Health Care Reform Brings New Requirements for Tax-Exempt Hospitals

Under the Patient Protection and Affordable Care Act, tax-exempt charitable hospital organizations must comply with several new requirements to maintain their tax-exempt status. The additional requirements apply to organizations recognized as 501(c)(3) that operate a facility required by a state to be licensed, registered or similarly recognized as a hospital. The additional requirements also apply to organizations whose chief functions, according to the IRS, are to provide hospital care and are therefore exempt under Internal Revenue Code (IRC) Section 501(c)(3).

A charitable hospital organization operating more than one hospital facility must meet the requirements separately for each facility. The hospital organization will not be treated as a tax-exempt organization with respect to any hospital facility for which the requirements are not separately met.

Governmental hospitals are not exempt under 501(c)(3) and, in general, are not required to comply with the new requirements. However, governmental hospitals may have received exemption under 501(c)(3) in addition to their formation/exemption as a governmental entity. Governmental hospitals with an exemption under 501(c)(3) are known as dual status hospitals. In the past, governmental hospitals requested 501(c)(3) status to allow the organization access to certain employee benefit plans. In addition, governmental organizations may have issued bonds as a 501(c)(3) issuer and not as a governmental issuer. Governmental entities should review their status to determine if they are dual status organizations. If so, a governmental organization also should carefully review benefit plans and bond issues to determine if it needs to comply with the new requirements to maintain 501(c)(3) status.

Effective for tax years beginning after March 23, 2010, the following new requirements must be met to maintain exempt status under IRC Section 501(c)(3).

Community Health Needs Assessments Requirements
Requires the hospital to conduct a community health needs assessment during the current tax year or in either of the two tax years immediately preceding the tax year and adopt an implementation strategy to meet the needs identified. The assessment should include input from persons who represent the broad interest of the community served by the hospital. The assessment must be widely available to the public. An excise tax of $50,000 may be imposed on a hospital failing to meet the community health needs assessments requirement.

Financial Assistance Policy Requirements
Requires the hospital to establish the following written policies:

  • Financial assistance policy that includes:
    • Eligibility criteria for financial assistance and whether such assistance includes free or discounted care
    • Basis for calculating amounts charged to patients
    • Methodology for applying financial assistance
    • Actions the organization may take in the event of nonpayment, including collections action and reporting to credit agencies, for organizations which do not have a separate billing and collections policy
    • Measures to widely publicize the policy within the community the organization serves
  • Emergency medical care policy requiring the organization to provide care for emergency medical conditions regardless of an individual’s eligibility under the organization’s financial assistance policy

Limitations on Charges Requirements
Requires the hospital to limit the amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the organization’s financial assistance policy. The charges are limited to no more than the amount generally billed to individuals who have insurance covering such care. Also, the hospital must prohibit the use of “gross charges.” While the IRS has not defined “gross charges,” the term generally refers to the full cost a hospital charges for services, without reduction for any discounts negotiated with insurance providers.

Collection Limitations Requirements
Requires the organization make reasonable efforts to determine whether an individual is eligible for assistance under the organization’s financial assistance policy before engaging in extraordinary collection actions.

Information Reporting Requirements
Requires the hospital provide the following information to the IRS each tax year:

  • Description of actions taken by the organization to address the needs identified in its community health needs assessment along with a description of any community health needs that are not being addressed with written explanation as to why these needs are not being addressed
  • Audited financial statements. If the hospital’s financial statements are included in a consolidated financial statement with other organizations, the consolidated financial statements must be provided

For more information on this issue or related matters, please consult your BKD advisor.

This post was written by:

Anne, a manager in BKD’s Tulsa office, has more than seven years of experience in public accounting. She provides tax compliance and consulting services to clients in various industries, but is primarily focused on not-for-profit and health care.

One Response to “Accounting Considerations Regarding the Medicare Recovery Audit Contractor Program”

  1. avatar Leland Choi says:

    Incredibly awesome post! Honest!


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Recent Comment

  • Karen Vance says:
    This would be under §484.18 of the Conditions of Participation describing regulations for the Plan of Care. Below is the Standard that addresses your issue: "§484.18(b) - Agency professional staff promptly alert the physician to any changes that suggest a need to alter the plan of care." From the State Operations Manual (guidance for state surveyors) "The
    February 24, 2011 on Webinars

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