Under the recently enacted Patient Protection and Affordable Care Act (the “Act”), tax-exempt hospitals are subject to new requirements to maintain their 501(c)(3) tax-exempt status. These requirements are intended to aid the Internal Revenue Service in ensuring that tax-exempt hospitals are providing a charitable service to the community.

Section 9007 of the Act adds two new sections to the Internal Revenue Code (the “Code”). Code Section 501(r) provides four specific requirements for tax-exempt hospitals to receive and maintain tax-exempt status. Code Section 4959 imposes a substantial excise tax on hospitals failing to meet the standards in the new Code Section 501(r). Specifically, an excise tax penalty of $50,000 will be imposed on each tax-exempt hospital that fails to satisfy the community health-needs assessment requirement for any taxable year. It is important to note that while other provisions of the Act are effective at later dates, most provisions of Section 9007 are effective for tax years beginning after the date of enactment (March 23, 2010).

The four new specific requirements under Code Section 501(r) that tax-exempt hospitals must satisfy in order to qualify and maintain 501(c)(3) tax-exempt status are:

  • Community health needs assessment. Each hospital must have (1) conducted a community health needs assessment in the applicable tax year or in either of the two taxable years immediately preceding such taxable year; and (2) adopted an implementation strategy to meet the community health needs identified in the assessment. The community health needs assessment must take into account input from individuals who represent the broad interests of the community served by the hospital (including those with special knowledge of or expertise in public health) and is made widely available to the public.
  • Financial assistance policy requirements. Each hospital must adopt a financial assistance policy which specifies: (1) eligibility criteria for financial assistance, and whether such assistance includes free or discounted care; (2) the basis for calculating amounts charged to patients; (3) the method for applying for financial assistance; (4) if the hospital does not have a separate billing and collections policy, the actions the organization may take in the event of nonpayment, including collections action and reporting to credit agencies; and (5) the measures to widely publicize the financial assistance policy within the community served. Additionally, each hospital must adopt an emergency medical care policy which requires the hospital to provide care for emergency medical conditions to individuals regardless of their eligibility under the financial assistance policy.
  • Limitation on charges. Each hospital must limit the charges for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy to not more than the lowest amounts charged to those who have insurance covering such care. Each hospital must also prohibit the use of gross charges.  
  • Billing and collection requirement. Each hospital must make reasonable efforts to determine whether the individual is eligible for assistance under the financial assistance policy before engaging in extraordinary collection actions.

Other provisions of Section 9007 affecting tax-exempt hospitals include:

  • Mandatory review. The U.S. Department of the Treasury is to review the community benefit activities of each tax-exempt hospital at least once every three years.
  • Reporting requirements. Section 6033(b) of the Code has been amended to require tax-exempt hospitals to submit additional items with the annual Form 990, including material related to the community needs assessment and audited financial statements.  
  • Agency reports. The U.S. Department of the Treasury is to submit an annual report to Congress on (1) levels of charity care, bad debt expense, and certain unreimbursed costs of taxable, tax-exempt, and government hospitals; and (2) costs incurred by tax-exempt hospitals for community benefit activities.
  • Multi-organization hospitals. For tax-exempt hospitals that own and operate more than one hospital facility, each facility must meet the new additional requirements provided in Section 9007. Otherwise, the tax-exempt hospital will lose tax-exempt status with respect to the non-complying facility.

Many tax-exempt hospitals may already be in substantial compliance with the new requirements of Section 9007, but all tax-exempt hospitals are well advised to review current policies and procedures to ensure strict compliance in order to maintain tax-exempt status and to avoid the new excise tax penalty.