AHA Proposes Amendment to Require IRS to Follow to APA in Enforcing Community Benefit Rules

To obtain and maintain tax-exempt status, hospitals must comply with a community benefit standard, the basic framework for hospital exemption. On April 12, 2013, the American Hospital Association (AHA) released a report by Ernst & Young showing that for tax years 2009 and 2010, tax-exempt hospitals exceeded their community benefit obligations. On April 15, 2013, AHA addressed the  House Ways and Means Committee to provide a proposed amendment to Internal Revenue Code (IRC) section 6033 that would require the IRS to adhere to the Administrative Procedure Act (APA) and Paperwork Reduction Act when implementing new rules for tax-exempt organizations, specifically referring to the community benefit.

Results of Schedule H Community Benefit Reporting 

Not-for-profit hospitals have been required to file Schedule H with the IRS since 2009 to show the benefits they provide to their communities. Schedule H reports hospital’s benefit to the community through questions on free or discounted care, Medicaid underpayments, health research, education, bad debt expense attributable to patients eligible for financial assistance, Medicare shortfalls, and other community benefits and building activities. The AHA asked Ernest & Young to analyze and report on data collected from the Schedule H forms filed by not-for-profit hospitals nationwide for tax years 2009 and 2010 according to Richard Umbdenstock, AHA president and chief executive officer. Schedule H’s were received from approximately one-third of hospitals required to file Schedule H in 2010 and 30 percent of hospitals required to file Schedule H in 2009. The results are presented by segments, including by systems, number of hospitals included, and single hospitals, as well as by size, location and type of hospital.

Tax-exempt hospitals hospitals served their communities in diverse ways, and they consistently provided benefits to the community valued at more than 11 percent of their total expenses in 2009 and 2010, according to the Ernst & Young report. Hospitals spent an average of 11.6 percent of their total expenses on benefits to their communities in 2010 and 11.3 percent in 2009. In addition, the report showed that direct benefits to patients, including free care, financial assistance and spending to fill in Medicaid underpayments averaged 5.7 percent of expenses in 2009 and 2010. “The report demonstrates that, measured in dollars alone, hospitals of every size, type and general location are not only meeting, but are exceeding, the community benefit obligations conferred by their tax-exempt status,” Umbdenstock stated. 

A form filed with the IRS – even one as complicated as Schedule H – can never convey the full measure of the benefits a hospital provides to its community. That is why AHA believes that communities themselves are in the best position to determine whether the benefits provided by their local hospital match their needs and aspirations,” Umbdenstock said.

AHA’s Proposed Amendment Would Require IRS to Adhere to the APA

On April 15, 2013, AHA submitted comments on hospital tax exemption and the community benefit standard to the House Ways and Means Committee’s Working Group on Charitable and Exempt Organizations. The comments were in response to the rules the IRS is in the process of adopting to implement four new requirements for tax-exempt hospitals mandated by section 9007 of the Patient Protection and Affordable Care Act. Under the new requirements, hospitals must: (1) adopt a written financial assistance policy and a policy related to emergency medical care; (2) limit the amounts it charges to individuals eligible for financial assistance for emergency or other medically necessary care; (3) limit extraordinary collection actions before making reasonable efforts to determine an individuals eligibility for financial assistance; and (4) conduct a community health needs assessment every three years. The requirements became effective for tax years beginning March 23, 2010, except for CHNA requirement, which became effective for tax years beginning March 23, 2012.  The AHA contends that the IRS has developed policy without following the APA’s notice and comment process for development of regulations. Although the IRS has not yet published final regulations, hospitals are required to be in compliance today. Failure to meet the requirements can result in fines, excise taxes or loss of tax exemption.

AHA submitted a proposed amendment to IRC section 6033 that would require the IRS to adhere to the Administrative Procedures Act and Paperwork Reduction Act. “The proposal would rectify the IRS’ lapse in process for issuing informal guidance that binds tax-exempt organizations without any formal opportunity for input,” and “ensure public participation and transparency in the IRS’ process for issuing new or materially amended forms to collect information from tax-exempt organizations,” AHA news reported