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Potential Challenges to Tax-Exempt Status for NFP Hospitals

“As the Trump administration moves to reform the federal tax code, the country’s tax-exempt hospitals are bracing for potential challenges to their not-for-profit (NFP) status, with billions of dollars in federal taxes at stake,” according to the Healthcare Financial Management Association (HFMA) in an article released last week.


NFP hospitals face increased scrutiny from both the Internal Revenue Service (IRS) and state regulators.


Earlier this year for the first time under the Affordable Care Act (ACA), the IRS revoked the tax-exempt status of a rural NFP hospital—which is both a critical access hospital and a disproportionate share hospital—noting the hospital “failed to comply with the requirements of Internal Revenue Code section 501(r) to conduct a community health needs assessment, adopt an implementation strategy, and make it widely available to the public.” (Read the IRS determination letter here.)


In addition, Sen. Chuck Grassley (R-Iowa) threatened more IRS action if NFP hospitals fail to meet their legal commitments “to provide treatment for those who can’t pay or can’t pay enough toward the cost of their own care.” (“Tax-Exempt Hospitals Face Growing Scrutiny,” HFMA Weekly, October 20, 2017)


One senior analyst foresees more scrutiny of tax-exempt hospitals coming from state regulators. State and local taxes provide the biggest benefits of tax-exempt status to NFP hospitals—a huge benefit given the size of their physical facilities, according to the director of Northwestern University’s Kellogg’s Health Enterprise Management Program.


State assessors and attorneys general have taken actions in California, Illinois, New Jersey, Connecticut and Montana. Some of these actions have ripple effects across a state; for example, after a state tax court ruled against Morristown (N.J.) Medical Center in 2015, 35 New Jersey hospitals were sued for property taxes. Many hospitals later settled by making payments in lieu of taxes.


NFP hospitals should explain community benefits and go beyond the Form 990 standards. They need to let the public know that they are charitable entities, not just businesses, and combat the view that they are operating the same as for-profit entities, one analyst noted. (“Tax-Exempt Hospitals Face Growing Scrutiny,” HFMA Weekly, October 20, 2017)


AHA Report


In anticipation of tax-exempt challenges, the American Hospital Association commissioned Ernst & Young to study the value of NFP hospitals’ community benefits.


The study found that in 2013, the estimated tax revenue forgone due to the tax exempt status of non-profit hospitals was $6.0 billion. In comparison, the benefit tax-exempt hospitals provided to their communities, as reported on the Form 990 Schedule H, was estimated to be $67.4 billion, 11 times greater than the value of tax revenue forgone. (Estimates of the federal revenue forgone due to the tax exemption of non-profit hospitals compared to the community benefit they provide, 2013, Ernst & Young for AHA, October 2017)


To read the study, click here.


Some are skeptical of the report’s findings, noting inaccuracy of hospital cost reporting, bills and expenses and the valuation of benefits. The chair of the American Health Lawyers Association’s Tax and Finance Practice Group pointed out that state sales and property taxes are more significant financially than the federal income tax benefit. He said that the report employs “a more expansive definition of community benefit” that also includes Medicare underpayments, professional education, and research, which he conceded may spur disagreement from state tax assessors. (“Tax-Exempt Hospitals Face Growing Scrutiny,” HFMA Weekly, October 20, 2017)




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