IRS allows unusual not-for-profit affiliation

The Internal Revenue Service has approved an unusual transaction that allows a small not-for-profit hospital with a declining patient census to affiliate with a larger hospital, sell part of itself to staff physicians, maintain its tax-exempt status and stay afloat. While the IRS declined to name the hospitals involved, MODERN HEALTHCARE has discovered their identities and tracks their unconventional path toward affiliation.     

Distinguishing community benefits: tax exemption versus organizational legitimacy

US policymakers continue to call into question the tax-exempt status of hospitals. As nonprofit tax-exempt entities, hospitals are required by the Internal Revenue Service (IRS) to report the type and cost of community benefits they provide. Institutional theory indicates that organizations derive organizational legitimacy from conforming to the expectations of their environment. Expectations from the state and federal regulators (the IRS, state and local taxing authorities in particular) and the community require hospitals to provide community benefits to achieve legitimacy. This article examines community benefit through an institutional theory framework, which includes regulative (laws and regulation), normative (certification and accreditation), and cultural-cognitive (relationship with the community including the provision of community benefits) pillars. Considering a review of the results of a 2006 IRS study of tax-exempt hospitals, the authors propose a model of hospital community benefit behaviors that distinguishes community benefits between cost-quantifiable activities appropriate for justifying tax exemption and unquantifiable activities that only contribute to hospitals' legitimacy.     

Capacity considerations and community benefit expenditures of nonprofit hospitals

The United States Internal Revenue Service (IRS) and some states require nonprofit hospitals to demonstrate that they provide a substantial community benefit in order to get or maintain their tax-exempt status. This places every nonprofit hospital at risk. This article is about certain common factors that impact the management of all nonprofit hospitals and their ability to comply with such laws.     

Under the gun

This year Congress will consider proposals to significantly restrict the access of not-for-profit healthcare organizations to affordable capital and other federal benefits of their tax-exempt status. The federal benefits of tax-exempt status are (1) exemption from federal tax on net income, (2) eligibility for tax-deductible charitable contributions, and (3) access to tax-exempt financing. Of these, the last is probably most important because hospitals' capital needs are substantial and almost always met through the issuance of tax-exempt bonds. In recent years, budget pressures have prompted many state and local governments to challenge the tax-exempt status of not-for-profit organizations. At the federal level, tax-exempt bonds have been under sustained attack for the past 10 years, and tax-exempt organizations have been under scrutiny for the past 4 years. In 1989 several bills were introduced in Congress that would limit some of the benefits of tax exemption. This year the signs are particularly ominous: Budget pressures are severe, no one seems willing to call for "new taxes," and tax-exempt organizations are considered fair game. To preserve their tax-exempt status, not-for-profits must act now to convince congressional decision makers that they deserve their tax exemptions and need them to continue to provide community service.     

Community benefits and health reform: creating new links for public health and not-for-profit hospitals

The Patient Protection and Affordable Care Act (PPACA) put new requirements on not-for-profit (NFP) hospitals to document provision of community benefits, to justify their tax-exempt status. Specific PPACA provisions include requirements that NFP hospitals conduct or participate in a community health needs assessment and work to address the needs identified. Consideration is given to these particular PPACA mandates and to Internal Revenue Service (IRS) actions to implement them. The background of concerns that have been expressed about whether the NFP hospitals' tax exemption should be continued and a brief history of that exemption is noted. Not-for-profit hospitals have resources that the federal government is requiring them to bring to public health improvement, during a time when the public health agencies at the federal and state level continue to experience reductions in funding. Linking of the NFP hospitals' compliance activities with the public health agency community health planning activities will help fulfill its PPACA requirements and the regulatory reporting requirements for the IRS.     

