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How Nonprofit Hospitals Must Prepare for IRS Changes

Karen Minich-Pourshadi, for HealthLeaders Media, January 31, 2011

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.

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