Nonprofit Hospitals Must Work with Communities to Help Secure Their Tax-Exempt Status

The cost of hospital tax exemptions across all levels, including state, local and federal, has been growing rapidly, and according to a recent Time article, it’s now approaching $80 billion annually. This cost includes charitable deductions for hospitals’ contributors; exemptions on related income, sales tax and property tax; hospitals’ use of tax-exempt bond proceeds; and the exclusion of tax on the income provided to the bondholders.

As Laura Kalick noted in her recent post, given the size of tax exemptions and current budget constraints for government entities across the board, various jurisdictions have begun initiatives to increase the level of revenue collected from nonprofit healthcare systems. Critics are ramping up their efforts and challenging lawmakers to consider options—such as those Laura discuses in her post—to raise additional funds from nonprofit healthcare entities. Tax exemptions are critical to hospitals’ long-term financial viability, though, and institutions need to understand the evolving requirements, regulations and industry dynamics that are exerting new pressure on their exempt status.
Market and financial pressures are compounded by the regulatory regimes governing nonprofit healthcare systems, such as the Affordable Care Act and IRS Section 501(r). For example, under Section 501(r), hospitals receiving tax exemptions must provide a community health needs assessment (CHNA) and implementation strategy. They must also indicate the criteria for a financial assistance policy for eligible patients, provide criteria for who is eligible and then establish an application process, as well as specific billing and collection policies. These policies must be widely publicized and communicated to individuals in the community, and must also make a reasonable effort to notify individual patients of the financial assistance policy (FAP) offered by the hospital.
Failure to comply with all the requirements of 501(r) could result in the loss of 501(c)(3) status, which can be catastrophic for tax-exempt institutions, making all income taxable and potentially impacting the deductibility of contributions.
Given these pressures, it is more critical than ever before that hospitals understand and act upon both their financial and clinical obligations to their patient communities in order to protect their tax-exempt status. In order to satisfy the community outreach requirements associated with their exemption, such as financial assistance and their CHNA, hospitals will need to use advanced data analytics and population management skills to determine community health needs. They will then need to develop a clinical program and implementation strategy  so that the patient population needs are being addressed.These strategies can include preventive and post-acute care, both of which help reduce costly hospital readmissions and lead to improved patient satisfaction.
Indeed, compliance may not be the only key to helping nonprofit hospital systems succeed; continually improving the service they provide their communities and adding value to their patients’ lives will be crucial in demonstrating how their exemption benefits the community as a whole. It is imperative that institutions understand the demographic composition of the communities they serve, as well as the capacity of patients to pay for care. Investments in the necessary infrastructure and systems to gather and analyze this information may be costly, but they are a critical long-term expenditure for hospital systems to secure their tax-exempt status and reinforce the good service they provide to their communities.
Nonprofit Hospitals Must Work with Communities to Help Secure Their Tax-Exempt Status,” originally appeared on The Nonprofit Standard, the blog of BDO’s Nonprofit & Education practice, that offers thought leadership on the accounting, tax, and management challenges faced by nonprofit organizations, along with commentary on sector trends and developments.