IRS proposes ruling on physician recruitment. How a hospital recruits physicians would affect its tax-exempt status

On March 15, 1995, the Internal Revenue Service (IRS) announced a proposed revenue ruling stating how certain physician recruitment practices could be implemented without threatening hospitals' tax-exemption. As proposed, the IRS ruling would provide flexibility for recruitment incentives rather than a list of strict physician recruitment guidelines. The proposed ruling is not legally binding until issued in final form, and there is no deadline for finalizing it. In the meantime, however, the standards outlined in the proposed ruling reflect arrangements the IRS likely would approve, which should be an incentive for tax-exempt hospitals to follow reasonable physician recruitment practices. Assuming a hospital complies with other legal requirements such as fraud and abuse laws, it must answer two key tax-exempt status questions for its recruitment or retention package: Will the incentives result in a disguised distribution of profits from the operation of the organization? Is the total incentive package reasonable under all the facts and circumstances, both in absolute total value for physician(s) recruited and in relation to services required by the hospital and the community? The proposed ruling also provides guidance on basic documentation requirements and a process for approving recruitment arrangements.     

The IRS looks closely at homes for the aging. Organizations must be prepared to face increased scrutiny on tax-exempt status and financing

Tax-exempt status has long been perceived as appropriate for the traditional retirement home (i.e., congregate housing and life-care facility), which serves the elderly and typically experiences low profit margins. An organization that is both organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for testing for public safety may qualify for tax-exempt status under Internal Revenue Code section 501(c)(3). The Internal Revenue Service uses the generic term "homes for the aging" to include all forms of retirement housing facilities (except nursing homes that solely provide the highest level of nursing care). A home for the aging that qualifies under section 501(c)(3) (through satisfaction of the organizational and operational tests) will qualify for charitable status for federal tax purposes if it operates to satisfy the following basic needs of aged persons: suitable housing, healthcare, and financial security. In general, not-for-profit organizations recognized as exempt under code section 501(c)(3) may be eligible for tax-exempt financing to develop a home for the aging through the issuance of tax-exempt bonds. Effective tax-exemption planning is a necessary part of the business planning process by sophisticated not-for-profit organizations that own and operate (or desire to own and operate) charitable homes for the aging and similar housing facilities serving the elderly. The benefits of exempt status remain attractive for many such organizations. The challenge of obtaining and maintaining that status is becoming far more burdensome.     

Contribution retribution. Health system, CEO must pay excise taxes after pressuring workers to help fund state association's PAC through payroll deductions

The IRS wants not-for-profit health systems to remember to keep their distance from politics--it's taxing the payroll contributions at one system that went to a state hospital association's PAC. Kenneth Robbins, left, says hospitals should always be conscious of activities that could jeopardize their tax-exempt status. "It's an issue we've been concerned with as long as I can remember," he says.     

Not-for-profits: business basics for survival

Many not-for-profit hospitals are struggling to keep their doors open. Although executives often contend that they are not playing on a level field, the fundamental cause is the hospital's failure to earn an excess of revenue over expenses. The tax exemption enjoyed by a not for profit can be a tremendous advantage. Some may argue that uncompensated care negates that benefit, but uncompensated care is a problem for the industry, not just not-for-profit institutions. The real issue at stake is the not-for-profit mentality--a belief that a tax-exempt business is not supposed to make money. On the contrary, our goal is to provide much-needed services to the community, and to do that well, we must make money. When solid business practices are followed, a hospital will be able to provide the basic healthcare services needed with positive financial results.     

Ambulatory surgery center joint ventures involving tax-exempt entities.

This article provides an overview of the tax-exempt related issues for ambulatory surgery center joint ventures involving tax-exempt entities. The article analyzes the key points of analysis of the guidance released by the IRS, in particular General Counsel Memorandum 39862, Revenue Ruling 98-15, and Redlands Surgical Services v. Commissioner of the Internal Revenue Service. These key points include whether the venture results in private inurement to insiders and whether the venture furthers the charitable purposes of the tax-exempt entity. The article also provides practical guidance to analyze the documents and structure of the joint venture to ensure compliance with the IRS guidance. These practical considerations include, among other things, whether the charitable purposes of the tax-exempt entity are clearly expressed in the documents and whether the tax-exempt entity has sufficient control over the joint venture to ensure the charitable purposes are being adhered to.     

Proposed changes in arbitrage rules aim to simplify cumbersome process

The Internal Revenue Service has proposed an overhaul of its rules governing profits earned by not-for-profit institutions when they temporarily invest proceeds from the sale of tax-exempt bonds. The current rules, implemented in 1986 to counteract such abuses, are long and complicated, IRS officials admit. The new rules could be in place by June 30.     

