It shouldn’t come as any surprise to healthcare financial leaders that when the Patient Protection and Affordable Care Act passed last year, legislators managed to work in a few provisions about requirements for nonprofit healthcare providers as well as some changes to how charges to patients qualifying for financial assistance and debt collection should be calculated.
Section 9007 of the PPACA sets forth new requirements for nonprofit hospitals that must be followed to retain tax-exempt status. The new rules mandate such hospitals to administer community health needs assessments and to clarify and make known their financial assistance policies. A community health needs assessment entails nonprofit hospitals assessing the effectiveness of their efforts to meet the needs of the community they serve and to provide public access to the findings, and that holds true for the financial end of things too, in terms of how much financial assistance they provide.
It sounds like straightforward stuff, but as with most things mandated, there’s more to it, and by the way, failing to apply the regulations correctly can cost providers up to $50,000 in penalties as well as possible civil or criminal consequences.
To get a clearer picture of some of the details involved with these new IRS tax changes I asked Milton Cerny, attorney at McGuireWoods LLP in Washington, DC, two key questions. Cerny knows more than the average attorney about taxes; apart from representing a broad range of nonprofit organizations, he has actually worked in the lion’s den, having served at the National Office of the IRS in Washington, D.C.
1. What do nonprofit hospitals need to do to keep their tax exempt status?
“Historically the IRS code didn’t provide tax exemption specifically for hospitals or describe what it was, so it was left to the IRS to clarify through regulations and rulings. From those came the development of the nonprofit, charitable hospital—one that provides relief for the poor and provides a broad community benefit,” he says. “In the new statutory requirements for a tax exempt hospital the IRS uses the term ‘community benefit’ but they haven’t defined what that will mean.”
The IRS tax forms 990 and 990 Schedule H will be attempting to gather information about a hospital through the community needs assessment to determine if they really are operating for the community’s benefit. So the needs assessment for 2012, when these PPACA provisions take full effect, will be very important because [hospitals] will have to prove community benefit. Nonprofit hospitals need to do these community needs assessments every three years, too. If they don’t they are subject to a $50,000 penalty.
Next they need to write and publish for the public a financial assistance plan. It needs to include the eligibility criteria for financial assistance, as well as how the hospital calculates the patient charges and how the patient can apply for assistance.
Guidance on how nonprofit hospitals should calculate eligibility for financial assistance is still in a comment period. Once all the comments have been gathered, the IRS and Treasury will issue their final guidelines as to what is the acceptable calculation process—this guidance is anticipated to arrive sometime the middle of this year. When applied, if the new formula uncovers that a hospital isn’t providing enough charitable care, then it could affect a hospital’s nonprofit status.
Also, they want to know how the hospital is billing and collecting for the charges issued to patients. “In the past there may have been debt collection procedures at some hospitals where some people were being unnecessarily abused. So the thought process on this is the law should provide for a debt collection process that’s fair and reasonable,” Cerny says.
2. How will the IRS measure whether a nonprofit hospital is meeting the new criteria for their nonprofit status?
“That is the big question, and it’s what the IRS charged with defining for us,” says Cerny. “And where will the IRS take this?”
Cerny believes that most small, county, or public hospitals will likely be able to meet any criteria that the IRS might put forth—given the lower economic nature of the patient base in many of these area. However, that doesn’t negate the fact that these hospitals, like all other nonprofit hospitals, will have to do the needs assessment and publish their financial assistance criteria.
Larger hospitals and health systems, however, may have to strive even harder than in the past to show that they are meeting a real community need and providing enough charitable care to maintain their nonprofit status—something that may be increasingly difficult when we enter into 2014 and more people move onto health insurance plans as part of the PPACA.
“There’s a lot of uncertainty about what this regulation could do,” says Cerny. “Right now, nonprofit hospitals should be conducting a compliance audit of their activities and make sure they are ready to create these reports, and document everything for the IRS.”
Cerny adds that nonprofit hospitals need to analyze how they are providing a community benefit, and just as importantly, how their offering is different from another organization across town. “The IRS has a very strong interest in whether or not a hospital is truly providing the benefits that entitle them to tax-exempt status,” he says.
Financial leaders take heed, the IRS provisions as part of PPACA may seem simple, but the consequences for interpreting them incorrectly could be disastrous for a nonprofit hospital. If you want to keep your tax status intact, be sure to assign someone on your team (if you haven’t done so already) who can thoroughly complete the community needs assessment process and moreover, someone who can track and monitor the IRS’ progress on the guidelines they will use to assess your efforts to serve your community.
Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
