Section 9007 of the health reform bill passed by the Senate on December 24, 2009 contains specific requirements for Section 501(c)(3) hospitals wishing to retain their tax exemption. This development is of interest to all exempt organizations, not just hospitals, because it is another example of Congressional action imposing specific standards on particular types of exempt organizations (such as Section 501(q), added by the Pension Protection Act of 2006 to address credit counseling organizations).
Its provisions also increase requirements for exempt hospitals' transparency and public accountability, a favorite topic of Senator Charles Grassley (R-Iowa) of the Senate Finance Committee, and is another indication that scrutiny of tax-exempt organizations is unlikely to abate. Senator Grassley has recently issued two releases on rising college tuition, high not-for-profit executive compensation, and the need for governance transparency.
For the past 40 years, the availability of tax exemption for hospitals and other health care organizations has been judged by the "community benefit" standard articulated by the IRS. We have previously described the history of the community benefit standard. If Congress adopts a health reform bill and the Senate provisions are included, hospitals will have greater transparency and public accountability requirements. Because the House health reform bill passed in November had no provision concerning this issue, it is unlikely that the hospital tax exemption provisions will change significantly in the process of agreeing upon a final bill.
Section 9007 of the bill, in essence, codifies and elaborates on certain key aspects of the "community benefit" standard. The penalty provisions and focus on ongoing charity care trends should prompt hospital governance and management to pay much closer attention to these particular requirements and the broader distinctions between tax-exempt and for-profit hospitals.
The legislation contains the following four specific requirements, which hospitals must satisfy in order to qualify for tax-exempt status under Section 501(c)(3):
- Community health needs assessment. Each hospital must conduct or participate in a community health needs assessment at least every three years and report on its implementation. A hospital not meeting this standard would be subject to an excise tax.
- Financial assistance policy. Each hospital must adopt a financial assistance policy spelling out its criteria for free or discounted care and make the policy widely available.
- Limitations on charges. Each hospital must charge those who are eligible for partial financial assistance no more than the amount generally billed (that is, the "list price" cannot be charged for the balance).
- Billing and collection. Each hospital must make reasonable efforts to determine whether a patient is eligible for assistance under its financial assistance policy before taking extraordinary collection actions.
Interestingly, the legislation would also require the IRS to review each hospital's community benefit activities at least once every three years – the level and manner of scrutiny is not specified. The IRS has not indicated how it would conduct such reviews. Finally, the Departments of Treasury and Health and Human Services would be required to report each year to Congress on levels of charity care and other activities of tax-exempt, public, and taxable hospitals.
Many tax-exempt hospitals have already adopted most of the practices set forth in the health reform legislation. Even if the hospital tax exemption provisions (or health reform itself) do not pass, however, hospitals that currently do not engage in these practices should consider adopting some or all of them to stay current with the practices that the public and the government expect.
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