On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the Act), imposing under new IRC Section 501(r) requirements hospitals must meet in order to maintain their tax exemption, and increasing the amount of information tax-exempt hospitals will have to provide to the IRS and Congress. The Act is effective for taxable years beginning after the date of enactment.

Under the Act, a hospital must: (1) conduct a community health needs assessment once every three years; (2) adopt a financial assistance policy; (3) limit charges for those qualifying for financial assistance; and (4) refrain from extraordinary collection actions before making reasonable efforts to determine whether a patient qualifies for financial assistance.

The Act also will require tax-exempt hospitals to provide even more information and data to the IRS and Congress. Hospitals must include and disclose additional information on Form 990/Schedule H (community health needs assessment implementation and financial audits). The IRS must report annually to Congress on comparative levels of hospital charity care and complete a Congressional study on emerging trends after five years.

Organizations subject to the new additional requirements include any 501(c)(3) organization which operates a facility which is required by a state to be “licensed, registered or similarly recognized as a hospital,” as well as any other organization that “has the provision of hospital care as its principal function or purpose constituting the basis” for its tax status. The requirements must be met separately with respect to each facility in order for the organization to be treated as a 501(c)(3) with respect to such facility.

Community Health Needs Assessment

The community health needs assessment requires each hospital to conduct a community health needs assessment every three years and adopt implementation strategies to meet identified needs. The assessment must take into account input from persons who represent the broad interests of the community served by the hospital facility, including those with special knowledge or expertise in public health, and it must be made widely available to the public and be based on current information collected by a public health agency or nonprofit organization. Two or more related or unrelated hospitals may jointly conduct an assessment. The effective date for the completion of the assessment is the taxable year that begins two years after the date of enactment. Under Section 4959, a $50,000 penalty will apply to an organization that consistently fails to satisfy the requirement.

Financial Assistance Policy

Each tax-exempt hospital must adopt, implement and publicize a financial assistance policy that includes the following: (1) eligibility criteria for the assistance, and whether it includes free or discounted care; (2) the basis for calculating the amounts charged to patients; (3) the method for applying for financial assistance; (4) collection actions to be taken in the event of non-payment (including reporting to credit agencies); and (5) measures to widely publicize the policy within the hospital community. Hospitals also must adopt a written Emergency Medical Care (EMC) policy which requires organizations to provide, without discrimination, care for “emergency medical conditions” to individuals regardless of their eligibility under the organization’s financial assistance policy.

Charge Limitations

Organizations must limit charges for emergency or “other medically necessary care” provided to individuals who qualify for financial assistance to “the amounts generally billed” to individuals with insurance. “Generally billed” means that amounts billed to those who qualify for financial assistance may be based on the best (or an average of the three best) negotiated commercial rates, or Medicare rates. Further, hospitals must “prohibit the use of gross charges” (i.e., charge master rates) when billing individuals who qualify for financial assistance.

Limitation on Collection Actions

Hospitals must refrain from engaging in “extraordinary collection actions” without first making “reasonable efforts” to determine whether the individual is eligible for financial assistance. “Extraordinary collection actions” include lawsuits, liens on residences, arrests, body attachments or other similar collection actions. “Reasonable efforts” include the notification by the hospital of its financial assistance policy to a patient upon admission, and the notification regarding financial assistance in written or oral communications with the patient regarding the patient’s bill (including invoices and telephone calls) before collection action or reporting to credit rating agencies is initiated.


The Act imposes two new requirements on tax-exempt hospitals filing Form 990 and Schedule H: (1) they must now describe how they are addressing the needs identified in the community health needs assessment, as well as describe any identified needs not being addressed and explain why not; and (2) they must include a copy of their audited financial statements with the tax return.

IRS Annual Report to Congress

Finally, the Act requires the IRS to provide an annual report to Congress that includes the following information for tax-exempt hospitals, taxable hospitals, and government hospitals: (1) levels of charity care; (2) bad debt expenses; (3) unreimbursed costs for services provided with respect to means-tested government programs; and (4) unreimbursed costs for services provided with respect to non-means-tested government programs. The annual reports must also include information on costs incurred by tax-exempt hospitals for community benefit activities.

The above requirements of the Act must be met by hospitals wishing to retain their tax exemption. The Act increases hospitals’ transparency and public accountability, and hospitals should act immediately in order to meet the Act’s requirements.