Running Head: NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
1
What Does the Patient Protection and Affordable Care Act Require of Nonprofit
Hospitals to Assure They Are Meeting IRS Requirements and What Are the Penalties
for Noncompliance With the New Requirements?
By
Stephanie Forton
BS Athletic Training
Michigan State University, 2013
Advisor:
Dr. Marilyn K. Skrocki
Associate Professor
Health Science Department; Master of Science Health Administration and
Leadership
Winter Semester, 2015
Saginaw Valley State University
University Center, MI
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NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
Table of Contents
Page
Chapter 1 ............................................................................................................................................. …8
Introduction ..................................................................................................................................... 8
Background ...................................................................................................................................... 9
Statement of the Problem ......................................................................................................... 10
Purpose of the Study .................................................................................................................. 11
Theoretical Framework / Rationale ..................................................................................... 11
Research Questions..................................................................................................................... 11
Significance of the Study ........................................................................................................... 12
Definition of Terms ..................................................................................................................... 12
Assumptions / Limitations ………………………………………………………………..…………15
Chapter 2 ............................................................................................................................................. .16
Types of Hospitals ....................................................................................................................... 16
Nonprofit ................................................................................................................................... 16
For-profit ................................................................................................................................... 17
Government Hospital ............................................................................................................ 17
District ........................................................................................................................................ 18
Nonprofit Hospitals .................................................................................................................... 18
Number of Nonprofit Hospitals in the United States ................................................ 18
501(c)(3) Designation……………………………………………………………………………...19
How to Apply………………………………………………………………………………………19
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
Recordkeeping………………………………………………………………………………....20
Filing Requirements…………………………………………………………………………20
Disclosure Requirements………………………………………………………………….21
Comparison of Nonprofit and For-Profit Hospitals................................................... 22
Nonprofit Hospitals Challenged ....................................................................................... 23
Patient Protection and Affordable Care Act ...................................................................... 24
Charitable Guidelines ................................................................................................................. 26
State vs. Federal Tax Exemption ............................................................................................ 27
Chapter 3 ............................................................................................................................................. .30
Description of Methodology .................................................................................................... 30
New Requirements for Nonprofit Hospitals ................................................................ 30
Design of Study ............................................................................................................................. 30
Data Analysis ................................................................................................................................. 31
New Requirements ................................................................................................................ 31
Penalties for Noncompliance................................................................................................31
Types of Hospitals .................................................................................................................. 31
Chapter 4 .............................................................................................................................................. 33
The Four Requirements to Assure Nonprofit Hospitals Are Meeting PPACA
Requirements ................................................................................................................................ 33
Community Health Needs Assessment .......................................................................... 33
Financial Assistance Policy ................................................................................................. 35
Limitations on Charges ........................................................................................................ 36
Billing and Collections Practices....................................................................................... 38
Potential Penalties for Noncompliance ............................................................................... 39
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NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
Excise Tax .................................................................................................................................. 39
Removal of Tax Exempt Status.............................................................................................39
Facility Level Taxation…..........................................................................................................40
Chapter 5...................................................................................................................................................41
Conclusions........................................................................................................................................41
Further Research.............................................................................................................................42
4
5
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
Tables
Page
Nonprofit Hospital Trends by State ........................................................................................... 22
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NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
List of Figures
Page
Accessing the Community Health Needs Assessment on MidMichigan
Health website………………………………………………………………………….34
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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Abstract
The affects of the new requirements for nonprofit hospitals that were put in place with the
passing of the Patient Protection and Affordable Care Act were examined through a
literature search, along with the penalties in place for nonprofit hospitals who do not
comply. A community health needs assessment must be done by nonprofit hospitals at
least once every three years. A financial assistance policy must be put in place and well
publicized to the individuals who require its services. Nonprofit hospitals must limit the
charges that are assessed to uninsured individuals who come into the hospital for medical
care. Before a nonprofit hospital makes extraordinary efforts to collect bills from
patients, they must assure that the individual does not qualify for financial assistance.
These requirements aim to help nonprofit hospitals return to their original mission from
when they first became nonprofit. The penalties in place include a $50,000 excise tax
and possible removal of nonprofit / tax-exempt status. There is still work that must be
done in order to make the requirements and penalties more effective.
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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Chapter 1
Introduction
In the United States 57.9% of hospitals are classified as nonprofit (Kaiser Family
Foundation, 2015). A nonprofit (NFP) hospital is owned locally and focuses its attention
on local concerns of the surrounding community. Nonprofit hospitals are tax-exempt
entities and must, “demonstrate their benefit to the community through charity care,
outreach, education, and research programs” (Anne Arundel Medical Center, 2015,
About Us: Fiscal Facts section) in order to keep that status.
The Patient Protection and Affordable Care Act (PPACA) was passed in March of
2010. President Barrack Obama signed it into law on March 23, 2010, with many major
parts going into effect on January 1, 2014. Talks of the PPACA began in July of 2009
and it was first voted on in November of 2009 (History and Timeline of the Affordable
Care Act, 2014). One provision of the health care reform law was the addition of four
new requirements for nonprofit hospitals to assure they are deserving of the benefits they
receive. According to Cynthia Mog in The National Law Review (2015), “The goal
behind these requirements is to both encourage each charitable hospital to work to
improve the health of the community it serves, and to protect patients from abusive
collection practices by such charitable hospitals” (ACA Requirements section, para. 1).
Tax-exempt hospitals
will now be held accountable for their special tax status and the charitable patient care
and community benefits they are required to provide. Provisions in the PPACA
outline specific measures for accountability and will enhance transparency to ensure
that charitable hospitals are indeed acting charitably. (Marietta, 2010, p.1)
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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Nonprofit hospitals will now have to clearly demonstrate they are deserving of the tax
exemption and other benefits they receive from the government.
Background
Even though there are approximately 2,900 nonprofit hospitals in the United States,
some people believe not all of them are deserving of their tax-exempt status. As Paula
Song, a professor of health services organization at Ohio State University stated in a New
York Times article, the value of both tax exemption and community benefit should be
about equal, but this is not true for most hospitals (Rosenthal, 2013). It is difficult to tell
sometimes whether a nonprofit hospital deserves the benefits it receives because
guidelines are not all clear on what benefits must be provided to the surrounding
community in order to maintain their status as nonprofit / tax-exempt. As an article by
Cory Davis of the National Health Law (2011) program provides
Without clear guidelines in law or regulation, hospitals have usually been left to
determine for themselves what activities qualify as community benefits. Not
surprisingly, these activities vary across hospitals and hospital organizations, and
even where similar benefits are recognized they are often measured inconsistently.
(Background section, para. 6)
Until there are consistent guidelines as to what community benefits must be provided by
nonprofit hospitals, it will be hard to determine whether benefits received outweigh
benefits provided.
In return for the benefits nonprofit hospitals provide to the community they serve,
nonprofit hospitals receive benefits from the government. Organizations differ as to
benefits they receive through tax exemptions. The main benefits nonprofit hospitals
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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receive are the benefits that accompany a nonprofit hospital’s tax-exempt status. Three
kinds of tax breaks for tax-exempt organizations are: “exemption from capital taxes on
income and property, tax exemption in bond financing (which has the added benefit of
freeing up NFP hospitals’ endowments to earn tax-free income), and deductibility of
charitable contributions” (Nesvisky, 2015, para. 6).
Organizations are not the only groups that can gain from IRS benefits, as
individuals can also gain from IRS benefits. The patient who visits the nonprofit medical
center could benefit from reduced fees or increased services. Additionally nonprofit
stakeholders as, “administrators, doctors, and other employees may enjoy the benefit via
increased salaries or improved working conditions” (Nesvisky, 2015).
Statement of the Problem
In recent years, evidence has shown that nonprofit hospitals have not always been
living up to the community benefit requirements accompanying their nonprofit and taxexempt status. Many people believe the community benefits provided by a nonprofit
hospital should be equivalent to the amount of money saved due to the hospital’s taxexempt status. One aspect of community benefit that is reviewed is uncompensated care.
According to a report by the Congressional Budget Office (2006):
The average ‘uncompensated-care share’ – the cost of uncompensated care as a share
of hospitals’ operating expenses – was much higher at government hospitals (13.0
percent) than at either nonprofit hospitals (4.7 percent) or for-profit hospitals (4.2
percent). (p. 2)
The Congressional Budget Office report shows that in some cases nonprofit hospitals do
not provide much greater amounts of community benefit than for-profit hospitals, even
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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though nonprofit hospitals gain much more in return from the government. Complicating
the issue has been regulations and requirements for nonprofit hospitals that have not
always been strongly enforced.
Purpose of the Study
The purpose of this study is to review new requirements for nonprofit hospitals that
were put in place with the passing of the Patient Protection and Affordable Care Act.
The objective of this study will be to look at each new requirement individually and
evaluate possible penalties, including an excise tax and possible removal of tax-exempt
status, which hospitals may face for noncompliance with the new requirements.
Theoretical Framework / Rationale
Nonprofit hospitals are not living up to expectations of the tax-exempt status they
have been given in previous years. One reason is there is a lack of enforcement or reason
for nonprofit hospitals to change their ways if they have strayed from the original
nonprofit missions. Rationale for this study is that by looking at new requirements
hospitals can be provided information allowing them to better meet their mission of
benefiting the surrounding community.
Research Questions
The following paper will be looking to answer two questions related to the topic of the
Patient Protection and Affordable Care Act (PPACA) and nonprofit hospitals.