Is there a future for the not-for-profit hospital?

The issue of the future of the not-for-profit hospital is not one of not for profit versus investor owned, but of economic viability. A shift toward business practices in the not-for-profit hospital is occurring and may help explain why few studies have been able to show distinctive differences between not-for-profit and investor-owned hospitals. Although the system is set up to give not for profits special privileges for promoting a societal common good, a gradual erosion of those privileges has blurred the distinction between the two types of entities. With a process I call "competitive advantage incrementalism," investor-owned hospitals chip away at the privileges afforded their tax-exempt competitors. At the same time, the not-for-profit hospitals increasingly adopt the successful practices of the business world, and are guided by board members and executives who hold to a big-business view of healthcare. What is the future for the not-for-profit hospital? They must continue to exist, although they can expect increasing operating burdens to continue as not for profits. They and investor-owned facilities become progressively more similar in operations and structure. The not-for-profit institutions must prove that they produce a community benefit to justify not-for-profit status. That is a heavier burden than merely producing a high rate of return for investors.     

Concealing compensation from the IRS

Tougher reporting requirements from the Internal Revenue Service are prompting some not-for-profit hospitals to seek ways to hide compensation arrangements from the public and the media. Critics believe those tactics could get hospitals in hot water with the law, especially now that the IRS has launched a new, aggressive auditing offensive.     

Answers,at last. After three years of waiting,the IRS' merger financing guidelines provide a solution for the not-for-profit healthcare industry

The long wait is finally over for the not-for-profit hospital industry. After three years of intense scrutiny, the Internal Revenue Service has proposed rules for consolidating tax-exempt debt. For not-for-profits, this move means that merger refinancing can continue for many deals left on hold. IRS lawyer Bruce Serchuk (left) helped draft the new rules, which also provide a clear path to closure for mergers completed with acquisition financing.     

IRS: where's the charity? Rural hospital manager may lose federal tax exemption

A rural hospital management company with ties to VHA may lose its federal tax exemption because, according to the Internal Revenue Service, there's nothing charitable about operating a hospital under contract. The case against the company is significant because it calls into question the tax exemptions of any not-for-profit corporation that manages or leases hospitals.     

The plight of the not-for-profit

Recent controversies in the hospital sector have questioned whether the levels of charity care, community benefit, and executive compensation provided by not-for-profit hospitals are consistent with mandates of their tax-exempt status and mission statements. This article demonstrates that these recent controversies stem from a combination of historical influences, regulatory inequities, and competitive disadvantages, which are suffocating many not-for-profit hospitals across the nation. Once the current environment is described, the article discusses each threat and offers actionable recommendations to quell current attacks faced by the industry. First, to address the current probe by the Internal Revenue Service, hospitals must begin to link their executive compensation with their organizational mission. Second, to address recent lawsuits, the article presents a standardized definition of community benefit and recommends an alternative model to classify charity care. Finally, to address recent congressional hearings, the article offers a plan for hospitals to gauge their expected benefit to the community they serve.     

Community benefit prevails. Are radical changes in hospital tax-exemption laws necessary?

Voluntary, not-for-profit hospitals are in danger of losing their tax-exempt status as policymakers lean toward stricter charity care requirements that would penalize hospitals which failed to provide at least a predetermined level of charity care. Proposed legislation abandons community benefit and advocates a relief-of-poverty standard. The relief-of-poverty standard advances the notion that hospitals are not providing enough charity care to merit their tax exemption. However, the voluntary hospitals' share of uncompensated care costs (as a percentage of total costs) increased from 70 percent in 1981 to 75 percent in 1989. The relief-of-poverty standard is inferior to the community benefit standard because it does not take into account that the character of community benefit varies among hospitals and communities. However, community benefit must be better defined. Some current activities--individual hospital reassessments, collective hospital reassessments, voluntary development of criteria, and statutory standards--will be instructive in efforts to arrive at a definition of community benefit that is appropriate for the specific community. Leaders in voluntary, not-for-profit hospitals need to develop positive and equitable criteria for hospital tax exemption. These hospitals' accountability is in question, but it is their integrity that is at stake.     

