The Patient Protection and Affordable Care Act, signed into law by President Obama on March 23, 2010, establishes new requirements for hospital organizations that are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code of 1986. These new requirements apply to all exempt organizations that operate at least one hospital facility and are imposed in addition to, and not in lieu of, other tax-exempt organization requirements.

Under Section 501(c)(3), a hospital facility must demonstrate that it is organized and operated exclusively for a charitable purpose. The IRS applies this test to hospital facilities by determining whether such facilities provide a "community benefit."

While the IRS has steadily expanded the community benefit accountability requirements for the past few years, the new law adds more definition and penalties for the IRS to enforce. Overall, it will result in a heavier burden on exempt hospital facilities to demonstrate, on an ongoing basis, that they provide a benefit to their community. Under the new law, to remain exempt, organizations that operate a hospital facility must:

  • Conduct a "community health needs assessment" at least once every three years and adopt an implementation strategy designed to meet the community needs identified through the assessment. The assessment may be conducted together with other exempt organizations or hospital facilities (including related entities) and may be based on available information collected by public health agencies or other exempt organizations. The assessment process must incorporate input from persons who represent the broad interests of the community served by the hospital facility, including persons with specialized knowledge regarding public health issues. Each hospital facility must annually report to the IRS on its Form 990 how it is addressing the needs identified in the assessment. If all identified needs are not addressed, the hospital facility must disclose the reasons why such identified needs are not addressed. In connection with this reporting, each hospital facility will be required to provide the IRS with its audited financial statements. Each organization that operates a hospital facility must conduct its first community health needs assessment by its 2013 tax year. Failure to fulfill the new reporting requirements will result in a new excise tax of up to $50,000.
  • Implement a written, widely publicized financial assistance policy. This policy must indicate (i) the eligibility criteria for financial assistance, (ii) whether such assistance includes free or discounted care, (iii) the basis for determining the amount billed to patients who are eligible for assistance, (iv) how to apply for financial assistance, and (v) what actions the hospital facility may take in the event of nonpayment, including collections action and reporting to credit agencies. Additionally, each hospital facility must implement a policy to provide emergency medical treatment to individuals and to prevent discrimination against those eligible for financial assistance in the provision of emergency medical treatment.
  • Limit the amount they charge for emergency or other medically necessary care provided to individuals who qualify for financial assistance to the amounts generally charged to individuals who have insurance covering such care. Additionally, a hospital facility may not use "gross charges" when billing individuals who qualify for financial assistance. (The term "gross charges" is not defined. However, gross charges generally are the full cost a hospital charges for services, without taking into account any discounts negotiated with insurance providers.)
  • Refrain from taking "extraordinary collection actions" against an individual without first making reasonable efforts to determine whether the individual is eligible for financial assistance under the hospital facility’s policy

Organizations that operate multiple hospital facilities must demonstrate that each hospital facility meets each of the new requirements. The organization will not be treated as an exempt organization with respect to any hospital facility that fails to meet the requirements.

The Secretary of the Treasury is required to review the community health needs assessment and implementation strategy of each hospital facility at least once every three years to ensure that the hospital facilities meet the community benefit standard. The Secretary of the Treasury is also required, together with the Secretary of Health and Human Services, to (i) annually report to Congress regarding the levels of charity care, bad debt expenses, unreimbursed costs of means-tested government programs, and unreimbursed costs of non-means-tested government programs incurred by all hospital facilities, as well as the costs incurred by exempt hospitals in connection with community benefit activities, and (ii) within five years, report to Congress regarding the trends in these amounts.

We expect the Treasury Department and IRS to issue administrative guidance interpreting the new requirements and will monitor developments. Exempt organizations that operate one or more hospital facilities should be aware of the new requirements and should be prepared to implement the new policies.