What does the PPACA require of nonprofit hospitals to assure they are meeting
IRS requirements?

What are the penalties for nonprofit hospitals who don’t meet new requirements
set forth in the PPACA?
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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Significance of the Study
This study holds both personal and professional significance. Personally I have a
great interest in helping individuals who are less fortunate to be treated fairly. Nonprofit
hospitals are supposed to be a place where individuals who may not be able to afford
insurance, or may not have funds to receive care at for-profit facilities, can go for medical
treatment. If nonprofit hospitals are held accountable for meeting requirements set before
them then greater numbers of people will be able to be helped in the medical field.
Professionally this study about new nonprofit hospital requirements added by the
PPACA can help nonprofits to gain a better understanding of what is required of them,
which includes how they can get back to accomplishing the mission they put forth when
first becoming nonprofit organizations. Information from this study can also help other
individuals in healthcare fields to further their work. One group of individuals is health
care advocates for medically indigent individuals. It can help advocates to assure clients
they are serving have a place to go to receive quality and affordable care. Nonprofit
hospitals leaders can use information from this study to ensure their organizations are
following all necessary requirements included with nonprofit status.
Definition of Terms
For the purpose of this study, the following terms are defined.
Nonprofit hospital. A nonprofit is “under local control, focuses on local concerns,
has no private gain, provides access to care, and gives its attention to community needs”
(Anne Arundel Medical Center, 2015, What Does Nonprofit Mean For You? section).
A nonprofit hospital may bring in a profit, but any profits must be reinvested in the
nonprofit hospital rather than given to owners (Congressional Budget Office, 2006).
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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According to the Medicare Newsgroup (2015), “A nonprofit hospital means the facility
does not pay either state or local property taxes or federal income taxes because it is
considered a charity, and proves certain community benefits in accord with state and
federal guidelines” (para. 1).
Tax-exempt. This phrase refers “to being free from, or not subject to, taxation by
regulators or government entities. A tax-exempt entity can be excused from a single or
multiple taxation laws” (Investopedia, 2015, Definition section).
Community benefit. Community benefits are “programs and services designed to
improve health in communities and increase access to health care. They are integral to
the mission of Catholic and other nonprofit health care organizations, and are the basis of
tax exemption” (Catholic Health Association of the United States, 2015, “Overview”,
para. 1).
Charitable guidelines. There are multiple definitions of charitable guidelines that
different nonprofit hospitals follow. One of the definitions is, “not billing poor people for
care they receive”, while another is, “identifying and covering the difference between the
cost of services a poor person receives and the amount received through third parties
(such as private insurance, Medicare, Medicaid)” (Wyland, 2012, para. 2 and 3). A third
definition, which is also referred to as uncompensated care, is, “the difference between a
hospital’s posted rates for services and the rates paid by third party insurers, whether
private or governmental” (Wyland, 2012, para. 4).
For-profit hospital. A hospital being for-profit means, “the facility is either owned
by private investors or is owned publicly by shareholders and is part of a company that
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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issues shares of stock to raise revenue to expand the hospital activities.” (The Medicare
Newsgroup, 2015, para. 2).
Internal Revenue Service (IRS). The IRS was established in 1862 and works under
the umbrella of the United States Department of the Treasury. It is primarily responsible
for, “collection of individual income taxes and employment taxes, but also handles
corporate, gift, excise and estate taxes” (Investopedia, 2015, Definition seciton).
Patient Protection and Affordable Care Act (PPACA). This act is landmark health
reform signed by President Barack Obama in March 2010. According to the health
insurance glossary on healthinsurance.org (2015):
The legislation includes a long list of health-related provisions that began taking effect
in 2010 and will ‘continue to be rolled out over the next four years’. Key provisions
are intended to extend coverage to millions of uninsured Americans, to implement
measures that will lower health care costs and improve system efficiency, and to
eliminate industry practices that include rescission and denial of coverage due to preexisting conditions.” (“Definition”, para. 1)
IRS final rule. The final rule went into effect on December 29, 2014. The final rule
was put in place to provide, “guidance regarding the requirements for charitable hospital
organizations added by the Patient Protection and Affordable Care Act” (HFMA
Summary of IRS 501(r), n.d, p. 2).
Internal Revenue Code (IRC). The Internal Revenue Code is, “the body of law that
codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and
employment taxes” (The Free Dictionary-Legal, n. d., “Definition”, para. 1). The first
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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Internal Revenue Code was established in 1939, with revisions in 1954 and most recently
1986 (Legal Information Institute, n.d.).
Section 501(r). Section 501r is an amendment to the IRC that was added by the
PPACA. It adds four new requirements that 501(c)(3) organizations must meet on a
facility-by-facility basis for each facility they own (IRS, 2015).
Section 501(c)(3). This section is, “the portion of the US Internal Revenue Code that
allows for federal tax exemption of nonprofit organizations, specifically those that are
considered public charities, private foundations or private operating foundations”
(Foundation Group, 2015, The Basics section).
Emergency Medical Treatment and Labor Act (EMTALA). EMTALA is, “A
federal law that requires anyone coming to an emergency department to be stabilized and
treated, regardless of their insurance status or ability to pay, but since its enactment in
1986 has remained an unfunded mandate” (American College of Emergency Physicians,
2014, “Main Point”, para. 1).
Gross charges. Gross charges are, “the full value of medical services provided before
any adjustment” (Wolper, 2011, p. 697). Two ways gross charges can be reduced include
contractually agreed upon reimbursement discounts and charity adjustments (Wolper,
2011).
Assumptions / Limitations
This study is based on the assumptions that all nonprofit hospitals have the resources
and ability to implement the new requirements introduced with the Patient Protection and
Affordable Care Act. Limitations to this study include being able to find published data
available under the specific search terms and constraints as identified in Chapter 3.
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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Chapter 2
