Non-Profit Hospitals: Meeting the Tax-Exempt Challenge

Posted by Dan Schulte

Over the past several years, non-profit hospitals have been challenged by tax-exempt hurdles more than ever. It’s been 40 years since the 1969 IRS Revised Rules made a distinction between community benefit and private benefit entities, and hospitals have worked to meet the IRS-set community benefit standards to qualify for 501(c)(3) status.Image removed. To gain or maintain that tax-exempt status, nonprofit hospitals needed to prove that they met certain requirements, including commitment to medical research, or providing expensive, necessary, and under-reimbursed services like an Emergency Room, or an intensive care burn unit. Obtaining tax-exempt status, and maintaining it, is not a luxury for many hospitals—it is an essential part of their financial structure, and certainly an intrinsic part of their mission and vision statements. However, the process of maintaining 501(c)(3) status became more complicated when Congress passed the Affordable Care Act. Most nonprofits have a long history of promoting the health of the communities they serve, and that hasn’t changed. What has changed? It’s that hospitals have to take on the added challenge of proving their commitment to the poor. Section 9007 of the Act established some additional rules for hospitals to follow, which are summarized in the ACA and in the IRS Code (at 501(r)), including:

  1. Patient discounts. Non-profit hospitals need to provide a formal discount structure to their self-pay patients Image removed.similar to the discounts given to HMOs and other payers. Hospitals can no longer charge financially needy patients at 100% of the Chargemaster rates. It is the hospital’s responsibility to develop the discount plan, either by looking back at its historical discounts, or looking forward to what Medicare or Medicaid would pay for the same services. The hospital must also make reasonable efforts to contact the patient about the possibility of discounts, and to explain the written charity care application process. Once those hurdles are met, and the patient does not comply with the application process or proves that he does not financially qualify for discounts, the hospital may continue to collect the balance at gross charges.
    After the hospital has satisfied the processes associated with its discount policies, and formally established the discount (or established that the patient does not qualify for a discount) the hospital may continue with ordinary collection efforts. At the same time, the patient’s failure to cooperate does not mitigate the hospital’s responsibility to make determinations about whether the patient would qualify for a financial discount.
  2. Financial Assistance Policies. Top-performing hospitals have a written Financial Assistance Policy (FAP).Image removed. The ACA now makes it mandatory to have a widely distributed written policy that includes eligibility criteria, comments about how much discounted care a patient might receive, and information on how charges are calculated. The FAP should also include instructions on how to apply for assistance, and should also include the forms that a patient should complete in order to obtain a discount. The FAP requirement should be in place now; Section 9007 stipulated that all sections except the CHNA (below) were effective with the hospital’s tax year beginning after March 23, 2010.
  3. CHNA. Each nonprofit hospital is responsible for writing a community health needs assessment (CHNA) plan Image least once every three years. A provider who is updating their CHNAs must redefine the community they serve and assess the health needs of that community. In assessing the community’s health needs, the hospital must solicit and take into account input received from persons who represent the broad interests of its community, even as it builds on previous CHNAs. The written plan, which the hospital should distribute in the community each time it is updated, should show how the hospital is going to meet various local healthcare needs. There’s a hefty annual penalty per hospital ($50,000) for failure to maintain an updated plan. The deadline for the first written CHNA was the hospital’s tax year ending after March 23, 2012, so every nonprofit hospital should have written one by now. CHNAs that were first written in 2012 are now due for their second iteration, so hospitals need to check the date of their last CHNA to ensure that they are updating the plan in a timely manner.

Hospitals and others who are analyzing CHNAs and IRS 990-H documents may want to read IRS Notice 2014-2 for some clarifications regarding definitions, exemptions, and other fine points of the regulations. Likewise, IRS Notice 2014-3 is of interest regarding a hospital’s rights and responsibilities regarding the correction of delinquencies regarding IRS 501(r) regulations. Bulletin 2015-5 also supplies solid directions in this regard. The regulations continue to be refined, and the most current summary is available at

Due to these types of post-reform pressures, from tax-exemption oversight to the looming Oct. 1 ICD-10 coding deadline, provider BPO is projected to grow at 30% year over year, according to the World Health Organization. Undoubtedly provider resources stretched thin by these regulations and fiscal challenges. Today’s BPO providers are increasingly seen as true partners by provider clients, who need expertise closer than arms length to thrive in this new environment. HGS delivers working solutions for financial clearance, medical coding, and Image claim resolution designed to improve net revenue, reduce bad debt, and accelerate cash collections. We augment our clients' revenue management efforts in an ongoing supplemental role or during specific events typically lead to pressures on cash flow, including patient accounting system conversions, process transformation and redesign efforts, staff turnover, and talent recruitment challenges. Our Self-pay services help identify areas of concern regarding charity care and community need, as well as ease the collection efforts with our customers’ communities.

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