>Hospital Tax-Exempt Status: Considerations Regarding Maintaining Exempt Status
Written by Scott Becker, JD, CPA, Milton Cerny, JD, & Anna Timmerman, JD, McGuireWoods | May 10, 2011
Tax-exempt hospitals (each a “hospital” and, collectively, “hospitals”), and their affiliated tax-exempt faculty or physician practices if applicable, may face concern about retaining their tax-exempt status in the face of the Patient Protection and Affordable Care Actand other changes to tax-exemption requirements. This article provides background, considerations and recommendations for a hospital to consider in maintaining its tax-exempt status, including the following core suggestions:
Take steps to develop a rebuttable presumption that all compensation relationships are reasonable;
Follow the tax-exemption requirements imposed by PPACA, now codified at Section 501(r) of the Internal Revenue Code (discussed in Section 2 below);
Provide, document and review the charitable benefits and charity care the hospital provides to the community on an annual basis;
Publicize the hospital’s willingness to accept Medicare and Medicaid patients and its services available to indigent patients;
and Ensure that any money allocated for community benefit purposes is utilized for activities that actually provide a community benefit, such as research or education of health professionals. The hospital should likely, however, do more than simply allocate certain funds to assure that it can defend that it properly serves community purposes.
Hospitals, as a starting point to assess community benefit, should be aware that case law, particularly state case law, suggests that if the value of charitable services provided each year is 1 percent or less of gross revenues, then the amount of community benefit is not adequate. [1] Under federal law, no specific percentage has been mandated. An IRS study recently found that of the hospitals it surveyed, on average, approximately 9 percent of revenue was spent on community benefit. Twenty percent of hospitals surveyed reported total community benefit spending of less than 2 percent of revenue. In addition, nearly 60 percent of the hospitals surveyed provided less than or equal to 5 percent of revenue on uncompensated care. Similarly, a 2006 Congressional Budget Office report found that non-profit hospitals devoted approximately 5 percent of total revenues to uncompensated care. Thus, it appears that dedicating 3-7 percent of revenue on a variety of community benefit and charity care activities is likely adequate.
