Maintaining tax-exempt status is critical for most hospitals. Aside from the financial implications of having to pay taxes, many hospitals accept payments from Medicare or Medicaid, so they are subject to more stringent standards than private hospitals. Their tax-exempt status is crucial to continuing care.

To avoid losing its 501(c)(3) tax-exempt status, a hospital must adhere to guidelines the IRS put in place as well as meet reporting and excise tax requirements. Keeping 501(c)(3) status requires a concerted effort from healthcare professionals.

How IRS Regulations Impact a Hospital’s 501(c)(3) Status

Every hospital that wants to maintain tax-exempt status has to follow the same guidelines. For a hospital to receive 501(c)(3) status, it must meet these basic requirements:

  • Exempt purposes: Every tax-exempt organization must be either charitable, educational, literary, religious, or scientific, or it must provide public safety testing, the fostering of amateur sports competitions, or the prevention of cruelty against children or animals.
  • Earnings: For a hospital to get or keep its tax-exempt status, it cannot pay any of its earnings to private shareholders or other individuals. It also cannot serve the interests or net earnings of private parties.
  • Action organizations: Hospitals and other tax-exempt organizations are not able to substantially participate in activities that influence legislation and they cannot campaign for (or against) any political candidate.

While these are just the basic requirements to get 501(c)(3) status, they are the foundation for how the Affordable Care Act approaches additional IRS requirements. Without this status, hospitals are not able to receive payments for government-funded healthcare programs.

Hospitals can lose their tax-exempt status if they fail to adhere to any of these initial requirements, but those are the only rules for healthcare facilities.

4 IRS Section 501(r) Requirements That Help Maintain 501(c)(3) Status

After the Affordable Care Act was rolled out, the IRS made updates to its regulations. IRS Section 501(r) includes additional requirements that hospitals must meet to keep their 501(c)(3) status:

1. Section 501(r)(3): Community Health Needs Assessment

Once every three years, tax-exempt hospitals must complete a Community Health Needs Assessment, or CHNA. The CHNA must solicit input from people who serve the community interests and/or have expertise in public health. The CHNA should be made widely available to the public, as well.

Every CHNA must define who makes up the community, assess the health needs of that community, and offer strategies for dealing any of said needs that come up during the CHNA process. The implementation strategy is a written plan for how a hospital intends to address the health needs, or why they are not addressing the need if that is the case.

2. Section 501(r)(4): Financial Assistance and Emergency Medical Care Policies

Every hospital facility must have a financial assistance policy (FAP.) This policy will outline eligibility criteria, as well as provide information on how patients are charged and what happens if they do not pay their medical bills. The FAP must be widely available to the public and it should include information on how people can apply for financial assistance.

In addition to the FAP, hospitals must also establish a written emergency medical care policy. This policy will stipulate what qualifies as emergency medical care for all patients, and how charges will be assessed for medical care that isn’t considered medically necessary.

3. Section 501(r)(5): Limitation on Charges

In respect to patients that are FAP-eligible, hospital facilities are obligated to limit how much they charge for emergency and medically-necessary care. They cannot charge more than the Amount Generally Billed (AGB) for patients who have private health insurance.

There are two ways that hospitals can calculate AGB. One way is using the look-back method, which multiples a hospital’s gross charges for medical care by specific AGB percentages that are calculated annually. The other way, the prospective method, uses the same billing and coding process as a hospital would use for Medicare or Medicaid patients.

4. Section 501(r)(6): Billing and Collections Policy

Before a hospital can engage in extraordinary collection actions, or ECAs, it must make reasonable efforts to determine whether a patient is eligible for financial assistance or not. Reasonable efforts include giving patients a 120-day notification period and a 240-day application period to apply for financial assistance.

If a patient does not complete the application process or is determined not to be FAP-eligible, hospitals are able to participate in collection activities like deferring medically-necessary care until medical bills are paid or selling the debt to a third-party.

Tips to Help Maintain a Hospital’s 501(c)(3) Status

Without a doubt, 501(c)(3) compliance is a top priority for most hospital executives and healthcare professionals. Though, keeping policies and procedures up-to-date can be challenging and time-consuming.

Fortunately, there are ways a hospital can streamline its practices to ensure 501(c)(3) status is never at risk:

  • Find a tax professional: The only person qualified to help hospitals maintain their IRS tax-exempt status is a tax professional. Hiring a professional will ensure hospitals meet their requirements.
  • Choose medical billing software: Technology like medical billing software is one of the most efficient ways to both increase patient satisfaction and decrease 501(r) compliance errors.
  • Create a compliance checklist: A compliance checklist is the first step in putting together a comprehensive policy that addresses the 501(r) requirements.

Hospitals that invest in their tax professionals and medical billing software will see the best results. Both of these options offer a legal avenue to compliance that doesn’t require hospital professionals to start from scratch.

Put Focus on 501(c)(3) Requirements for Hospitals

If a hospital is already providing emergency medical care and other healthcare services that are covered by Medicare or Medicaid, maintaining 501(c)(3) status is critical for continued operations. Without this status, hospitals will lose payments from government-funded sources.

If a hospital wants to start providing medical care that is covered by Medicare or Medicaid, it needs to follow these guidelines to obtain tax-exempt status.

501(c)(3) requirements are the basis for a hospital’s ability to collect payments from the government. Following them must be a priority for hospital executives.