The purpose of this research thesis is to determine what the Patient Protection and
Affordable Care Act (PPACA) requires of nonprofit hospitals to assure they are meeting
Internal Revenue Service (IRS) requirements and what possible penalties could be for
nonprofit hospitals who don’t meet the new requirements that have been set forth in the
PPACA. Published data can be located in a plethora of locations including state / federal
statutes, journal articles, and commentaries as further identified in Chapter 3. Research
focused on different types of hospitals, nonprofit hospitals, 501(c)(3) status, charitable
guidelines that nonprofit hospitals are to follow, and state vs. federal tax exemption.
Types of Hospitals
There are many different ways hospitals can be classified, one of which is by
ownership. Four categories within the ownership classification include nonprofit, forprofit, government owned, and district hospitals. Classification is self-reported by
hospitals. The American Hospital Association collects the information as part of their
annual survey (see example of this portion of survey in Appendix A) and makes it
available through their various data products (K. Garber, personal communication, March
9, 2015).
Nonprofit. A nonprofit is “under local control, focuses on local concerns, has no
private gain, provides access to care, and gives its attention to community needs” (Anne
Arundel Medical Center, 2015, “What does nonprofit mean for you?”, para. 1). A
nonprofit hospital may bring in a profit, but any profits that the hospital brings in must be
reinvested into the hospital (Congressional Budget Office, 2006). New York
Presbyterian Hospital is the largest nonprofit hospital in the United States. It was created
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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through a merger on January 1, 1998 (New York Presbyterian Hospital History, 2015).
New York Presbyterian Hospital has total revenues of $4.3 billion with charity care
totaling $99.1 million (New York Presbyterian Hospital Facts and Financials, 2015).
For-profit. For-profit hospitals have facilities owned by private investors or owned
publicly by shareholders and are part of a company that issues shares of stock to raise
revenue to expand the hospital activities (The Medicare Newsgroup, 2015). One existing
theory as to how for-profit hospitals make a profit is they, “differentially locate in areas
with relatively well-insured patients” (Horwitz, 2005, p. 790). By strategically choosing
their patients, for-profit hospitals have a better chance to get a return on the services they
provide. One of the largest for-profit hospitals in the United States is St. Mary’s Medical
Center in West Palm Beach, FL (Gamble, 2014). St. Mary’s Medical Center began in
1938 as a 50 bed nursing home, but was expanded to 150 beds nine years later. In 2012,
St. Mary’s had total net revenues of $260,552,424 and charity care provided equaling
$36,805,667 (St. Mary’s Medical Center, 2015).
Government hospital. A government hospital is, “a hospital administered by
officials of the city, county, state, or nation” (MediLexicon, 2015, Definition section).
For this reason government hospitals may not be able to provide the services they once
did (Who Owns the Hospital, 2014, para. 4). Since the turn of the century, “Faced with
mounting debt and looming costs from the new federal health care law, many local
governments are leaving the hospital business, shedding public facilities that can be the
caregiver of last resort” (Sataline, 2010, para. 1). More than 1,000 of the nation’s
hospitals are owned by governments and, “many are drowning in debt caused by rising
health care costs, a spike in uninsured patients, cuts in Medicare and Medicaid and
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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payments on construction bonds sold in fatter times” (Sataline, 2010, para. 5). One
example of a situation in which a government was affected by rising debt and financial
struggles is Eliza Coffee Memorial Hospital located in / owned by Lauderdale County,
Ala. Eliza Coffee Memorial Hospital was sold to a for-profit company after struggling to
return pay to insurers. As a Lauderdale County commissioner who approved the deal
stated, “We were next to knocking on bankruptcy’s door” (Sataline, 2010, para. 3).
District. A district hospital is most often seen in California. California has 43 district
hospitals, 20 of which are critical access. District hospitals are, “formed by the will of
the people, with board members locally and individually elected by their communities”
(Knox, 2014, para. 3). One example is Salem Memorial District Hospital (SMDH) in
Salem, MO. SMDH first opened its doors in 1970. This hospital is a 25 bed critical
access hospital serving five counties in the heart of the Ozark National Scenic Riverways
(http://www.smdh.net/getpage.php?name=Index).
Nonprofit Hospitals
As time has progressed through the years, the medical field has changed to try and
better serve the patient. One change, which has taken place over the years, is
establishment of nonprofit hospitals.
Number of nonprofit hospitals in the United States. The United States is home to
approximately 2,900 nonprofit hospitals (Rosenbaum & Margulies, 2011). In June of
2014 Becker’s Hospital Review put out a list of the 50 largest nonprofit hospitals in the
United States. This list includes hospitals falling into multiple categories as follows:
governmental hospital district, governmental city, governmental city-county,
governmental county, governmental federal, governmental other, governmental state,
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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voluntary nonprofit (church), and voluntary nonprofit (other) (Gamble, 2014). Number
of beds housed in each medical center or hospital was the statistic looked at in creating
this list. Number 1 on the list was New York Presbyterian Hospital / Weill Cornell
Medical Center in New York City with 2,478 beds (Gamble, 2014). Rhode Island and
Vermont each have 100% of their hospitals as nonprofits, and five other states are in the
90% nonprofit range. Wyoming has the lowest percentage of nonprofit hospitals at
20.8% (Kaiser Family Foundation, 2015). See table 1 below for a look at trends of states
who have been mentioned in this section. Hospitals and medical centers on the list
covered the entire country, west coast to east coast. Many of the organizations on the list
also hold the status of tax-exempt, in addition to nonprofit.
501(c)(3) designation. According to the IRS, there are multiple benefits that
organizations receive from applying for, and receiving, the 501(c)(3) designation. The
largest benefit is the tax exemptions of federal income taxes, and in certain circumstances
employment taxes as well. Another benefit to 501(c)(3) organizations is the ability to
receive tax-deductible charitable contributions. “Individuals and corporate donors are
more likely to support organizations with 501(c)(3) status because their donations can be
tax-deductible” (IRS, 2014, p. 3). Other benefits include possible exemption from taxes at
the state and local level, along with the possibility of reduced postage rates from the
United States Postal Service (IRS, 2014).
How to apply. Once a group organizes a nonprofit institution, they are then able to
apply for tax-exempt status and the title of being a 501(c)(3) organization. There are
three key components to being eligible for 501(c)(3) status

