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Why Nonprofits Must Prepare Now for Closer IRS Scrutiny

 |  By Philip Betbeze  
   September 30, 2011

We spend a lot of time and effort trying to educate ourselves, and you, about the realities of healthcare reform. In many cases, the bottom line seems to be that your bottom line is poised to get ever tighter in the coming few years.

While our focus on the measurement and process re-engineering on which many hospitals and health systems are embarking is appropriate, let's not forget the prominent role that the Internal Revenue Service is about to play in healthcare reform.

We are at its beginning stages as the forms you must complete to justify your nonprofit status increase in complexity and detail.  But in the future, much of your hospital or health system's story will be told by your IRS filings, says Michael Regier, senior vice president and general counsel for VHA Inc., and a noted expert on tax matters.

Not only that, but you might want to consider that a future in which your nonprofit status will be judged in part by the way you tell that story, is probable, if not inevitable. Regier and other experts will convene Oct. 13 for a HealthLeaders Media webcast about the agency's increasing involvement in healthcare, but, in search of a sense of the seriousness with which healthcare leaders are treating the new regulations, I thought I would try to catch up with him prior to that event.

"People don't realize how much of healthcare reform has been assigned to the IRS," says Regier. "From the individual mandate to tax credits to all these new provisions for nonprofit subsidies, the IRS will be the regulator. The IRS itself is still getting its arms around it."

One of the most recent requirements for nonprofit hospitals and health systems deals with the community health needs assessment, which must be performed at least once every three years. Further, the hospital or health system must make that document widely available to the public, along with a written implementation plan.

In full, new IRS regulations require 501(c)(3) organizations to complete the following:

  • Adopt and implement written financial assistance and emergency medical care policies,
  • Limit charges for emergency or other medically necessary care,
  • Comply with new billing and collection restrictions, and
  • Conduct a community health needs assessment at least once every three years (this fourth requirement is effective for tax years beginning after March 23, 2012)

Though more detailed than they're used to, "this is not unfamiliar to the nonprofit sector. They've been dealing with community benefit planning," says Regier. "The difference is that it's never been a toll gate to get or maintain tax-exempt status."

The implication, says Regier, is that eventually these reports will be used by the agency to determine baseline measurements of the cost and benefit of various community benefit programs across the nation—a way to compare and contrast with an idea that some minimum standard might be implemented in future years.

In completing the community health needs assessment and action plan, Regier says, one huge complication has already arisen. Regulations seem to indicate that hospital facilities must satisfy these new obligations on a facility-by-facility basis. That means multi-facility health systems can't use one document for the entire organization—instead, the forms must be filed by each facility.

"It's the place where the IRS could give multi-hospital systems the most heartburn," Regier says. "They want to be able to do one system-wide community health needs assessment. If you require facility-by-facility implementation plans, you may lay on duplicative and unnecessary costs."

Regier says he worries that longer term, the IRS is constrained by the legislation into setting this needs assessment process up in a way that may not move the healthcare system toward the health policy goals of paying for population health management rather than paying for volume.

"The community needs health needs assessment could be a powerful tool on population health management," he says. "But if we set up a system that has the unintentional effect of making hospitals define their community as narrowly as possible, you don't use this tool and you suboptimize its ability to manage population health. At the same time, the IRS has to live with the statutory language they've got."

Regier predicts Congress will again have to weigh in as the process is tweaked, but with the idea that future standards will come from establishing the baseline, Regier says hospitals must do the difficult, almost fortune-telling work of determining where they might fall on the community benefit bell curve.

"In part that's because organizations have established patterns of community benefit work," Regier says. "Will that be seen as adequate? If not, will that put my tax status in jeopardy? Are there squandered investments here?" he asks rhetorically.

The answer is, no one really knows. But the work doesn't have to rely on predicting future standards, Regier adds. He says generally, hospitals and health systems should remember that IRS form 990, the annual information return, is a public relations document in addition to a regulatory compliance document. See if it passes the "smell test." 

"Make sure the story of your organization is told in a complete, authentic way and shows you in the best light that you can," he says. "Secondly, don't rely on your form 990 to tell your story to the community.

You have to get the word out, he says, with a public relations effort. After all, nobody will tell your story for you.

Philip Betbeze is the senior leadership editor at HealthLeaders.

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