Tax-Exempt Hospitals and New Reporting Requirements

CPAs can help clients complete community health needs assessments.

The Patient Protection and Affordable Care Act of 2010 (PPACA) imposes reporting requirements under new IRC § 501(r) for charitable hospitals regarding the fulfillment of their charitable purpose as tax-exempt organizations. Specifically, if they have not already done so, these hospitals must complete a community health needs assessment and draft a financial assistance policy. Individuals eligible for assistance must not be charged more than those with insurance, and hospitals must be able to document that they follow this practice. Hospitals must also follow new rules concerning billing and collections.


These and other new requirements are in addition to new reporting requirements on Schedule H of Form 990, Return of Organization Exempt From Income Tax. The IRS acknowledges that the additional reporting burden could be substantial. CPAs serving nonprofit hospitals need to be ready to assist their clients with completing Schedule H, the community health needs assessment and other exempt-organization reporting.



As of 2006, the majority (59%) of hospitals in the U.S. were tax-exempt. As early as 1956, the IRS in Revenue Ruling 56-185 established the general guidelines for hospitals to meet the charitable-purpose requirement for tax-exempt status: (1) The hospital must be organized to serve the sick; (2) it must serve those who can pay little or nothing toward their care; (3) use of the facilities may not be restricted to a particular group of doctors; and (4) no net earnings may inure to the benefit of any individual.


In the 1960s, the requirement to care for patients who could not pay or paid discounted rates was removed from the requirement for tax-exempt status by Revenue Ruling 69-545. The IRS replaced the element of the charity care standard (serving those who pay little or nothing) with a broader, more far-reaching community-benefit standard. This standard interprets the charitable purpose to include promoting health to the general community, not solely to those who cannot pay. While articulating a community-benefit standard, the 1969 ruling left many questions unanswered, including: Which activities qualify as community benefits? How should the activities be measured? What are the minimum levels of benefit a hospital should provide to maintain its valued tax-exempt status?


Over time, inconsistent interpretations and applications of the community-benefit standard arose. These variations led to substantial differences in and inconsistent measurements of the amount of community benefits. In a 2008 report, the U.S. Government Accountability Office presented the extent to which standards varied in the reporting of community benefits by nonprofit hospitals (see report no. GAO-08-880, These variations and inconsistencies were also evident on Form 990, the primary tool used by hospitals and other tax-exempt organizations to report their financial and operating activities. The form, which had not been significantly redesigned for more than 40 years, needed an overhaul to reflect the drastic changes in the tax-exempt sector and to capture the reporting of community benefits by tax-exempt hospitals.


In 2008, the redesigned Form 990 was launched, along with several new schedules. New Schedule H requires information regarding charity care, community benefits, community activities, bad debts, Medicare and collection practices, community-building activities and a health needs assessment. While questions in Part V, Section B, about the community health needs assessment (CHNA) introduced by the PPACA were optional for the 2010 tax year, other parts of the schedule were mandatory for hospitals required to file Form 990.


Most of the reporting requirements of Schedule H were introduced by the PPACA and codified in new IRC § 501(r). Most took effect with tax years beginning after March 23, 2010, but questions about hospitals’ CHNAs, introduced by the PPACA under section 501(r)(3), are effective with tax years beginning after March 23, 2012. Hospitals that choose to report early can rely on the anticipated regulatory provisions in Notice 2011-52 (



Tax-exempt hospitals must conduct a CHNA every three years and adopt an implementation strategy that meets the community health needs identified through the assessment (section 501(r)(3)(A)). The CHNA must take into account input from community representatives, including those with special knowledge of or expertise in public health (section 501(r)(3)(B)(i)). Notice 2011-52, issued in July 2011, contains detailed anticipated regulatory provisions on what should be included in the CHNA. It must include a description of (1) the community served by the hospital and how the community was determined; (2) the process and methods used to conduct the assessment, including data sources and analytical methods applied to identify community health needs; (3) how the hospital took into account input from persons who represent the community’s broad interest; (4) the community health needs prioritized; and (5) the community’s existing health care facilities and other resources that are available to meet the health needs identified through the CHNA. Hospitals must report this information on Part V, new Section B, lines 1–7, and Part VI of Form 990, Schedule H.



Educate your client. The CHNA reporting postponement creates a window of opportunity for CPAs to educate clients about the detailed requirements of the new law as well as the penalties associated with noncompliance, which include a $50,000 excise tax and/or revocation of exempt status. The penalty applies for each facility owned by the organization and for each tax year for which the failure occurs. CPAs must reach out now to discuss the reporting requirements and to ensure that they are included in discussions so that proper planning takes place.


Aid your client in data collection. Information regarding a CHNA must come from a number of sources, including public health agencies, social services agencies, public housing agencies, charitable organizations, churches and schools. The CPA can help to ensure adequate internal controls are in place to protect the integrity of the collection process. CPAs can also help nonprofit hospital clients have a clear understanding of the data collection process and can review and assess the data.