being organized as a corporation, trust, or unincorporated association;
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA

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a substantial portion of an organization’s activities must further its exempt
purpose while certain other activities are prohibited or restricted; and

have one or more exempt purposes stated in the organizing document. (IRS, 2014,
p. 3)
Under section 509(a) of the IRC, “organizations that provide medical or hospital care
(including the provision of medical education and in certain cases, medical research,”
(IRS, 2014, p. 5) are considered public charities.
For most organizations the filing of the application must be done by the end of the 27th
month after they were legally formed (IRS, 2014). The first step in the application
process requires an organization to apply for an Employer Identification Number (EIN),
which is done by filling out Form SS-4 (IRS, 2014). Once an organization has received
their EIN, they must complete Form 1023 Application for Recognition of Exemption
Under Section 501(c)(3) of the Internal Revenue Code and mail it to the provided
address, accompanied by the required application fee (IRS, 2014).
There are three main requirements of a 501(c)(3) organization in order to keep their
status: recordkeeping, filing requirements, and disclosure requirements.
Recordkeeping. Like many organizations, section 501(c)(3) organizations are,
“required to keep books and records detailing all activities, both financial and
nonfinancial” (IRS, 2014, p. 6). This information is important in determining whether an
organization has public or private foundation status.
Filing Requirements. There are three major areas of filing requirements for 501(c)(3)
organizations: annual information returns, annual electronic notice, and unrelated
business income tax. The annual information return is accomplished through the
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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completion of Form 990 (IRS, 2014). An annual electronic notice can be completed in
place of Form 990 for organizations that have gross receipts normally totaling $50,000 or
less by completing Form 990-N Electronic Notice (e-Postcard) for Tax-Exempt
Organizations Not Required to File Form 990 (IRS, 2014). Unrelated business income
tax requires an organization to fill out Form 990-T if, “it has $1,000 or more of gross
income from an unrelated trade or business during the year” (IRS, 2014, p. 7).
Disclosure requirements. Organizations who have gained section 501(c)(3) status
must make their application forms and annual return forms available to the public when
they are requested, and the hospital can not charge the public for such a request (IRS,
2014). After 2006, unrelated business income tax returns that are filed must also be made
available to the public for a three-year period (IRS, 2014), so private information for
donors and other individuals should not be included on these forms. In regards to
disclosure of charitable contributions there are two rules imposed by federal tax law
1) a donor must obtain a written acknowledgement from a charity for any single
contribution of $250 or more before the donor can claim a charitable contribution on
his / her federal income tax return; 2) a charitable organization must provide a written
disclosure to a donor who makes a payment in excess of $75 partly as a contribution
and partly for goods and services provided by the organization. (IRS, 2014, p. 8)
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Table 1
Nonprofit Hospital Trends by State
Source: Kaiser Family Foundation.
Comparison of nonprofit and for-profit hospitals. According to the American
Hospital Association, “There are 5,724 hospitals in the United States. Of these, 2,903
hospitals are nonprofit and 1,025 are for-profit” (Dunn & Becker, 2013, points 1 and 2).
There are some similarities and differences between nonprofit hospitals and for-profit
hospitals. One of the areas that differences appear is acceptance of patients. Nonprofit
hospitals typically accept everyone without discriminating based on ability to pay
(Writing, n.d.). For-profit hospitals are more likely to take greater numbers of patients
who are able to pay for care they receive and leave those unable to pay to get care at
nonprofit hospitals (Andre & Velasquez, 1988). Community benefits provided by both
for-profit and nonprofit hospitals have some similarities and some differences. Both
types of hospitals provide some sort of community benefit, “however, nonprofit hospitals
may make these events available more frequently and on a larger scale” (Writing, n.d.,
Community Benefits section). Community benefits are a large part of what allows a
nonprofit hospital to keep its status. Examples of community benefits provided by
nonprofit and for-profit hospitals include preventative health education, smoking
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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cessation programs, ongoing medical education for staff and college students entering the
medical profession, and urgent care / emergency room services (Writing, n.d.).
Over the past decade, there has been some great debate as to which hospitals should
be classified as for-profit and nonprofit. This debate is mostly due to a lack of clarity
over exact parameters for each classification and the feeling by some individuals that
both nonprofit and for-profit hospitals act similarly. One individual who has been
outspoken on this issue has been Senator Paul Ryan, a Representative from Wisconsin.
In 2012, Ryan proposed a cap on tax code deductions of $17,000, and there were no
exceptions. This proposal made nonprofits angry as they stated that, “the limits on
charitable giving, which the Congressional Budget Office said ranks among the largest
categories of personal deductions, would kill donations” (Frank, 2014, para. 2). Since the
original proposal in 2012, Paul Ryan has changed his stance on the subject. Regarding
his decision to allow the exception for charitable donations, Ryan stated,
Charities ought to be a tax expenditure that is still preserved because civil [society] is
one of the most important components of American life, of getting people involved in
our communities and philanthropies. I think that is a very important thing to preserve
and that’s pretty much as a supply side or a low tax-rate guy. (Frank, 2014, para. 4)
Nonprofit hospitals challenged. Not all nonprofit hospitals seem to live up to
standards set before them when they gained nonprofit status. According to a quote by
Professor Colombo in a New York Times article, “The standard nonprofit hospital
doesn’t act like a charity anymore than Microsoft does” (Rosenthal, 2013, para. 14).
Congressional hearings that took place during the creation of the PPACA revealed similar
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
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thoughts when it found nonprofit and for-profit hospital to provide similar levels of
charity care (Cohen, 2013).
Just because a hospital has nonprofit status, doesn’t mean that hospital will always do
things in a way to support the mission of organizations with nonprofit status. One
example of a nonprofit hospital that has faced some questions in regards to some of their
practices is Mosaic Life Care (formerly Heartland Regional Medical Center) in St.
Joseph, MO. The debt collection practices of Mosaic Life Care have been called into
question as thousands of individuals who should be receiving free medical care are
instead being sued for payments from the care they receive. In a story on National Public
Radio (NPR), one family interviewed owed $25,000 to the hospital after having their
wages seized for 10 years (Arnold, 2015). This family is not alone as supported by a
statement from Senator Charles Grassley of Iowa that states, “Reports detail a number of
instances where Mosaic failed to identify patients who would qualify for financial
assistance and who have since been subject to abusive billing and collection practices”
(Kiel, 2015, para. 4).
Congress has tried to develop ways in order to reverse the trend of hospitals not
meeting the requirements that accompany the status of being nonprofit. One example of
Congress’ efforts to reverse the trend of hospitals not meeting the requirements
accompanying nonprofit status was included in the PPACA.
Patient Protection and Affordable Care Act
The law that is at the center of the new requirements that have been put in place in
order to try and help nonprofit hospitals return to their nonprofit mission is the Patient
Protection and Affordable Care Act (PPACA). Getting the PPACA passed as a law was
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
25
not a simple process as there were many questions about it along the way. The
government made attempts throughout the process to gain input from individuals who
would be impacted by the law’s passing, especially those involved with nonprofit
hospitals that would be affected by the new requirements accompanying the PPACA.
Gathering of input started in 2009 when talks of the PPACA first began.
The original bill starting the path for the PPACA was put together by Nancy Pelosi
and a group of House of Representative Democrats in July 2009 (History and Timeline of
the Affordable Care Act, 2013). The Patient Protection and Affordable Care Act
(PPACA) was signed into law on March 23, 2010 by President Barrack Obama. Since
the PPACA was signed into law, challenges and funding issues have continued. From
2009-2013, nearly 400 amendments were proposed and the constitutionality of the law
was being challenged. The United States (US) Court of Appeals first ruled the PPACA
constitutional on November 8, 2011, and the following June the US Supreme Court
reaffirmed a portion of the law was constitutional (Cohen, 2013). However, the Supreme
Court did declare unconstitutional the PPACA’s Medicare Expansion. This declaration
came in National Federation of Independent Business (NFIB) vs. Sebelius in June of
2012. On November 14, 2011 the US Supreme Court began to hear the case of NFIB vs.
Sebelius, which was brought by 26 states and the National Federation of Independent
Business in which this group was trying to argue that elements of the Affordable Care
Act were unconstitutional (History and Timeline of the Affordable Care Act, 2014). The
Supreme Court ruled the way they did because they felt that the federal government was
trying to enforce actions that were to be under the control of state governments
(Musumeci, 2012). Even as changes were being implemented, some groups were trying
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
26
to eliminate the law. A first ruling was that major provisions of the PPACA were
constitutional. Since the bill was signed into a law, changes have continuously been
implemented, and will continue to be until 2020. The Treasury Department, “lead agency
