HEALTH CARE COMPLIANCE 1 (HEALTH INFORMATION MANAGEMENT) 1 . Conduct some research on the community benefits offered by a local tax-exempt hospital. Review

HEALTH CARE COMPLIANCE 1 (HEALTH INFORMATION MANAGEMENT) 1 . Conduct some research on the community benefits offered by a local tax-exempt hospital. Review

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HEALTH CARE COMPLIANCE 1 (HEALTH INFORMATION MANAGEMENT) 1 . Conduct some research on the community benefits offered by a local tax-exempt hospital. Review its website to see how it describes its community activities and summarize your findings. Are you satisfied that it has met the IRS community benefit standard? Under what section of the Internal Revenue Code are non-profit, tax-exempt entities organized?

2. List a minimum of five components of a compliance program designed to protect a hospital’s tax-exempt status. (Not just its tax-exempt bond financing.)

3. Provide five examples of incentives that hospitals use for recruiting and retaining physicians. 

– attached powerpoint to help Chapter 4

Federal Income Tax

Learning Objectives

Benefits of tax-exempt status

Ways that tax-exempt status may be lost

IRS pressure on tax-exempt hospitals

How a hospital can provide community benefit

Problems with “excess benefit transactions”

Legally-safe physician recruitment incentives

Tax-exempt status in a joint venture

Tax-exempt status compliance program


Tax-exemption for health care entities is available under section 501(c)(3) of the Internal Revenue Code.

The largest segment of the health care industry composed of non-profit entities are hospitals.

Tax-exempt status of non-profit hospitals has become a hot issue, legally and politically.

Benefits of Tax-Exempt Status

Need not pay federal income taxes

Generally need not pay state income taxes, state/local sales taxes, and property taxes

Donations to exempt entities are tax deductible

Exempt entities may receive foundation and government grants

May use tax-exempt bond financing

Free from pressure of shareholders

Indications That a Hospital Does Not Deserve Tax-Exempt Status

Few free or discounted care patients

Minimal dollar value of free care

Unpaid bills immediately sent to collections

Uninsured patients charged full rates

Failure to publicize indigent patient policies

Failure to provide community benefits

No allocation of revenue surplus to research, education, and medical training

Requirements for Hospital Tax-Exempt Status

Community benefits

Excess benefit transactions

Unrelated business income

Transparency requirements under PPACA

Physician recruitment and retention

Mergers and acquisitions, joint ventures

Tax-exempt bond financing

Community Benefit Standard

Activities the IRS looks for in determining if a non-profit organization has met its community benefit standard.

Community-oriented governing board

Open staff privileges

Emergency medical care

Non-emergency medical care

Use of surplus funds

Charity care

Health promotion


Excess Benefit Transactions

Providing economic benefit to a “disqualified person” without receiving something of equivalent fair market value in return.

Definition of “disqualified person”.

Recipient of excess benefit pays excise tax.

Managers approving the transaction liable for 10% tax on excess amount.

Compensation tied to % of net earnings.

Unrelated Business Income

Money-making activities unrelated to an entity’s charitable purpose.

Hospital gift shops and parking garages.

Income generated by an activity “regularly carried on” and not substantially related to charitable purpose is taxed at normal corporate rates.

New Transparency Requirements Under PPACA

Community health needs assessment every 3 years

Written financial assistance policy and emergency care policy

Avoid abusive billing and collection practices

Hospital emergency care charges for uninsured patients no higher than for insured patients

Every 3 years, IRS review of hospital’s community benefit activities

Physician Recruitment & Retention

In order to offer physician recruitment incentives, hospitals must do the following:

Demonstrated community need for physician

Or located in Health Professional Shortage Area

Formal written physician recruitment policy

Recruitment package negotiated at arm’s length

Market-reasonable financial incentives

Each package approved by board of directors

Mergers and Acquisitions

These transactions must be conducted at FMV.

Hospital buys physician practice at inflated price, or sells assets at below FMV.

Be able to demonstrate FMV of the exchange; professional valuation is key.

Risk of anti-kickback and Stark violations.

For-profit entity buys a non-profit entity.

Joint Ventures

Tax-exempt entity partners with non-tax-exempt entity.

Venture serves hospital’s charitable purpose.

Venture gives priority to exempt purposes over maximizing profits.

Hospital does not yield control of its activities to its non-tax-exempt partner.

Tax-Exempt Bond Financing

Must use bond proceeds to advance the hospital’s charitable purposes.

Put to a “qualified use” not a “private use”.

Management & service contracts present special risk; IRS has defined 6 safe harbors.

Reasonable contract compensation, not based on share of profits, qualified user free to terminate contract, and contract term limits.

Employment Taxes

Are medical directors and clinic physicians employees of a hospital?

Hospital’s degree of control over the physician’s work activities is key.

Physician has no private practice, paid a fixed salary, hospital provides supplies and support, submits claims for physician’s work, and is on duty at the hospital during specified hours.

Steps to Protect Tax-Exempt Status

Incorporate exempt status measures in overall compliance program.

Concentrate on high risk areas, use checklists to keep transactions and arrangements within legal limits.

Document employee training, compliance reviews and other measures, and procedures for identifying & resolving violations.

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