Practical Ways to Maintain Tax-Exempt Status for Hospitals

When hospitals operate as nonprofit organizations, they may qualify for tax exemption under Section 501(c)(3) of the Internal Revenue Code. However, in order to qualify for tax-exempt status, hospitals must apply and be formally recognized by the IRS while proving that they provide benefits to the community.

Meanwhile, under the Affordable Care Act (ACA), hospitals must meet additional requirements regarding billing and reporting in order to retain tax-exempt status.

Combine all of this with the fact that there has been increased scrutiny of these hospitals by Congress, and it’s perhaps more important than ever for nonprofit hospitals to take proactive measures to protect their tax-exempt status.

Why the Increased Scrutiny?

In 2020, the American Hospital Association (AHA) conducted a study on tax-exempt hospitals in the United States — ultimately finding that most of these hospitals are contributing far more in community benefits than they are receiving in tax breaks.

Still, another 2023 analysis of nonprofit hospitals found the opposite to be true. And although the methodologies used in this study have been questioned since its publication, it has drawn the attention of Congress and has resulted in significantly higher scrutiny.

How to Protect Your Hospital’s Tax-Exempt Status

As a result of this heightened scrutiny, tax-exempt hospitals must be prepared to demonstrate their value to the community and prepare for potential audits.

So, what are some steps that can be taken now? As soon as possible, tax-exempt hospitals should take the time to review their financial assistance policies and optimize their community offerings.

Review Financial Assistance Policies (FAPs)

First and foremost, nonprofit hospitals looking to retain their tax-exempt status should review their current FAPs to assess the ways in which they are providing discounted, affordable and even free care to the local community. After all, the sole purpose of FAPs is to ensure that tax-exempt hospitals are providing assistance to those who need it under Section 501(r) of the Affordable Care Act.

More specifically, these hospitals should review their own FAP policies and procedures as they relate to:

• • Eligibility criteria for financial assistance
  • The types of assistance offered
  • Accessibility to patients
  • Application processes and documentation required
  • Practices and timelines for collections

By ensuring that your hospital’s policies are in line with the ACA’s requirements, you can better protect your tax-exempt status moving forward.

Provide More Community Education Opportunities

Another key component in maintaining tax-exempt status as a nonprofit hospital is proving that the facility is giving back to the community at every opportunity. One specific way in which some hospitals are coming up short is in failing to provide opportunities for members of the community to understand how the hospital serves them. The audience should include not just patients, but also stakeholders and even political leaders.

In these educational workshops or similar events, hospital administrators should be prepared to discuss the amount of forgone taxes as they relate to the overall value and community benefit that the hospital provides. By putting in the time and effort to educate the community on the true benefits of tax-exempt hospitals, it may be possible to protect your facility’s tax-exempt status with local support.

Expand Community Benefits

In addition to educating the community and local politicians, tax-exempt hospitals should also be focusing their efforts on expanding the scope of community benefits to better serve their patients and local populations. After all, these benefits should be reported annually on Schedule Has a stipulation of a hospital’s tax-exempt status.

More specifically, IRS Section 501(c)(3) stipulates that these hospitals are required to demonstrate the initiatives and programs they provide that contribute to the health and well-being of the community in a positive way.

Some examples of community benefits that should be noted (and potentially expanded upon) include:

• • Free or discounted immunization programs
  • Community education programs
  • Professional development opportunities for healthcare workers
  • Medical research or related funding

If your facility is lacking in the benefits it can report on Schedule H, this could be seen as a red flag come tax time.

What Else Can You Do?

While the majority of tax-exempt hospitals are operating in full compliance with Section 501(c)(3) requirements, these facilities continue to face heavy scrutiny by Congress and other politicians. For this reason, all tax-exempt hospitals should take some time to review their own FAPs and community offerings to proactively protect their tax-exempt status and avoid issues down the road. Meeting with a qualified tax professional or financial advisor can provide valuable insight into maintaining compliance and identifying areas for improvement.

If your facility is looking for further guidance in navigating these requirements, our tax professionals are here to help. Contact us today.