Reading the tea leaves in a hospital's loss of tax-exempt status
Tax-exempt hospitals are required to conduct a community health needs assessment at least once every three years.
The hospital industry sat up and took notice when the Internal Revenue Service (IRS) said last month it had — for the first time — revoked a hospital’s tax-exempt status. The announcement alarmed the nonprofit sector, but analysts say that while it shows the federal government will take seriously a failure to abide the requirements for maintaining tax-exempt status, it doesn't necessarily signal a crackdown.
The hospital that had its status revoked was found not in compliance with section 501(r) of the Internal Revenue Code, and was notified earlier this year. State tax courts have been increasingly harsh when scrutinizing tax-exempt hospitals, and the Feb. 14 letter, released last month, suggests the IRS could be following that lead. While the identity of the hospital was not revealed, the letter states the exemption was withdrawn because the hospital failed to perform a community health needs assessment (CHNA), adopt an implementation strategy and make it broadly available to the public. These 501(r) requirements began in 2016.
The revocation involved a “dual-status” 501(c) (3) hospital operated by a “local county government agency” and means the hospital is no longer able to use certain employee benefit plans, could be subject to income, property and other taxes and can’t use tax-exempt bonds. It can still receive tax-deductible contributions, and tax-exempt status could make it easier to solicit them.
The IRS reported 2,482 compliance reviews of charitable hospitals completed between 2014 and 2016 in a June 2016 letter to Sen. Chuck Grassley (R-Iowa). Of those, 163 were slated for further examination. The Affordable Care Act (ACA), which established 501(r), requires the agency to conduct such reviews at least once every three years.
Hospitals need to accept that 501(r) is here to stay and learn to live with it, says Gil Ghatan, a senior associate in the tax and benefits department of Ropes & Gray. While Congress could still take another stab at repealing the ACA, lawmakers have shown strong bipartisan support for these requirements of charitable hospitals.
Warning or omen?
“I would be surprised if it is a one-off,” Keith Hearle, president of Verité Healthcare Consulting, told the Healthcare Financial Management Association’s Rich Daly following the tax-status letter’s release. He said he has been anticipating stepped up IRS enforcement based on his own reviews indicating poor compliance with 501(r).
Healthcare Dive reached out to experts on tax policy and nonprofit organizations to understand the implications of this case and how organizations can avoid putting their tax-exempt status in jeopardy.
While it’s hard to tell if this ruling represents a step up in IRS enforcement activities, the hospital’s failure to do a CHNA and adopt an implementation plan should serve as a reminder to all 501(c)(3) hospitals of the importance of ensuring compliance with 501(r), Ghatan told Healthcare Dive via email.
“It may certainly send some chills down the spines of some hospital managers,” says Gary Young, director of Northeastern University’s Center for Health Policy and Healthcare Research, "but my view is that this is a little bit more of an extreme case and not a signal that we’re going to see a lot more enforcement actions in the near term.”
Young notes, for example, the hospital in question didn't seem to necessarily value tax exemption, and appeared to be operating under limited financial resources that made compliance with 501(r) difficult. While the IRS could dig in and take a more aggressive stance on enforcement, he believes most hospitals are doing enough to meet the requirements.
That doesn't necessarily mean they are fulfilling the goals of the regulation. In an study published in the American Journal of Public Health, Young and co-authors found that while most tax-exempt hospitals have embraced the regulations to conduct a CHNA, engagement with local public health departments and other key stakeholders is often lacking.
"That’s important, but that’s at a level that probably the IRS is not going to hold most hospitals accountable for,” he tells Healthcare Dive.
While it’s unclear how far the IRS will go in enforcing 501(r), the recent ruling shows the agency won’t hesitate to revoke the tax-exempt status of hospitals that fail to meet basic requirements of the rule.
“When they issued the final regulations, they basically said your exempt status can be revoked if the noncompliance with the rules is more than minor and inadvertent,” says Laura Kalick, tax consulting director for BDO Consulting’s healthcare and nonprofit and education practices.
And by minor, the IRS truly means minor, she adds. Examples provided in the rule included circumstances such as documents being temporarily unavailable due to a website being down, or if a sign in an emergency room advising people about financial assistance fell down. Other infractions may be more than minor but still not willful — for example, if issues are identified in an audit and the hospital corrects them and discloses the action on their Form 990 nonprofit tax return.
The role of a CHNA
Prior to 501(r), there was Revenue Ruling 69-545, which established a community benefit standard. That required nonprofit hospitals to have an open medical staff, have a board that drew broadly from the community and to treat emergency room patients regardless of their ability to pay or type of insurance.
CHNA requires hospitals to take that a step further and actually assess the community’s health needs, come up with an implementation plan to meet those needs and then post that on their website for the public to see.
This is something of a paradigm shift for hospitals, which have historically been in the business of treating people only when they’re sick and crossing the hospital’s threshold. Now there is a federal initiative pushing hospitals to look outside their doors and be more engaged in community health activities.
“Certainly if you’re really going to be heavily committed to community health and you’re doing a very detailed community health needs assessment . . . the investment becomes much greater in terms of actually translating the needs assessment into action through an implementation plan, and then really making the investments to address health disparity, deal with certain population health issues, trying to reduce diabetes, obesity — that is a very expensive undertaking for hospitals,” Young says. “I think many hospital managers would argue they don’t have the resources to undertake that.”
And while there have been changes in public and private payment policies to support some of those activities, most hospitals still get paid to treat people when they’re sick, not to engage in population health activities, he adds.
In addition, many states require their own community benefit report showing what a nonprofit hospital does for its population. When the 501(r) rule was proposed, many stakeholders questioned whether organizations that were in compliance with state rules should automatically be considered in compliance with CHNA requirements, Kalick says. Ultimately, the IRS said all hospitals seeking tax-exempt status must comply with federal rules.
Maintaining nonprofit status
So how best to stay in compliance with 501(r)?
While it is well and good to conduct a CHNA and draw up an implementation plan, a hospital is not in compliance until the assessment and plan are made publicly available on its website. Hospitals should publish the information, along with financial assistance policies and applications, for assistance, in plain language and in languages that reflect the population, Kalick says.
“If you really want to drill down, you have to give people a sufficient amount of time in order to apply for financial assistance before the hospital will engage in any extraordinary collection actions,” she adds. According to the IRS rules, that is 240 days from the first bill.
Some hospitals are going even further and integrating the needs assessment into their strategic plan, notes Young. These hospitals, while still the exception, are going all-in in terms of trying to transition to institutions that have an expanded role in community health.
Hospitals that worry their policy is inadequate or not in compliance with 501(r) should check out neighboring institutions and find one that is, Kalick advises. “It’s not cheating to adopt a good policy that you see on another hospital’s website,” she says.
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