service. Notice 2010-39.
6Comments from different organizations to the new requirements for tax exempt hospitals are available here: http://www.wallerlaw.com/quotes/2010/08/10/comments-available-for-review-on-new-tax-exemption-requirements-for-nonprofit-hospitals.132997
7Remarks of Stephen Clarke, Project Manager, Exempt Organizations Division, Internal Revenue Service, as delivered at the 2010 Western Conference on Tax Exempt Organizations, an annual program co-sponsored by Loyola Law School and the Internal Revenue Service.  November 18, 2010. 
8Guidestar.org is a website where anyone can register free of charge and download the tax returns of a tax exempt organization (Form 990, 990-EZ or 990-PF) for the most recent three (3) years. The IRS generally uploads all exempt organization tax returns shortly after it receives them from the filer.

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