The Health Care and Education Reconciliation Act of 2010 (the “Act”), which was the second of the two pieces of health care reform legislation that Congress passed and the President signed late last month, imposes additional requirements on hospitals that wish to maintain an exemption under § 501(c)(3) of the Internal Revenue Code of 1986 (the “Code”). Since some of these new requirements are effective for the first year starting after the date of enactment, exempt hospitals should begin planning now for how they will comply with them. This is true even for those hospitals that, as part of their regular practice, may already have been doing a number of the things now required. They should be careful to assess their current practices in light of the requirements set forth in the Act, and any guidance the Internal Revenue Service may issue, to determine whether and to what extent it will be necessary to modify those practices.


Over the last several years, there has been much discussion (prompted in large part by Senator Charles Grassley, R-Iowa) regarding what should be the basis for granting hospitals tax-exempt status under Code § 501(c)(3). As hospitals have become more sophisticated, have entered into increasing numbers of joint ventures with physician organizations and other for-profit enterprises, have increased the levels of compensation paid to their senior executives, and, in some highly publicized incidents, undertaken what were deemed as very aggressive actions to collect unpaid amounts from patients of limited means, Sen. Grassley and others have begun to question whether the “community benefit” standard announced by the Internal revenue Service in 1969 (in Rev. Rul. 69-545) is the appropriate standard to apply in determining whether to grant hospitals exempt status under § 501(c)(3).

The New Requirements

The Act adds a new subsection (r) to Section 501 of the Code specifically relating to hospitals. Under new Code § 501(r), a hospital will not be treated as exempt under § 501(c)(3) unless it:

  1. meets the community health needs assessment requirement;
  2. meets the financial assistance policy requirement;
  3. meets certain requirements regarding the amount it charges patients; and
  4. meets certain billing and collection requirements.

These requirements are imposed on any facility operated by a § 501(c)(3) organization which is required by a state to be licensed, registered or similarly recognized as a hospital, or on any other organization which the Secretary of the Treasury determines has the provision of hospital care as its principal function or purpose constituting the basis for its exemption. If a hospital organization operates more than one hospital facility, the requirements must be satisfied separately with respect to each such facility. If not satisfied with respect to a particular facility, the organization will not be treated as exempt with respect to that facility.

1. Requirement for a Community Health Needs Assessment.

Under the Act, each hospital facility is required to conduct a community health needs assessment at least once every three years (applied by reference to the current year and the prior two years) and adopt a strategy for implementing the community needs identified through such assessment. The assessment must take into account input from persons who represent the broad interest of the community served by the hospital facility, including those with special expertise with respect to public health issues, and must be made widely available to the public. Further, the hospital must disclose in its annual information return on Form 990 how it is addressing the needs identified in the assessment, and, if not all needs are so addressed, the reasons why. In addition, it will have to include its audited financial statement as part of its Form 990. If the hospital facility fails to undertake such an assessment in any applicable three-year period, it will incur a penalty of up to $50,000.

2. Requirement of a Financial Assistance Policy.

Each hospital facility is required to adopt, implement and widely publicize a written financial assistance policy. The policy must indicate the eligibility criteria for financial assistance and whether such assistance includes free or discounted care. For those eligible for discounted care, the policy must indicate the basis for calculating the amounts that will be billed to such patients. The policy must also indicate how to apply for assistance and if the hospital does not have a separate billing and collections policy, must indicate what actions a hospital may take in the event of non-response or non-payment, including collections action and reporting to credit agencies.

In addition, each hospital facility is also required to adopt and implement a policy to provide, without discrimination, emergency medical treatment to individuals regardless of their eligibility under the financial assistance policy. In light of the fact that, under the previous standards for determining whether a hospital could be exempt, the Internal Revenue Service recognized that certain types of specialized hospitals did not need to maintain an emergency room, it is not clear how this requirement will be applied to such hospitals.

3. Requirement of a Limitation on Charges.

The hospital may not, with respect to emergency or other medically necessary care provided to individuals who are eligible for assistance under the financial assistance policy, charge more than the amounts generally charged to individuals who have insurance covering such care. The new law prohibits the use of gross charges in this regard, and the legislative history further explains that the hospital facility may not use “charge master” rates when billing such individuals. According to the legislative history, the amounts billed to individuals who qualify for financial assistance may be based on either the best, or an average of the three best, negotiated commercial rates, or Medicare rates.

4. The Billing and Collection Requirement.

The hospital facility, including affiliates of the hospital, may not engage in extraordinary collection actions before the hospital has made reasonable efforts to determine whether the individual is eligible for assistance under its financial assistance policy. The legislative history explains that extraordinary collection actions include lawsuits, liens on residence, arrests, body attachments and other similar collection processes. The hospital will be required to provide notification of its financial assistance policy upon admission and in written and oral communications with the patient regarding the patient’s bills, including invoices and telephone calls, before collection action or reporting to credit agencies is initiated.

5. Effective Dates.

The requirement regarding the community needs assessment is effective for the year that begins after the second anniversary date of the enactment of the Act, with the result that the hospital will satisfy that requirement if it conducts such an assessment during that year or the prior two years. The other requirements are effective for the tax year beginning after the date of enactment. Thus, a hospital will have to develop a financial assistance policy and satisfy the requirements regarding charges and billing and collection practices beginning next year.


These new provisions clearly reflect Congressional concerns regarding the basis on which hospitals should be granted an exemption under § 501(c)(3). Under the Act, the Secretary of the Treasury is required to report annually to Congress on 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 tax-exempt, taxable and governmental hospitals, as well as the costs incurred by private tax-exempt hospitals for community benefit activities. Further, the Secretary is required to conduct a study of any trends regarding those items and submit a report on such study no later than five years from the date of enactment. Consequently, it is likely that new Code Section 501(r) is a step, but not the final step, in Congress’ consideration of what should be the basis for the grant of tax-exempt status under § 501(c)(3) to hospitals.