Murtha Means More

IRS Begins "Stealth Audits" of Hospital Compliance with PPACA Requirements for Tax-Exempt Status

November 27, 2012

Hospitals are able to maintain their tax-exempt status only if they satisfy the “community benefit standard” established by the Internal Revenue Service in 1969.  That requires maintaining a broad-based community board, an open medical staff, a full-time emergency department that treats all patients regardless of their ability to pay for emergency services, acceptance of Medicare and Medicaid covered patients as well as those covered by insurance and the use of any excess funds for patient care, facility improvement, medical education, etc.  Whether a hospital meets the standard is based on a variety of “facts and circumstances.”  It is assumed that the IRS requires hospitals to provide “charity care” – care that is free or discounted based on financial hardship – but there is no specified amount.

Naturally, tax-exempt hospitals must also avoid paying excess compensation, providing private inurement and impermissible private benefit to individuals – the needs of the community must always be primary.  For a number of years, voices in Congress have been asking hard questions about whether tax-exempt hospitals were really meeting their obligations and whether the existing community benefit standard has become outdated.  The annually filed Form 990 and its Schedule H have been expanded by the IRS to capture data relevant to whether tax exempt hospitals are operating in accordance with the community benefit standard.   

The Patient Protection and Affordable Care Act (PPACA) added a new section 501(r) and several other sections to the Internal Revenue Code to strengthen expectations for tax-exempt hospitals.  Effective for taxable year 2011, tax-exempt hospitals must now conduct a “community health needs assessment” at least every three years and must adopt a strategy to meet the health needs that are identified. Such an assessment must include input from persons “represent[ing] the broad interests of the community served by the hospital facility,” including those “with special knowledge of or expertise in public health” and it must be made available to the public.  Tax-exempt hospitals subject to these new requirements must annually report to the IRS (i) how the organization is meeting the assessed community needs and (ii) list unmet needs together with an explanation of the reasons such needs remain unmet.  They must also supply copies of audited financial statements.  PPACA imposes a $50,000 excise tax for each year that a tax-exempt hospital subject to these provisions fails to satisfy the community needs assessment requirement.

In addition, the PPACA additions require hospitals to establish and publicize a written financial assistance policy that includes the eligibility criteria for financial assistance and specifies whether such assistance includes free or discounted care; tells how to apply for such assistance; and either sets forth the hospital’s billing and collection policy or describes the actions it will take if bills are not paid. The hospital must have a written policy regarding the non-discriminatory availability of emergency medical care without regard to payer status.  Charges for medically necessary care under the hospital financial assistance policy cannot exceed  “the amounts generally billed to individuals who have insurance covering such care.”  “Generally billed” means the amount (or an average of) that is billed to commercial payors – the hospital cannot inflate the bills by using “gross charges” for individuals eligible for financial assistance.  Nor can they engage in “extraordinary collection efforts” until it has made a reasonable effort to determine whether the individual is eligible for assistance under the organization’s financial assistance policy.

The IRS will begin a stealth audit of more than 3300 hospitals this year to determine their compliance with the PPACA requirements, and will continue to do so each of the next two years until all tax-exempt hospitals have been reviewed.  Hospitals will not know they are being audited.  While violation of the PPACA requirements can jeopardize a tax-exempt’s status, it is far more likely that a hospital will face a penalty for failing to conduct the community needs assessment.  Communtiy needs assessments are also extremely helpful to hospitals wishing to justify recruitment support programs that provide forgivable loans in order to cover community needs for additional physicians or new specialties. Many hospitals don’t do the assessments on a regular basis.

If you haven’t done a community health needs assessment in three years, get one done.  Look closely at your policies on financial assistance – are they adequate and does the implementation process match the policy or are there roadblocks for applicants? Are they well-publicized on your website and in signage?  Are policies translated into major languages spoken at your facility?   How is your billing and collection managed so there are no inconsistencies across your patient population? And of course, when you identify unmet community needs, what are you doing about them?

You want to be as sure as you can that when the IRS looks at your hospital – this year or next – your ducks will be in a row.

If you have questions about bringing your hospital into compliance, please contact your usual Murtha Cullina attorney or Elizabeth Neuwirth at 203.772.7742 /

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