While the requirements under section 6033(b)(15)(A) of what information a CHNA must disclose are generic, guidance in Notice 2011-52 and questions on Form 990, Schedule H, suggest some key elements to include:


Population profile. The starting point is gathering information on and profiling the local population within the hospital’s city, county, metropolitan region or other geographical location: the number of people in different age groups—infants, school-age children, adults and elderly. Then the population should be categorized by geography, transportation, gender, ethnicity, religion, language, literacy and education. The IRS states in Notice 2011-52 that it anticipates that a regulatory definition of a hospital facility’s community will also allow hospitals to take into account target populations or a hospital’s principal functions. Typically, infants and the elderly have the greatest health care needs. Profiling the local population also helps to determine birth rates (whether the population is increasing, decreasing or stagnant), mortality rates (life expectancy) and morbidity rates (illnesses and disabilities), which show trends that help to assess the need for services and patterns of disease.


Income and wealth distribution. Numerous studies have shown that poverty can negatively affect people’s access to health care and their ability to choose a healthy lifestyle; this in turn can affect life expectancy. CPAs can review income tax data from individual return statistics published by the IRS Statistics of Income Division ( and U.S. Census data to identify low-income neighborhoods and single-parent households—where health care needs might be greater.


Unmet needs. As a result of a rising demand for health care, shrinking budgets and an aging and ailing population, hospitals will have to cost and prioritize the needs identified during the CHNA process. The CPA’s role in costing and prioritizing these needs will be invaluable, as this will determine which programs can and cannot be adopted and implemented. Notice 2011-52, section 3.06, states the IRS and Treasury Department intend to provide in regulations that the CHNA also take into account input from governmental agencies with information relevant to the health needs of the area the hospital serves; community leaders, representatives and members of underserved groups or those with chronic disease needs; and any of a broad range of persons, groups and health care experts and advisers located in or serving the hospital’s community. This latter category could include a CPA advising the hospital on how to allocate limited resources to the needs that give the maximum health benefit to the community as a whole.


The hospital must explain why certain needs were not addressed. Again, the CPA’s advice is critical, because he or she can prepare a cost/benefit analysis to support why certain needs were not met. The CPA also can help the hospital prepare for the review every three years and take corrective action if there are deficiencies.



Under the PPACA, hospitals are required to maintain a written policy that includes eligibility criteria for free or discounted care; the basis for calculating patient charges; ways patients can apply for financial assistance; collection methods, if appropriate; conditions for emergency care; and methods to publicize the hospital’s financial assistance policy to the community. In an October 2010 comment letter, the AICPA recommended that this information be gathered by modifying certain questions on the Form 990 Schedule H (the comment letter is available at



The PPACA imposes significant limitations on billing and collection methods. Hospitals are prohibited from engaging in extraordinary collection actions before they make a reasonable effort to determine whether a patient is eligible for financial assistance (section 501(r)(6)). Congress and the IRS define extraordinary collection methods as including lawsuits and liens on a residence. They define reasonable efforts as including advising patients of the hospital’s financial assistance policy upon admission and in written and oral communications regarding the patient’s bill, including invoices and telephone calls (Notice 2010-39, quoting Joint Committee on Taxation, Technical Explanation of JCX-18-10). In the October 2010 comment letter, the AICPA requested further guidance, including specific examples of such reasonable efforts and extraordinary collection actions.


A further limitation is imposed on charges for medical services to individuals who are eligible for financial assistance. Hospitals must not charge more than is generally billed to an individual covered by insurance and are prohibited from using gross, or “chargemaster,” rates (those each hospital sets for specific services, generally higher than rates negotiated with insurers; see section 501(r)(5) and JCT Technical Explanation). The AICPA recommends that Schedule H contain a question requiring the hospital to specify the basis on which the “generally billed” amount is determined, such as negotiated commercial rates, best rates or Medicare rates.



Although many details are awaiting further guidance, tax-exempt hospitals already must implement an array of substantial new requirements for disclosing how they meet their exempt purposes and meeting community public health needs, as well as complying with new mandates under the PPACA concerning patient financial assistance and billing and collections practices. With their expertise in analyzing financial data and producing cost/benefit reports, CPAs will likely be called upon to help tax-exempt hospitals meet many of these new requirements, including completing and reviewing the CHNA.





  The Patient Protection and Affordable Care Act of 2010 (PPACA) imposes new reporting requirements on hospitals. Beginning in tax years after March 23, 2012, hospitals must conduct a community health needs assessment (CHNA) every three years and answer questions on new Schedule H of Form 990. Other provisions took effect March 23, 2010.


  Because penalties for failing to comply can include a $50,000 excise tax for each facility operated by a tax-exempt hospital, CPAs should educate their tax-exempt hospital clients and other health care entities now about these requirements.


  Hospitals must also establish a written financial assistance policy and comply with new requirements for charges, billing and collections for patients eligible for financial assistance.


  The information required by the CHNA will draw upon resources from within the community as well as data generated by the hospitals. CPAs may be called upon to advise hospitals on obtaining, compiling and reviewing data for the assessment, to provide cost/benefit analyses as part of it and to help prepare and review the finished document.


  The financial assistance policy must address eligibility, charges, billing and collections. Billing and collections policies must also comply with new restrictions related to extraordinary collection actions and limitations imposed on the amount that can be charged.


Jean T. Wells ( is an assistant professor of accounting at Howard University in Washington, D.C. Gwendolyn McFadden ( is an associate professor of accounting at North Carolina A&T State University in Greensboro, N.C.


To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at or 919-402-4434.





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