According to the American Hospital Association or AHA, 79 percent of the 4840 U.S. community hospitals today are nonprofit (59 percent are private nonprofit and 20 percent are operated by state and local governments). This means that these nonprofit hospitals may qualify for favored tax treatment under federal—as well as a variety of state and local income, property, and sales—tax laws.

In addition to tax exemptions, nonprofit status allows hospitals to benefit from tax-exempt bond financing and to receive charitable contributions that are tax-deductible to donors.

A study released in 2016 by Health Affairs revealed that 7 of the 10 most-profitable hospitals in the US are nonprofit hospitals, each earning more than $160 million from patient care services. However, current trends such as lower reimbursement rates, shift to outpatient care, growing merger and acquisition activity, and rising ambulatory competition has transformed the healthcare landscape.

For two straight years, expenses have surpassed revenues for nonprofit and public hospitals, creating instability and further pressuring hospital margins, according to the fiscal 2017 sector medians from Moody’s Investors Service.

Yet there seems to be hope as falling margins have reversed course in 2019 according to Fitch Ratings, with median margins improving over 10% compared to last year. Although this would appear to be light at the end of the tunnel, the challenges facing hospitals will still likely continue in the future.

For example, hospitals across the board (whether for-profit or nonprofit) may find patients increasingly seeking financial assistance as patient financial responsibility increased 12 percent from 2017 to 2018, according to TransUnion. The popularity of high-deductible health plans and greater cost-sharing arrangements with health plans is adding more fuel to this trend as patients are forced to pay more out-of-pocket costs.

Keeping Tax-Exempt Status: 501(r) Compliance

With the IRS policing compliance with Section 501(r) of the Internal Revenue Code, nonprofit hospitals need to do more than ever to keep their tax-exempt status.

In 2017, the hospital industry took notice when for the first time, the Internal Revenue Service (IRS) revoked a hospital’s tax-exempt status because the hospital failed to perform a community health needs assessment (CHNA), adopt an implementation strategy and make it broadly available to the public.

There are four specific areas that nonprofit hospitals have to address to keep their tax-exempt status:

  • Establishing a Community Health Needs Assessment (CHNA)
  • Establishing financial assistance policy (FAP) and emergency care policy
  • Limiting the amounts charged to FAP-eligible individuals
  • Making reasonable efforts to determine eligibility for assistance prior to engaging in extraordinary collection actions

There are some common issues regarding 501(r) compliance which hospitals need to look out for since they may trigger the IRS to do a full review, impose fines, or worse even revoke tax-exempt status:

  • The CHNA is not updated or comprehensive enough
  • The hospital fails to adopt an implementation strategy
  • There is inconsistent or selective application of the hospital’s FAP
  • The plain language summary or PLS is not readily available or in appropriate languages

Ensuring compliance with the policies in different situations within a complex industry like healthcare is quite a big challenge. It would be helpful for nonprofit hospitals to appoint key individuals who will be responsible for monitoring compliance with Section 501(r) in the long-term.

Revenue Cycle Concerns

Nonprofit hospitals face the same pressures as for-profit hospitals, with shrinking volumes, smaller federal reimbursements and rising costs. One of the key areas most impacted by the 501(r) requirements will be your hospital’s revenue cycle management. At the core of these requirements is the patient’s financial health.

For example, the hospital facility needs to make sure the patient has an opportunity to apply for financial assistance for several months after discharge. When a patient is FAP-eligible, the hospital also needs to make sure they aren’t overbilled and that the bill complies with the limitations on charges requirement.

In most cases, a hospital may not know on admission if the patient qualifies for financial assistance. Hence, a hospital facility may presumptively determine an individual’s FAP-eligibility based on information other than that provided by the individual or based on a prior FAP-eligibility determination.

However, hospitals still need to perform reasonable efforts to determine FAP-eligibility even when doing a presumptive determination that an individual is eligible for less than the most generous assistance available under a FAP. This can be done by:

  1. Notifying the individual regarding the basis for the presumptive FAP-eligibility determination and how to apply for more generous assistance available under the FAP
  2. Giving the individual reasonable time to apply for more generous assistance before initiating any extraordinary collection actions to the discounted amount owed for the care
  3. Processing any complete FAP application the individual submits by the end of the application period or, if later, by the end of the reasonable time period given to apply for more generous assistance

In addition, hospitals can also leverage data to identify which self-pay accounts can be pursued for collections and which accounts are presumptively eligible for charity care.