for implementation and oversight of the law and the agency already has issued a ‘Request
for Comments Regarding Additional Requirements for Tax-Exempt Hospitals’”
(Rosenbaum & Marguiles, 2011, p. 285) in the process in order to try and get input on
what changes can still be made.
One goal of the Patient Protection and Affordable Care Act is to improve care and
services provided by nonprofit hospitals in the United States. This goal was done by
introducing three new sections to the Internal Revenue Code. Section 501(r), “imposes
new requirements on 501(c)(3) organizations operating one or more hospital facilities”
(IRS, 2014, New Requirements for Charitable 501(c)(3) Hospitals section, para. 1).
Section 6033(b) lays out reporting needs for new requirements set out in section 501(r).
Section 4959 lays out consequences for failing to meet the new requirements in the
PPACA (IRS, 2014).
Charitable Guidelines
In return for benefits that nonprofit hospitals receive from the government, 501(c)(3)
status requires healthcare organizations to provide charitable care to the communities
they serve. It is hard to come up with one single definition of charity care as hospitals
have some freedom in determining what is counted as charity care. A couple of
definitions which have been provided in a Nonprofit Quarterly article include, “not
billing poor people for care they receive,” and, “identifying and covering the difference
between the cost of services a poor person receives and the amount received through third
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
27
parties (such as private insurance, Medicare, Medicaid)” (Wyland, 2012, para. 2 and 3).
A third definition is referred to as uncompensated care and looks at, “the difference
between a hospital’s posted rates for services and the rates paid by third party insurers,
whether private or governmental” (Wyland, 2012, para. 4). With so many definitions for
charity care, it is hard to determine and measure exactly how much is being provided by
each hospital in the United States because of variation of how hospitals can classify their
care. What may be considered charitable care by one hospital may not be classified as
charitable care by another. In 2003, the American Hospital Association (AHA) issued, “a
statement of principles and guidelines about hospital billing and collections practices,”
(Pryor, Rukavina, Hoffman, & Lee, 2010, p. 7) which included among other things:
provide financial counseling to needy patients, ensure that all written policies for
assisting low-income patients are applied consistently. Two years later the AHA felt that
most of its members were willing to comply with voluntary guidelines making
Congressional charity care requirements unneeded (Pryor, et al., 2010). According to
both the AHA and the national health care reform nonprofit hospitals must make their
charity care policies widely publicized because as is stated in the Community Catalyst
Access Project, patients cannot apply for financial assistance programs that they are
unaware of, and patients should have access to this information before they need to seek
care (2010). Without clear guidelines, there is much variation in how hospitals are able
to create and publicize their charity care policies, and until stricter guidelines are in place,
hospitals will continue to put forth what they want, even if it harms patients financially.
State vs. Federal Tax-Exemption
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
28
Tax exemptions can occur at the federal, state, or even local level. Nonprofit
organizations who have applied for 501(c)(3) status will likely receive benefits at all
three levels. They will receive exemptions from federal income tax, tax-deductible
contributions, reduced postal rates, exemption from federal unemployment tax, and taxexempt financing (Cullinane, 2013). These organizations are also eligible to receive,
“possible exemption from state income, sales, and employment taxes” (Cullinane, 2013,
Benefits of Tax-Exempt Status section’s bulleted list). Some local governments will also
provide tax breaks for organizations who settle within their city limits as a way to keep
businesses in the area. Even though the process of applying for tax-exempt status is
separate for the state and federal level some benefits may overlap. LegalFilings (2010)
reports
Although most state tax-exempt laws are designed to replicate requirements as
identified by the Internal Revenue Code, obtaining state exemption is a separate
process from obtaining federal exemption. Even if an organization has obtained
federal exemption, it must follow the procedures of the state franchise tax board to
obtain state tax exemption (Tax-Exemption FAQ’s, question 6).
Additionally, LegalFilings (2010) reports, “In some states, it is possible to obtain state tax
exemption before securing federal exempt status” (question 6).
The United States health care system has many elements that have changed over time
and factors that have affected those changes. One of the elements of the health care
system is the many ways in which hospitals can be classified, one of which is by
ownership type. The hospital classification that has gotten the most attention recently is
the nonprofit hospital. There have been many individuals who have questioned whether
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
29
nonprofit hospitals deserve the benefits they receive. Confusion over what hospitals are
able to count towards their community benefit has led to some of the questions regarding
whether nonprofit hospitals do enough. The Patient Protection and Affordable Care Act
added new requirements to nonprofit hospitals to help clarify some of the questions.
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
30
Chapter 3
Description of Methodology
New requirements for nonprofit hospitals. The study being done to answer this
research question is an exploratory study. An exploratory study is best when you need to
gather large amounts of information on a topic, and then be able to break apart the
information into individual requirements to further explore. An exploratory study also
allowed the researcher to look at some nonprofit hospitals individually to see how these
organizations have responded to the new requirements.
The topic being studied is a current topic, as the Patient Protection and Affordable
Care Act (PPACA) was not signed into law until March 23, 2010. Publications regarding
effects of the PPACA because of its relative newness are available daily.
Design of the Study
The study was completed through a literature search utilizing published information
on the topic that can be located in a plethora of locations such as state / federal statutes,
journal articles, and commentaries. Published information was available on the Internal
Revenue Service (IRS) website, the Kaiser Family Foundation website, USA Today, and
the New York Times. Zahnow databases provided information via Proquest and Proquest
for Nursing and Allied Health Source. Google Scholar and Google were two search
engines also used in finding information in the literature search. Most of the research for
each question was done using one list of search terms as single documents would often
discuss both the new requirements and the penalties for noncompliance. Most search
terms began with “nonprofit hospital” and included terms such as “requirements”,
“Affordable Care Act”, “in America”, “section 501r”, “penalties for noncompliance with
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
31
ACA”, “benefits received by”, “historical timeline”, “for-profit hospitals”, “community
benefit”, “benefits received versus provided”, and “Obamacare”. Other terms focused on
the Affordable Care Act itself such as “history of the Affordable Care Act” and “what it
provides in regards to 501(c)(3) status”. Other searches looked for definitions of terms as
stated in Chapter 1, types of hospitals as looked at in Chapter 2, “how to apply for taxexempt status”, and “charitable guidelines”. For the Proquest searches I used the terms
“nonprofit hospital and Affordable Care Act” and “nonprofit hospital and Affordable
Care Act or Obamacare”. The only search done specifically looking at the consequences
was a web search using the terms “nonprofit hospital penalties for noncompliance with
ACA”. This literature search did not include parameters for dates because the PPACA is
a current topic.
Data Analysis
Data for this study was broken down into three parts to be analyzed.
New requirements. After gathering all published data with the above stated research
terms, the researcher then looked individually at each new requirement put into place in
order to determine what their components were. The researcher also looked at what
hospitals could do in order to implement the new requirements.
Penalties for noncompliance with the PPACA. In addition to analyzing the new
requirements put into place, the researcher also analyzed information on penalties that
nonprofit hospitals face for not complying with the requirements.
Types of hospitals. In addition to looking at the research to help respond to each
individual research question above the researcher also looked at specific examples of
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
32
hospitals. This was done in order to look at both hospitals who were complying with the
new requirements and those who may be dealing with consequences for noncompliance.
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
33
Chapter 4
The purpose of this research thesis is to determine what the Patient Protection and
Affordable Care Act (PPACA) requires of nonprofit hospitals to assure they are meeting
IRS requirements and what possible penalties could be for nonprofit hospitals who don’t
meet the new requirements that have been set forth in the PPACA.
The PPACA, as it was passed in 2010, provides guidance to nonprofit hospitals.
Specifically, the PPACA helps to provide guidance regarding the expectations for health
care organizations to maintain their nonprofit designation under 501(c)(3). For a
summary of the guidance provided by the PPACA, see the table put out by the
Community Catalyst in Appendix B.
The Four Requirements to Assure Nonprofit Hospitals Are Meeting PPACA
Requirements
Community health needs assessment. The community health needs assessment
requirement has the longest implementation of the four PPACA requirements, as it began
in tax year 2012 rather than the first taxable year following the signing of the Patient
Protection and Affordable Care Act. According to the requirement, hospitals must
complete a community health needs assessment every three years, and must do so in a
working partnership with community organizations (Greene, 2015). Hospital officials
who are in charge of carrying out the needs assessment, “must seek input from people
who ‘represent the broad interests’ of the hospital’s community” (Community Catalyst,
2010, p. 4). Three sources of individuals must be contacted about providing input:
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA

