Expanded Exemption Standard for Hospitals

Since 1969, the tax-exemption requirements for nonprofit hospitals have been known as the community benefit standard. This standard requires nonprofit hospitals to operate for the overall benefit of the community served by the hospital.  (Please note that for purposes of this discussion, the term nonprofit is a legal term signifying the status of incorporation under state law. Nonprofit status is distinguishable from tax-exempt status which is determined under the Internal Revenue Code.)

In general, under the community benefit standard a nonprofit hospital should: (1) have a board of directors that represents the interests of the community; (2) operate an emergency room 24 hours a day, 7 days a week open to all patients regardless of their ability to pay for such health services; (3) participate in public health programs and provide care in a nondiscriminatory manner  to all other individuals able to pay the cost of medical services; and (4) reinvest any net earnings into new facilities, equipment and other programs needed to improve health services to the community. Thus, no specific requirement to serve indigent members of the community exists under the community benefit standard, other than through the emergency department.

The Patient Protection and Affordable Care Act introduces additional requirements hospitals must satisfy in order to qualify as tax-exempt organizations.  These requirements include conducting and implementing a Community Health Needs Assessment (“CHNA”), adopting a written financial assistance policy, prohibiting certain collection actions against patients qualifying under the hospital’s financial assistance policy, and adopting a limitation on charges policy.

The CHNA requirement is a fundamental change for hospitals seeking to obtain or maintain tax-exempt status.  Under this new requirement, on a facility by facility basis, nonprofit hospitals will now have to:  identify the community served; identify existing community resources (including those of other healthcare providers); identify specific community needs, including those of the community’s vulnerable members  (taking into account input from persons who represent the broad interests of the community served, including those with special knowledge of or expertise in public health);  prioritize both the needs of the community and the services the hospital will undertake to meet those needs; make the CHNA widely available to the general public; and give a status report regarding both met and unmet identified community needs annually to the IRS.  The CHNA itself must be conducted at least once every three years.

Thus, under this new requirement, each hospital facility must now identify specific medical needs of charitable, indigent, minority and other underserved individuals within the community served by that facility, and adopt and implement a plan to serve those needs.   No longer will the promotion of health be considered sufficient for obtaining tax-exemption unless vulnerable members of the community benefit from hospital activities. Tax-exemption is a privilege granted by Congress. Congress has now expanded the standard hospitals must meet in order to enjoy this privilege.

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