The IRS is quietly auditing tax-exempt hospitals’ community benefit activities. The information will be used for research, reporting, and compliance purposes—and may eventually result in changes to tax laws.
The Affordable Care Act (ACA) adds various new requirements that hospitals must meet to qualify for § 501(c)(3) status. These requirements—which are found in new subsection 501(r)—also mandate that the Internal Revenue Service (IRS) review each exempt hospital’s community benefit activities at least once every three years. Furthermore, the Secretary of the Treasury, in consultation with the Secretary of Health and Human Services, must report to Congress annually on levels of charity care, bad debt, and unreimbursed costs in government programs and must submit no later than 2015 a report on trends in these figures (See ACA § 9007(a), (c), and (e)).
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The IRS formed a special group in March 2011 to conduct these statutorily required “stealth audits,” so called because, according to the 2012 IRS Work Plan, “these reviews are not examinations and the group does not expect to contact hospitals while conducting the reviews.” Instead, the IRS will merely “use the information gathered from the reviews for research, reporting and compliance purposes, as well as to identify areas where additional guidance, education or Form 990 changes are needed.”
In addition to complying with new tax-exempt requirements, hospital finance and compliance leaders need to stay on top of how IRS stealth activities and reports may affect future tax rules and laws in their states and at the federal level.
New Requirements for Exemption
The Work Plan promised that the IRS would work with the Treasury Department to develop guidance on the new requirements, and indeed proposed regulations were published in June of last year (77 Fed. Reg. 38148, Jun. 26, 2012). According to Kurt J. Bennion of the accounting firm CliftonLarsonAllen, an IRS official provided some details about the regulations at an American Health Lawyers Association conference in October 2012. Based on that presentation and his own analysis, Bennion summarizes the requirements that a hospital must meet as follows:
- Conduct a community health needs assessment at least every three years, adopt an implementation strategy to meet the identified needs, and make the assessment widely available to the community.
- Adopt a detailed, written financial assistance policy describing the persons eligible for free or discounted care and make the policy widely available to patients and the community.
- This policy will likely need to be much more detailed than current policies on charity care and discounts.
- Adopt a written policy that requires the hospital to comply with the Emergency Medical Treatment and Labor Act (EMTALA) in providing emergency services without discrimination and regardless of ability to pay for the service.
- Limit the amounts charged for care provided to individuals who are eligible for financial assistance to “not more than the amounts generally billed to individuals who have insurance covering such care.”
- Make reasonable efforts to determine whether a patient is eligible for financial assistance before taking “extraordinary collection actions.”
Bennion says hospitals must be vigilant to document their compliance with all existing community benefit standards. Policies and procedures should be reviewed, and tax advisors should ensure that IRS Form 990 and Schedule H are properly completed.
Access related checklist: Checklist for Community Benefit Activities
For nearly two years, the IRS has been using Form 990 and its Schedule H, other IRS returns, and public records to gather information on not-for-profit hospitals’ community benefit activities. The new reviews required by the ACA will provide additional information, and they will be conducted at IRS facilities, rather than at hospitals. A hospital will be notified if the IRS determines that further examination is warranted. As the old adage goes, “no news is good news.”
Bennion believes the term “stealth audits” is especially apt, and we are not likely to hear much about the topic for the next couple of years. This is because section 501(r) did not change the fundamental requirements for exempt status, it only added some new administrative burdens in the form of paperwork and documentation. As a result, “the audits will be a quiet data-gathering effort by the government, at a time when hospitals have other pressing issues to deal with,” such as ICD-10 and meaningful use compliance.
Although other issues might be of more immediate concern, those relating to § 501(r) remain important and ought not to be overlooked. For example, consider these questions:
- What does it mean that one’s community health needs assessment must take into account input from persons in the community?
- How is that to be accomplished, and what is the definition of community? Is it a town, a metropolitan statistical area, the hospital’s larger service area, an entire state, or possibly a multi-state area?
- If the facility specializes in a certain service line, such as oncology or pediatric cardiology, is its “community” the entire country? Is the concept of “community” even relevant in such a case?
“As we review the literature and the results of needs assessments that have already been completed, we don’t see great variations across the country,” Bennion says. “Every community, however you define it, has essentially the same issues: access to care, poverty, obesity, smoking, diabetes, substance abuse, mental health, and so forth.”
Although the relative incidence may vary little from place to place, the process of assessing the community’s health needs can be valuable for many hospitals. Given the costs involved, Bennion recommends considering a joint study with other organizations such as metropolitan or state hospital associations.
Reexamination of Exempt Status
The greatest significance in these developments may be in how the information from the stealth audits may be used, says Bennion. The results might serve as a foundation for a change in the section 501(c)(3) exemption rules and state tax laws.
A clear definition of the word “charity” has always been elusive, especially as it applies to health care. The tax exemption of hospital corporations has been under attack for more than a quarter century—at least since the famous case of Utah County v. Intermountain Health Care, Inc. (709 P. 2d 265,Utah. 1985). Bennion says another reexamination of tax exemption may be in the offing given the amount of potential revenue at stake. He estimates that the elimination of hospitals’ federal tax exemption would produce around $140 billion in revenue annually, and if state exemptions were eliminated the total would be much higher.
“When the government’s summary of hospital information is released to the public, state governments could use it to modify their laws on exemption from income tax, property tax, and sales and use tax.” But Bennion is quick to add, “I’m not saying this would be good policy or would be politically popular, but the justification for hospitals’ exempt status is an issue that won’t go away.”
The Treasury/HHS report to Congress is scheduled for 2015, the year before the next national election. Given that such volatile issues tend to be addressed only in a President’s second term, it seems unlikely that § 501(c)(3) will be substantially amended until at least 2021, if at all. “But in the meantime, Bennion says, “the states will certainly be looking at property tax exemptions and other sources of revenue.”
J. Stuart Showalter, JD, MFS, is a contributing editor to HFMA’s Legal & Regulatory Forum.
Interviewed for this article: Kurt J. Bennion, CPA, CliftonLarsonAllen, Minneapolis, Minn., and a member of HFMA’s Minnesota Chapter (Kurt.Bennion@cliftonlarsonallen.com).
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Publication Date: Thursday, March 21, 2013