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New Requirements For Tax-Exempt Hospitals

A version of this article was published in The Daily Record on January 26, 2012.

While healing the sick is noble, it is not charitable if a market rate is charged for the medical services being provided.

Therefore, the question arises — what makes a hospital charitable, and, therefore, tax-exempt?

Curiously, the answer to this question is now found in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively referred to as the Accountable Care Act, and better known as Federal Health Care Reform. More specifically, the Affordable Care Act enacted a new Section 501(r) of the Internal Revenue Code, which Section is generally effective for fiscal years of tax-exempt organizations that begin after March 23, 2010.

As a result of Section 501(r), tax-exempt hospitals must now comply with a host of new operational and filing requirements to maintain their federal tax exemption. These new regulations generally apply to any Section 501(c)(3) organization that operates one or more hospitals. If an organization operates more than one hospital, each hospital must comply with the new requirements.

Under Section 501(r), a hospital will be treated as tax-exempt if the hospital satisfies: (A) a new community health needs assessment requirement; (B) a new financial assistance policy requirement; (C) certain new requirements regarding the amounts patients are charged; and (D) certain new billing and collection requirements.

(These requirements take the place of the prior requirements for a non-teaching hospital’s tax-exemption, namely: (1) providing free or below-cost health care to the extent of its financial ability, or (2) satisfying a “community benefit” standard either by operating an emergency room that is open to all regardless of their ability to pay, or providing another otherwise unmet community health benefit, if providing emergency care would be duplicative in a particular area.)

A. Needs Assessment

At least once every three years, a hospital must now conduct a community health needs assessment, which assessment must be made available to the public. The first of such required assessments must be completed prior to the end of a hospital’s fiscal year that begins after March 23, 2012.

Each assessment must take into account input from a broad range of interests, including the communities served by the hospital and individuals with public health expertise. An assessment may be based on current information collected by public health agencies or non-profit organizations, and may be conducted together with one or more organizations, including related organizations.

In the annual informational return that all tax-exempt entities must file, namely Form 990, a tax-exempt hospital must describe how the hospital is addressing the needs identified in its community needs assessment, and describe the needs not being addressed and why they are not being addressed.

In addition to other sanctions (including loss of exempt status), a hospital that fails to complete its community needs assessment in any three year period will incur a $50,000 penalty.

B. Financial Assistance

The new financial assistance rules have a financial assistance element and an access element.

The financial assistance element requires each hospital to adopt, implement and publicize widely, a written financial assistance policy. The policy must specify eligibility criteria, whether free or discounted care is available, and how the hospital calculates the amounts that are billed to patients. The financial assistance policy itself, or separate billing and collections policies, must also describe how to apply for assistance and the actions the hospital takes in the event of non-payment.

The access element requires each hospital with an emergency room to provide emergency medical care to all individuals, regardless of their ability to pay.

C. Patient Charges

Tax-exempt hospitals must now give “most favored nation” billing treatment to certain uninsured patients. Such hospitals are now required to limit their charges for “emergency or other medically necessary care”, provided to those who qualify under their financial assistance policy, to no more than the amounts charged to insured patients.

Applicable legislative history indicates that the amounts billed to individuals who qualify for financial assistance may be based on either the best, or an average of the three best, negotiated commercial rates, or Medicare rates.

D. Collections Practices

Finally, a tax-exempt hospital can no longer take “extraordinary” collection actions before making a reasonable effort to determine whether a patient is eligible under its financial assistance policy. Applicable legislative history indicates that extraordinary collection actions include lawsuits, liens on residences, arrests, body attachments and other similar collection processes.

In summary, the Affordable Care Act imposes significant new substantive and procedural burdens on tax-exempt hospitals and their sponsoring non-profit entities. Some, if not many, tax-exempt hospitals already meet, or substantially meet, the substantive obligations imposed by Section 501(r); however, few tax-exempt hospitals can yet claim that they are in 100% compliance with all of the new requirements in form and in practice.


September 20, 2011




Rosen, Barry F.


Health Care