In IRS First, Non-Profit Hospital Loses Status Under ACA Rules

Failure to comply with new community health needs assessment rules under the Affordable Care Act resulted in a non-profit hospital losing its tax-exempt status back in 2017. Has there been other cases like this since?

Source: Thinkstock – In IRS First, Non-Profit Hospital Loses Status Under ACA Rules

By Jacqueline LaPointe

August 24, 2017 – The IRS recently revoked a rural hospital’s non-profit status for failure to meet new community health needs assessment requirements under the Affordable Care Act.

According to an IRS letter dated Feb. 14, 2017, the unnamed hospital lost its tax-exempt status after the organization did not comply with 501(r) requirements to conduct a community health needs assessment, develop an implementation strategy, and make the assessment available to the public. Medicare considered the hospital to be Disproportionate Share Hospital and critical care access facility.

The hospital told the IRS that as a small rural organization, it “had neither the financial wherewithal nor the staffing to devote to the specific requirements of Treasury Regulation 501(r)-3 for conducting a proper Community Health Needs Assessment every three years.”

Although, the hospital also stated that it “really did not need, actually have any use for, or want their tax-exempt status.” Hospital representatives claimed that maintaining non-profit status interfered with Medicare reimbursement and other payment arrangements.

The hospital only maintained tax-exempt status “in case any liabilities arose relating to the prior management company who had originally obtained this status from the Internal Revenue Service.”

READ MORE: How the Affordable Care Act Impacted Healthcare Revenue Cycle

For many stakeholders, this is the first situation they have encountered in which the IRS revoked an organization’s tax-exempt designation rather than levy a tax penalty.

“We’ve seen in the last couple of years that the IRS has been focused on ensuring compliance in this area. It is a first that I’ve heard of that the status has been revoked,” Julius Green, CPA, JD, partner in the tax services group at Baker Tilly Virchow Krause, LLP, recently told “What we have typically seen with some other hospitals that have been assessed is the $50,000 excise tax penalty resulting from non-compliance with the rules.”

Under the Affordable Care Act, policymakers added four new requirements related to community benefits, which hospitals must meet to earn non-profit tax-exempt status. The additional requirements were:

  • Conducting a community health needs assessment and an associated implementation strategy
  • Creating a written financial assistance policy for medically necessary and emergency care

READ MORE: Nonprofit Organizations Lead Way in Hospital Revenue Cycle

  • Complying with limitations on hospital charges for certain individuals who qualify for financial assistance
  • Meeting specific billing and collection requirements

In terms of the community health needs assessment requirements, non-profit hospitals must perform the evaluation every three years and establish a plan to meet the identified needs, Green explained. The assessment must cover how the hospital plans to alleviate care barriers, including financial challenges, as well as strategies for preventing disease, improving nutrition, and addressing behavioral, social, and environmental issues.

“Within the implementation report, the hospital is required to indicate which specific issues that were identified through the needs assessment process that the hospital is going to take on and, with some level of specificity, how it plans to go about tackling those activities,” Green stated.

The community health needs assessment must also address how the hospital identified specific issues within their region.

READ MORE: What Is Healthcare Revenue Cycle Management?

“There is a report that describes what in fact the process was in terms of speaking to members of the community and getting their input on what they believe the hospital should be focusing on,” Green explained. “That includes identifying who the hospital spoke with, ensuring the organization spoke with underserved and minority populations, and also how the organization talks to them, whether it was through focus groups or through various instruments that are available.”

Non-profit hospitals must create a written report detailing its implementation plans and make that report widely available to the public.

Failure to comply with community health needs assessments requirements could result in a $50,000 excise tax penalty or the loss of tax-exempt status.

The IRS has been investigating non-profit hospitals for community health needs assessment compliance since the Affordable Care Act. However, new rules may affect recent evaluations of tax-exempt statuses.

Green stated that hospitals are currently in the third round of IRS investigations and they face additional requirements as a result. Prior to the third round, non-profit hospitals had to demonstrate that the organization was performing implementation activities.

Now, non-profit hospitals must report the outcomes of those activities to be in compliance.

To ensure non-profit hospitals follow IRS regulations, Baker Tilly recently advised the organizations to review reporting compliance during the mid-cycle, which is about halfway through the three-year process for community health needs assessments.

“While tax years 2017 and 2018 are mid-cycle for most hospitals’ CHNA [community health needs assessment] reporting requirements, hospitals are required to annually disclose on their Form 990s how they are addressing the significant health needs identified through their CHNAs,” the emailed tax alert stated. “Now is an excellent time to review implementation plan strategies to ensure you are appropriately capturing outcomes to report on Schedule H and in the next CHNA.”

Non-profit hospitals should also consider mid-cycle reviews because of state and local level investigations of hospital community benefit reporting.

“A number of high profile cases have demonstrated that local property tax exemption can also be revoked if hospitals cannot satisfactorily demonstrate their community benefit,” the consultants explained.