The Internal Revenue Service (IRS) has, for the first time, revoked a hospital’s nonprofit tax status for failure to meet the community needs assessment requirements under Internal Revenue Code (IRC) section 501(r). The hospital, which has not been identified, received a tax status letter from the IRS dated February 14, 2017 that was publicly released earlier this month. The IRS informed the hospital organization that it had failed to comply with the requirements of section 501(r) requirements to conduct a community health needs assessment, adopt an implementation strategy and make it widely available to the public.
The Affordable Care Act (ACA) requires the IRS to review, at least once every three years, the community benefit activities of approximately 3,000 charitable hospitals. In a June 2016 letter to Sen. Chuck Grassley (R-Iowa), the IRS stated it had completed 2,482 compliance reviews of charitable hospitals between 2014 and 2016. The IRS also commented that it had “assigned 163 hospital organizations for examination as a result of our compliance reviews.”
Many industry experts expect increased enforcement of the section 501(r) community needs assessment requirements.
The community needs assessment requirements of IRC section 501(r) apply to hospitals exempt under §501(c)(3) of the IRC. Section 501(r)(3)(B) requires that a community needs assessment take into account input from persons who represent the broad interests of the community served by the hospital facility, including those with special knowledge of or expertise in public health. The community needs assessment is also required to be made widely available to the public. These requirements were effective for tax years beginning after March 23, 2012.
The IRS takes the position that section 501(r) applies to all hospitals exempt under §501(c)(3), whether or not they may be owned by governments or political subdivisions. Accordingly, the IRS intends to apply the community needs assessment requirements to every hospital that has been recognized as an organization under §501(c)(3). In addition, these rules would apply to any exempt organization which operates a state-licensed hospital facility directly, or indirectly through a disregarded entity or a joint venture, limited liability company or other entity treated as a partnership for federal income tax purposes.
According to IRS requirements, state hospital organizations that operate as a tax exempt entity must:
(1) Establish written financial assistance and emergency medical care policies;
(2) Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy;
(3) Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions against the individual; and
(4) Conduct a community health needs assessment and adopt an implementation strategy at least once every three years. This plan should be publicly available online.
In this matter, the IRS noted that the hospital facility is known as a “disproportionate share hospital” and is designated by Medicare as a “critical care access facility” for Medicare billing purposes. The hospital facility was also tax exempt under section 501(c)(3). The hospital had a community needs assessment conducted by the National Rural Health Resource Center for their facility as part of Medicare’s process to attain a “critical care assesses facility” designation; however, they did not adopt an implementation strategy and did not make the document available to the public in paper form.
The IRS commented in its tax status letter to the hospital that it considered the hospital’s failure to meet the requirements of section 501(r) willfully, based on the hospital’s administrators comments that they had neither the will, financial resources nor the staff to follow through with the community needs assessment process. The hospital’s administrator had also expressed that they did not need to be exempt under IRC section 501(c)(3) and that this status actually affected the hospital’s ability to participate in various Medicare reimbursement programs.
This IRS enforcement action should be a reminder to hospitals to conduct due diligence over the community health needs assessment requirements in Internal Revenue Code Section 501(r), as well as, some lessons learned during an IRS audit of a hospital’s compliance with these requirements.
Written by: Clay J. Counryman