Academic journal article Journal of Accountancy

Tax-Exempt Hospitals and New Reporting Requirements: CPAs Can Help Clients Complete Community Health Needs Assessments

Academic journal article Journal of Accountancy

Tax-Exempt Hospitals and New Reporting Requirements: CPAs Can Help Clients Complete Community Health Needs Assessments

Article excerpt

EXECUTIVE SUMMARY

* The Patient Protection and Affordable Care Act of 2010 (PPACA) imposes new reporting requirements on hospitals. Beginning in tax years after March 93, 2012, hospitals must conduct a community health needs assessment (CHNA) every three years and answer questions on new Schedule H of Form 990. Other provisions took effect March 23, 2010.

* Because penalties for failing to comply can include a $50,000 excise tax for each facility operated by a tax-exempt hospital, CPAs should educate their tax-exempt hospital clients and other health care entities now about these requirements.

* Hospitals must also establish a written financial assistance policy and comply with new requirements for charges, billing and collections for patients eligible for financial assistance.

* The information required by the CHNA will draw upon resources from within the community as well as data generated by the hospitals. CPAs may be called upon to advise hospitals on obtaining, compiling and reviewing data for the assessment, to provide cost/benefit analyses as part of it and to help prepare and review the finished document.

* The financial assistance policy must address eligibility, charges, billing and collections. Billing and collections policies must also comply with new restrictions related to extraordinary collection actions and limitations imposed on the amount that can be charged.

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The Patient Protection and Affordable Care Act of 2010 (PPACA) imposes reporting requirements under new IRC [section] 501(r) for charitable hospitals regarding the fulfillment of their charitable purpose as tax-exempt organizations. Specifically, if they have not already done so, these hospitals must complete a community health needs assessment and draft a financial assistance policy Individuals eligible for assistance must not be charged more than those with insurance, and hospitals must be able to document that they follow this practice. Hospitals must also follow new rules concerning billing and collections.

These and other new requirements are in addition to new reporting requirements on Schedule H of Form 990, Return of Organization Exempt From Income Tax. The IRS acknowledges that the additional reporting burden could be substantial. CPAs serving nonprofit hospitals need to be ready to assist their clients with completing Schedule H, the community health needs assessment and other exempt-organization reporting.

BACKGROUND: PUBLIC PURPOSE AND EVOLVING REPORTING STANDARDS

As of 2006, the majority (59%) of hospitals in the U.S. were tax-exempt. As early as 1956, the IRS in Revenue Ruling 56-185 established the general guidelines for hospitals to meet the charitable-purpose requirement for tax-exempt status: (1) The hospital must be organized to serve the sick; (2) it must serve those who can pay little or nothing toward their care; (3) use of the facilities may not be restricted to a particular group of doctors; and (4) no net earnings may inure to the benefit of any individual.

In the 1960s, the requirement to care for patients who could not pay or paid discounted rates was removed from the requirement for tax-exempt status by Revenue Ruling 69-545. The IRS replaced the element of the charity care standard (serving those who pay little or nothing) with a broader, more far-reaching community-benefit standard. This standard interprets the charitable purpose to include promoting health to the general community, not solely to those who cannot pay. While articulating a community-benefit standard, the 1969 ruling left many questions unanswered, including: Which activities qualify as community benefits? How should the activities be measured? What are the minimum levels of benefit a hospital should provide to maintain its valued tax-exempt status?

Over time, inconsistent interpretations and applications of the community-benefit standard arose. …

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