The IRS has issued proposed regulations that will affect the way that nonprofit organizations operate charitable hospitals. The regulations provide guidance to charitable hospital organizations on the community health needs assessment requirements, and related excise tax and reporting obligations, enacted as part of the Patient Protection and Affordable Care Act of 2010 (Affordable Care Act).
The proposed regulations also clarify the consequences to charitable hospital organizations for failing to meet these and other requirements. Hospital organizations and their advisers should review these regulations in detail.
Nonprofit Hospital Requirements of the Affordable Care Act
Before 2010, advising nonprofit hospitals on the requirements of tax exemption was challenging. The Internal Revenue Code did not have provisions that were specific to hospitals. The lack of defined standards created a murky planning environment and even provided the basis for a class action charity care lawsuit in 2004.
Following almost a decade of heightened interest by the IRS, the Affordable Care Act added Code § 501(r) to clarify the requirements that charitable hospitals must meet in order to qualify for tax exemption under Internal Revenue Code § 501(c)(3).
The new rules apply to “hospital organizations,” a term that includes any nonprofit organization that operates a facility required by the state to be licensed as a hospital. The term also includes nonprofit organizations for which the provision of hospital care forms the basis for exemption under Code § 501(c)(3), as determined by the IRS. In order to qualify for tax exemption, a hospital organization must:
- Conduct a community health needs assessment (CHNA) every three years and adopt an implementation strategy to meet the needs identified in the CHNA.
- Have a written financial assistance policy and an emergency medical care policy that meet certain requirements.
- Limit charges for emergency and other medically-necessary care provided to individuals qualifying for medical assistance to not more than the amounts generally billed to individuals who have insurance coverage and prohibit the use of gross charges.
- Not engage in extraordinary collection efforts before making reasonable efforts to determine whether the patient qualifies for financial assistance.
The CHNA must reflect the input of a broad swath of the community in which the hospital operates, including health experts, and must be made available to the public. Organizations that fail to meet these requirements are subject to a $50,000 excise tax, which must be reported on the hospital’s Form 990.
Each hospital organization’s Form 990 must also describe how the hospital is meeting the needs addressed in the CHNA any needs that are not being addressed, including an explanation of why the needs aren’t being addressed.
The IRS issued Notice 2011-52, 2011-30 I.R.B. 60 (July 25, 2011) and proposed regulations on June 26, 2012 (2012 Regulations) to further clarify the CHNA requirements. The 2012 regulations provided guidance on financial assistance and emergency care policies, limitations on charges to individuals eligible for financial assistance, and billing and collection activities. But these regulations didn’t deal with the consequences of failing to comply with Code § 501(r).
There were also differences between Notice 2011-52 and the 2012 Regulations regarding how to treat hospitals that were operated by partnerships. Notice 2011-52 defined “hospital organization” to include organizations that operated hospitals through disregarded entities or partnerships. The 2012 Regulations did not include organizations operated through partnerships in the definition. This left some uncertainty about whether a hospital facility operated by a joint venture could qualify for tax exemption.
The New Proposed Regulations
The new proposed regulations were issued on April 5, 2013. They provide clear guidance on a number of important issues, including:
- All buildings operated by a hospital organization under a single state license are treated as a single hospital facility. This is a clarification of the 2012 Regulations, which only provided that such buildings “may be” treated as a single hospital facility.
- A hospital organization may operate a hospital facility through a partnership, as long as the hospital organization maintains sufficient control over the partnership to ensure that it fulfills its tax-exempt purposes. A grandfather rule that provides that hospitals that are organized primarily for educational or scientific purposes will not be considered to operate a hospital in certain circumstances.
- Minor, inadvertent errors will not result in tax sanctions as long as they are fully disclosed and quickly corrected.
- If a hospital organization operates more than one facility and one facility is noncompliant, the hospital organization will cease to be treated as tax exempt with respect to that particular facility (even though the hospital organization as a whole may still qualify for tax exemption). Income from noncompliant hospital facilities will be taxed at the corporate tax or trust rate.
- The $50,000 excise tax for failure to meet CHNA requirements is imposed annually for each year that the hospital fails to meet the requirements. If the hospital organization operates multiple facilities, the tax is applied separately to each facility.
- Hospital organizations have the flexibility define their own community for CHNA purposes. But a hospital facility can’t define its community in a way that excludes low-income or medically-needy segments of the population.
- A hospital facility must identify health needs of the community and come up with a plan for addressing them. The hospital can determine its own criteria by which to prioritize health needs.
- When performing a CHNA, a hospital must get input from at least one governmental health agency, members of medically underserved, low-income, and minority populations (or their representatives), and written comments relating to its most recent CHNA and related implementation strategy.
- The CHNA must be adopted by the governing body of the hospital and meet certain descriptive and definitional requirements.
- The CHNA must be made widely available to the public, including posting on the hospital facility’s website or the hospital organization’s website.
- The CHNA must identify significant health needs. The identified significant health needs must be covered in the hospital’s implementation strategy.
- Hospital organizations much either attach the CHNA to its Form 990 or include a URL to the website where the CHNA is publicly available.
These new regulations are still in proposed form. The IRS is soliciting public comments, and it is not clear when the regulations will be finalized. Notice 2011-52 allowed hospital organizations to rely on that notice until 6 months after further guidance was issued. Since the new proposed regulations were issued on April 5, 2013, hospitals may continue to rely on Notice 2011-42 until October 5, 2013.