34
At least one state, local, tribal, or regional governmental public health department
(or equivalent department or agency) with knowledge, information, or expertise
relevant to the health needs of the community;

Members of medically underserved, low-income, and minority populations in the
community, or individuals or organizations serving or representing the interests of
such populations; and

Written comments received on the hospital facility’s most recently conducted
CHNA and most recently adopted implementation strategy. (HFMA Summary of
IRS 501(r), n.d, p. 6)
Having hospital officials seek input from the community, “creates opportunities for
advocates, public health officials, and others to approach local hospitals about working
collaboratively to find solutions to unresolved health needs in their communities”
(Community Catalyst, 2010, p. 4). The needs assessment is required to help demonstrate
that a hospital is meeting the needs of the community it serves (Hinkle, 2013). Once a
community health needs assessment is completed by the hospital, it must be made
publically available.
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
35
Figure 1. Accessing the Community Health Needs Assessment on MidMichigan Health
website.
There are five different requirements that must be a part of any community health
needs assessment carried out by hospitals and health care organizations, which include:

sources used to conduct the assessment,

analytical methods applied to identify community health needs,

how hospitals took into account the input of persons who represent broad interests
in the community,

a prioritized description of the community’s health needs, and

a description of existing local health care facilities and other resources that are
already in place to meet theses needs (Metcalf, Partner, Lewis, & Roca, 2013,
Community Health Needs Assessment section).
Once the community health needs assessment is completed, hospitals must adopt
strategies to meet community health needs identified in the assessment (Community
Catalyst, 2010), or provide an explanation if certain identified needs can’t be met
(Metcalf, Partner, Lewis, & Roca, 2013). See Appendix B for a table from Community
Catalyst that breaks down the four requirements of nonprofit hospitals that were put in
place by the PPACA.
Financial assistance policy. A financial assistance policy must be implemented
within the first taxable year following the signing of the Patient Protection and
Affordable Care Act. The goal of the financial assistance policy is to make patients, and
others in the community, aware of the assistance that can be received if one is not able to
pay for the care that they need (Community Catalyst, 2010). There are minimum
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
36
requirements for what must be included in a financial assistance policy under the
PPACA. These requirements include:

