How tax-exempt hospitals can prepare for increased IRS scrutiny

REAL ECONOMY BLOG | October 22, 2024

Authored by RSM US LLP

Nonprofit hospitals are facing heightened scrutiny over their tax-exempt status as regulators and lawmakers consider whether the benefits these hospitals provide to their communities justify the tax exemptions they receive.

Nonprofit hospitals received an estimated $28 billion in federal tax exemptions in 2020, according to the Kaiser Family Foundation. But there is broad disagreement over how much nonprofit hospitals provide in community benefits. An industry trade group, the American Hospital Association, put the community benefit at $130 billion in 2020. Some studies say that the community benefit is much lower leaving as much as a $25.7 billion deficit between tax breaks and contributed community benefits.

One central area of disagreement is over what constitutes a community benefit. Charity care, financial assistance and wellness programs all fit in this category, but some do not include a shortfall in Medicaid. Research has questioned whether nonprofit hospitals have pursued lucrative treatments over providing community benefits.

A closer look

The scrutiny comes amid a push in Congress to make health care more affordable. Charity care, which is a component of community benefits provided by hospitals, is a means to accomplish this. The Internal Revenue Service, for its part, announced this year that it would conduct examinations to verify the tax-exempt status of nonprofit hospitals, including the community benefit standard.

The IRS director for exempt organizations and government entities, Rob Malone, recently said that the agency had started the examinations of hospitals and had hired new agents to conduct them. These agents are analyzing details, walking through all hospital facilities and researching hospital websites to ensure compliance with 501(r).

What can health care organizations do?

To address the anticipated regulatory scrutiny and IRS examinations, health care organizations should consider the following actions:

• Conduct a mock 501(r) IRS examination.
  • Review website links to confirm the community health needs assessment (CHNA) and financial assistance policies (FAP) and related documents are easily accessible.
  • Review the CHNA and FAP for 501(r) requirements.
  • Assess the CHNA and implementation strategy to identify and document accomplishments in addressing the community needs identified through the CHNA.
  • Review Form 990 Schedule H for completeness and compare to content on external communication.
  • Verify that the CHNA and FAP have received required approvals from the board.
  • Conduct a walkthrough of all facilities to ensure that required signage is displayed and that the patient intake process for FAP applicants is properly implemented.
• Calculate differentials between community benefit and value of tax-exempt status.
  • Some organizations perform this calculation annually to evaluate their standing regarding community benefit. This analysis helps identify any modifications in their community benefit activities and initiatives.
• Focus on outcomes for the community.
  • The benefits provided back to the community are not always quantifiable. The prevention of illnesses and improvements in community health resulting from outreach efforts are often not captured expenses in the annual community benefit report. It is important to communicate these outcomes to stakeholders in addition to fortifying the value of the hospital’s community benefit.

For additional health care insights, check out our related article, Risk of losing tax-exempt status could be disruption for many nonprofit hospitals, and our industry outlook.