Industry advisers are split over whether more such exemption revocations are coming, but all expect expanded enforcement.

Aug. 15—Charity-care reporting requirements under the healthcare reform law may have gone into effect only last October, but already one hospital has lost its not-for-profit tax status as a result. Charity-care reporting requirements under the healthcare reform law may have gone into effect only last October, but already one hospital has lost its not-for-profit tax status as a result.

The first-time tax-status revocation under Affordable Care Act (ACA) 501(r) requirements applied to a “dual-status” 501(c)(3) hospital operated by a “local county governmental agency” and was confirmed by a redacted copy of the tax status letter, which was dated Feb. 14, 2017, and posted to the IRS website in August.

Neither an IRS spokeswoman nor the redacted letter identified the hospital. Loss of the 501(c)(3) exemption eliminates the ability of hospitals to use certain employee benefit plans; likely subjects hospitals to income, property, and other taxes; bars receipt of tax-deductible contributions; and disallows use of tax-exempt bonds.

The 501(r) requirements on performing community health needs assessments (CHNAs) and offering financial assistance became effective for tax years beginning on or after Dec. 29, 2015, meaning tax-exempt hospitals operating on the calendar had to be in compliance by Jan. 1, 2016, and those with a different fiscal-year end had to be in compliance by Oct. 1, 2016.

The only enforcement information previously released by the IRS was a June 2016 letter to Sen. Charles Grassley (R-Iowa), which noted that at that point the IRS had completed 2,482 compliance reviews under 501(r). Additionally, 163 hospitals were assigned for “examination” as a result of those compliance reviews, but no further actions were identified.

The ACA requires the IRS to review the community-benefit activities of about 3,000 tax-exempt hospitals at least once every three years.

This was the first time that Keith Hearle, president, Verité Healthcare Consulting LLC, Alexandria, Va., had heard of an instance in which a hospital lost its not-for profit exemption over 501(r) requirements. He has heard of several others that incurred the $50,000 excise tax for failing to meet the CHNA requirement.

“I would be surprised if it is a one-off,” said Hearle, who has been expecting more IRS enforcement after his own reviews indicated widespread hospital vulnerability due to poor compliance.

Reasons for Revocation

Hospital 501(r) requirements include:

  • Conducting a CHNA at least once every three years
  • Making the CHNA publicly available on a website
  • Adopting an implementation strategy to meet the needs identified in the CHNA
  • Adopting a financial assistance policy and publicizing the policy, including by posting it on a website
  • Limiting the amounts charged to individuals who are eligible for financial assistance
  • Making individuals aware of the financial assistance policy prior to engaging in certain collection actions

Among the reasons for the IRS action against the county government hospital was its finding that the hospital did not make the CHNA widely available to the public through a website, although it had paper copies available on request.

“The hospital indicated to the IRS that it might have acted on some of the recommendations included in the Implementation Strategy Report, but that a separate written implementation policy was neither drafted nor adopted,” the IRS letter stated.

Officials at the small rural hospital said they lacked the staffing to comply with 501(r) requirements. They also said they “really did not need, actually have any use for, or want their tax-exempt status under Section 501(c)(3),” according to the IRS letter. The hospital believed its tax-exempt status somehow prevented its involvement in certain payment arrangements. It had maintained 501(c)(3) status “only in case any liabilities arose relating to the prior management company that had originally obtained that status from the IRS.”

The IRS deemed the hospital’s failure “egregious” because its leaders had “neither the will, the resources, nor the staff to follow through with the” 501(r) requirements.

Widespread Vulnerability

Industry advisers worry that many hospitals could be vulnerable to IRS enforcement—if not tax-exemption revocation—under the new requirements.

“A lot of them just assume that what they have, in terms of policy and procedure, suffices under the final regulations and have not done a lot,” said Andrew Kloeckner, a partner for Omaha-based law firm Baird Holm.

Even hospitals that have taken steps to become compliant with the requirements can face downsides, including complications with their collection efforts, which in turn can delay cash flow, Kloeckner said.

Jan Smith, a tax senior manager in Crowe Horwath’s Healthcare practice, indicated that the likelihood of a similar penalty or the likelihood of this determination setting a precedent at other hospitals may be limited.  This is due to the unusual position taken by the revoked hospital’s officials that they didn’t need or want charitable status (in addition to governmental status).  

“If hospitals are making a good-faith effort to comply, I would be surprised if the IRS would revoke their tax status at this stage of 501(r) examinations,” Smith said in an interview.  

However, she is aware of several health systems that the IRS is seeking to penalize under the CHNA tax provision.

The IRS’s 501(r) compliance reviews include the agency’s analysis of hospital websites and “other information designed to identify the hospitals with the highest likelihood of non-compliance,” IRS Commissioner John Koskinen stated in his 2016 letter to Grassley.

Justin Lowe, senior manager with the Exempt Organizations Tax Practice at Ernst & Young, underscored that hospital websites are among the publicly available information that the IRS reviews.

He urged hospitals to make sure that all required documents, including the CHNA and financial assistance policy, are on the website and easily findable.

Insufficient approaches to 501(r) compliance, Kloeckner said, include instances when hospitals purchase financial assistance policy templates that are provided by a consultant and not submitted for legal review, potentially leaving audit vulnerabilities. Kloeckner also urged attention on practices and procedures outside of the policies. 

Small government-operated hospitals are among the most vulnerable to enforcement, Hearle said, because they may not be required to file Form 990, which provides reminders about 501(r) compliance requirements.

“It’s a group of hospitals I’m concerned about,” Hearle said.

Among the financial assistance requirements with which hospitals are most likely to struggle, Hearle said, is making available lists of physicians who are associated with the hospital and who utilize the same charity care policies.

“Patients obtaining charity care from a hospital want to find physician groups through which they can get the same charity care, as opposed to some group that doesn’t offer charity care,” Hearle said.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Tuesday, August 15, 2017