The Impact of the Individual Mandate and Internal Revenue Service Form 990 Schedule H on Community Benefits From Nonprofit Hospitals

In response to a growing concern that nonprofit hospitals are not providing sufficient benefit to their communities in return for their tax-exempt status, the Internal Revenue Service (IRS) now requires nonprofit hospitals to formally document the extent of their community contributions.While the IRS is increasing financial scrutiny of nonprofit hospitals, many provisions in the recently passed historical health reform legislation will also have a significant impact on the provision of uncompensated care and other community benefits.We argue that health reform does not render the nonprofit organizational form obsolete. Rather, health reform should strengthen the nonprofit hospitals’ ability to fulfill their missions by better targeting subsidies for uncompensated care and potentially increasing subsidized health services provision, many of which affect the public''s health.INTERNAL REVENUE CODE § 501(c)(3) exempts nonprofit hospitals from federal income taxes. Since 1969 the community benefit standard1 has been the criteria by which the deservedness of tax exemption has been determined.2 There is, however, a long-standing debate in both the health policy and economics literatures on whether there is a substantial difference between the actions of for-profit and nonprofit hospitals, with empirical evidence supporting both schools of thought.3 The inconclusive nature of this research helped spur political and legal action regarding community benefit provision by nonprofit hospitals.4 In response to this growing concern that nonprofit hospitals are providing insufficient benefits to their communities in return for their tax-exempt status, the Internal Revenue Service (IRS) has revised Form 990 requiring nonprofit hospitals to submit additional detailed financial documentation regarding their community benefit expenditures on Schedule H beginning with 2009 filings.Simultaneously with tax reform, many provisions in the recently passed health reform legislation5 will also significantly impact hospitals and their provision of community benefit activities. Sufficient provision of these services has important implications for the public''s health. Former US Surgeon General David Satcher has argued that health reform and, specifically, the reduction in the number of uninsured, is “critical to our achieving the overarching goal of eliminating disparities in health.”6^(p15) Regina Benjamin, the current US Surgeon General, states that “eliminating health disparities should certainly be at the top of our national health agenda.”7 Approximately 31% of direct medical costs for minority populations from 2003 to 2006 were excess costs resulting from health inequities.8We explored the potential ramifications of the Patient Protection and Affordable Care Act (PPACA) and the Health Care Education Affordability Reconciliation Act of 2010 (HCEARA) on the level, measurement, and potential change in the composition of hospital community benefits, with regard to the new IRS regulations. We considered whether these legislative changes may further blur the distinction between for-profit and nonprofit hospital behavior and performance and explored the potential public health consequences of eliminating the tax-exempt status of nonprofit hospitals. We used data from Maryland, a state that implemented legislation similar to the recent IRS regulations in 2001, to guide our discussion and evaluate potential effects under these new legislative acts.     

Does mission still matter? A hospital may forfeit its future by forgetting its community

The public finds it increasingly difficult to distinguish voluntary, not-for-profit health care organizations from their for-profit competitors. One result of this trend is challenges to not-for-profits' tax-exempt status. In 1987, this article's author, with Bruce Vladeck, published a book called Mission Matters: A Report on the Future of Voluntary Health Care Institutions. That book warned not-for-profit hospitals that, if they were to survive, they must maintain a close relationship with their communities. They urged such hospitals to nurture five traditional characteristics: Values that reflect community commitment. Accountability to patients and communities. Long-term commitment in the face of short-term trends and opportunities. A physician-hospital relationship that fosters a symbiosis of service. Institutional voluntarism that allows institutions to be both provider and beneficiary of community service. In this article, the author seeks to remind leaders of voluntary, not-for-profit institutions, including Catholic institutions, that they neglect community service at their own peril.     

The economics of for-profit and not-for-profit hospitals

This paper examines the economics of for-profit and not-for-profit hospitals through the prism of capital acquisitions. The exercise suggests that of two hospitals that are equally efficient in producing health care, the for-profit hospital would have to charge higher prices than the not-for-profit hospital would, to break even on capital acquisitions. The reasons for this divergence are (1) the typically higher cost of equity capital that for-profit hospitals face; and (2) the income taxes they must pay. The paper recommends holding tax-exempt hospitals more formally accountable for the social obligation they shoulder, in return for their tax preference.