whether the hospital offers free or discounted care,

eligibility criteria for receiving financial assistance,

basis used to decide how much patients are charged for care,

description of how to apply for financial assistance, and

the steps the hospital might take to collect payment, unless the hospital has a
separate billing and debt collection policy already in place (Community Catalyst,
2010).
Although the requirement states that all hospitals must have eligibility criteria for
individuals applying for financial assistance, each hospital has freedom to determine what
the eligibility criteria is in their organization (Hinkle, 2013). The financial assistance
policy applies to all medically necessary care no matter where it is provided in the
hospital, whether in the emergency room or another area of the hospital. Another part of
the financial assistance policy requirement under the PPACA requires a separate policy
stating that nonprofit hospitals must provide emergency medical care to all individuals
whether those individuals qualify for financial assistance or not. This is in accordance
with the Emergency Medical Treatment and Active Labor Act (EMTALA) (Community
Catalyst, 2010). See Appendix B for a table from Community Catalyst that breaks down
the four requirements of nonprofit hospitals that were put in place by the PPACA.
Limitations on charges. The limitations on charges requirement was one of the first
to be implemented, as it went into affect in the first taxable year after the Patient
Protection and Affordable Care Act was signed into law (Rosenbaum & Marguiles,
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
37
2011). The practice of overcharging self-pay patients has long been a problem in the
United States. This requirement works to make it so that hospitals across the country are
not using ‘gross charges’ (Community Catalyst, 2010). Gross charges are, “the full value
of medical services provided before any adjustment” (Wolper, 2011, p. 697). Hospitals
must charge the same rates for both insured and uninsured patients known as ‘amounts
generally billed’. There are two methods hospitals can use to determine the amount
generally billed, but once a hospital chooses a method they must continue to use that
method going forward and can’t switch between methods (Metcalf, Partner, Lewis, &
Roca, 2013). Method one is the ‘look back’ method, which is based on the “actual
amount of past claims paid to the hospitals facility by either Medicare fee-for-service
(FFS) or Medicare FFS plus private health insurers’ payments” (Hinkle, 2013, New
Requirements section, para. 5). The second method is ‘prospective’ and “requires a
hospital to estimate the amount it would be paid by Medicare and Medicare beneficiary
for emergency / medically necessary care if the eligible individual were a Medicare Feefor-Service (FFS) beneficiary” (Hinkle, 2013, New Requirements section, para. 5). There
are two situations in which gross charges can still be used: when an individual doesn’t
qualify for financial assistance or when an individual does qualify but fails to complete
an application for financial assistance (Hinkle, 2013).
Even with all of the good coming from the limitations on charges requirement, there
are still some concerns this requirement was weakened in the legislative process. One
concern is a lack of transparency. Information has yet to become widely available to the
public as to a hospital’s gross charges and what insured patients are paying for medical
services. The Centers for Medicare and Medicaid Services tried to help alleviate the
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
38
concern about the publicity of a hospital’s gross charges when they, “issued guidelines,
effective October 1, 2014, that allows hospitals to either make public a list of their
charges or their policy for allowing the public to view a list of those charges” (Illinois
Hospital Association, n.d., para. 1). Another concern is vagueness in the wording of the
requirement, which, has led to some hospitals being able to continue overbilling
uninsured patients who should be receiving financial assistance (Community Catalyst,
2010). See Appendix B for a table from Community Catalyst that breaks down the four
requirements of nonprofit hospitals that were put in place by the PPACA.
Billing and collections practices. Another of the requirements that went into affect
in the first taxable year following the signing of the Patient Protection and Affordable
Care Act worked to bring the billing and collections practices of United States hospitals
under control. The billing and collections practice requirement of the PPACA, “prohibits
nonprofit hospitals from engaging in ‘extraordinary collection actions’ before making a
‘reasonable effort’ to determine whether a person qualifies for the hospital’s financial
assistance policy” (Community Catalyst, 2010, p. 3). Extraordinary collection actions are
defined in the proposed regulations as “actions taken by a hospital against an individual
relating to obtaining payment of a bill for care covered under the hospital’s financial
assistance plan that requires legal or judicial process” (Metcalf, Partner, Lewis & Roca,
2013, Billing and Collections Practices section, para. 1). There are three steps that must
be taken in order to determine whether an individual qualifies for a hospital’s financial
assistance plan, and all steps must be completed before moving forward with
extraordinary collection measures (Hinkle, 2013). A hospital must notify individuals
about its financial assistance plan, provide assistance to an individual who submits an
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
39
incomplete application, and determine / document whether an individual is qualified for a
financial assistance plan (Hinkle, 2013). Under this requirement, even if an individual
signs a written waiver of their right to financial assistance, a hospital still has the duty to
make reasonable efforts to determine whether an individual is eligible for assistance
(Hinkle, 2013). Another aspect of this requirement is the fact that hospitals are
prohibited from selling an individual’s debt under the financial assistance plan (Metcalf,
Partner, Lewis, & Roca, 2013). See Appendix B for a table from Community Catalyst
that breaks down the four requirements of nonprofit hospitals that were put in place by
the PPACA.
Potential Penalties for Noncompliance
In addition to the requirements for nonprofit hospitals put in place by the Patient
Protection and Affordable Care Act, penalties were identified for hospitals that do not
comply with the requirements.
Excise tax. The excise tax was put in place for nonprofit hospitals who fail to comply
with the community needs assessment requirement (Community Catalyst, 2010). This
tax will cost a noncompliant hospital $50,000, not only in the first year of noncompliance
but also in each succeeding year of noncompliance (Hinkle, 2013). If a health care
organization runs more than one facility, the excise tax can be levied on a facility-byfacility basis for each one failing to comply.
Removal of tax-exempt status. For some instances of noncompliance, it is possible
that a hospital could lose its tax-exempt status (Hurtubise, 2014). When the IRS is
determining whether or not to remove the tax-exempt status of an organization there are
multiple factors that they consider. These factors include whether or not the incident in
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
40
question is the first of its kind for the organization, size / scope / nature / significance of
the incident, how promptly the incident was corrected, and whether there are policies /
procedures in place to prevent such incidents in the future (HFMA Summary of IRS
501(r), n.d). The IRS wants to see that organizations are making an effort to try and
prevent failures from being repeated in the future.
If a hospital loses its tax-exempt status, they stand to lose all of the benefits
accompanying the status. These benefits include paying no taxes at the federal (and
sometimes state and local) level, qualification for special grants / government funding,
special rates for services such as postage, and possibly some key donations because the
donor can’t deduct the payment from their own taxes (“What Are the Benefits,” 2014).
According to a Forbes report, “If you count all the sales, property, and income taxes that
nonprofit hospitals avoid paying it would total $20 billion” (Whelan, 2012, para. 7). If a
nonprofit hospital loses its tax-exempt status, they would then be forced to add the
amount previously saved to their yearly budget as additional costs.
Facility level taxation. The facility level tax was put in place by the final rule and
can have an impact on hospital organizations that operate more than one facility. It can
be implemented when one or more facilities within an organization fail to comply with
any of the four new requirements put in place by the PPACA. The facilities that are
issued this tax are ones that, had they not been apart of a multiple facility organization,
could have lost their tax-exempt status for their noncompliance.
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
41
Chapter 5
Conclusion
In the early years of corporate health care, nonprofit hospitals were supported by
charitable donations. This changed in 1965 when Medicare was established (Social
Security Administration, n.d.). After Medicare was established, it became a major
funding provider for nonprofit hospitals. Now, in addition to funding received from
Medicare, organizations seek clarification regarding confusion with nonprofit hospitals as
to what is required of them to meet the charitable aims of 501(c)(3). The Patient
Protection and Affordable Care Act (PPACA) has taken steps in order to try and relieve
some of this confusion.
The Patient Protection and Affordable Care Act (PPACA) was signed into law in
March of 2010. With the signing of the PPACA came four new requirements nonprofit
hospitals would have to fulfill in order to avoid possible penalties. The added
requirements were the completion of a community health needs assessment, creation of a
financial assistance policy, limitation on charges that patients can be billed, and stricter
rules on billing / collection practices. Potential penalties include payment of an excise
tax and possible removal of tax-exempt status.
One major goal of the new requirements is to bring nonprofit hospitals back towards
the mission they professed to have when first gaining nonprofit / tax-exempt status.
Research shows some people believe not all nonprofit hospitals provide enough benefit to
the communities in which they are located to deserve the benefits they receive as an
organization. In order for the requirements to achieve the goal they were put in place to
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
42
achieve, the government must not only put the requirements in place, but must also help
organizations in how best to prepare for implementation to be successful.
There are two significant penalties that are possible for those organizations failing to
comply with the new requirements. For organizations who fail to complete a community
health needs assessment at least once every three years there is a $50,000 excise tax,
which will be levied each year the organization fails to comply. This tax will be levied
against each individual facility within an organization that fails to comply. The other
possible penalty is revocation of tax-exempt status. In addition to the excise tax and
removal of tax-exempt status provided in the PPACA, there are some instances in which
a hospital will not be penalized for noncompliance in regards to the four new
requirements of the PPACA. One instance is if the issue is found to be not egregious
(Slajda, 2013). Another instance where the hospital can avoid penalties is if they fix the
issues in question and disclose the plans for doing so to the proper officials. It is hard to
know whether these penalties will be enough moving into the future to get all
organizations to comply, especially when not all requirements have a penalty for
noncompliance.
Further research
Upon completion of this study, there are some suggestions to be put forward for areas
of further study. One area of further study could look at clarifying whether bad debt due
to increases in deductibles from marketplace can be added to reach the numbers required
for community benefits. Right now organizations do not have strict guidelines as to what
can be considered community benefit, so what one organization may see as a community
benefit, another may not. The lack of strict guidelines could lead to variations in
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
43
outcomes for two different organizations who may in actuality be doing the same thing.
Another area of further study is the IRS providing detailed guidelines as to how much
community benefit is required from a nonprofit hospital. As with the previously stated
further area of study, hospitals have some discretion right now as to what is considered
community benefit. This discretion for hospitals could lead to one hospital being
penalized and another being rewarded for doing the same thing if they classify
differently.
Overall, the new requirements for nonprofit hospitals that have been put in place with
the passing of the Patient Protection and Affordable Care Act are a step in the right
direction, but there is still work that needs to be done moving forward.
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
Appendix A
44
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
Appendix B
Page 6
Reform’s New Requirements for Non-profit Hospitals, May 2010
Table 1: Non-profit Hospitals and Reform At-a-Glance
Requirement
Financial Assistance Policy
Effective Date
Tax Years after 3/23/10
Limits on Charges
Tax Years after 3/23/10
Worth Noting
Many of the other protections
hinge upon how robust a
hospital’s financial assistance
policy is. Hospitals have
considerable discretion in
establishing these policies.
Prohibits price-gouging for all
patients, with additional
protections for those qualifying
for financial assistance.
Possibly intersects with Section
2718, which requires hospitals to
annually publish a list of their
standard charges.
In granting the Secretary authority
to issue regulations, the law
specifically mentions “reasonable
efforts” to determine eligibility
before pursuing certain collection
activity as an area ripe for further
guidance.
Fair Billing/Debt Collection
Tax Years after 3/23/10
Community Needs Assessments
Tax Years after 3/23/12
Failure to comply with this
provision will result in a $50,000
excise tax, making this the only
provision with an interim penalty.
Hospitals should begin the
assessment process now to ensure
assessments are timely.
Reporting
Hospitals file audited financial
statements, descriptions of their
community benefit activities with
tax returns. Community benefit
activities subject to audit every
three years.
Secretary of the Treasury tracks
trends in safety-net spending.
Effective Date
Tax Years after 3/23/10
Worth Noting
Tax Years after 3/23/10
Looks at all hospitals’ bad debt,
charity care, and unreimbursed
public programs expenses.
Requires Treasury to consult with
HHS. Useful for understanding
impact of health reform on safety
net spending.
Community Catalyst is a national non-profit advocacy organization building
consumer and community leadership to transform the American health care system.
www.communitycatalyst.org
45
NEW REQUIREMENTS FOR NONPROFIT HOSPITALS IN PPACA
46
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