Nonprofit Hospitals

Posted on Wednesday, July 17, 2013

According to the American Hospital Association’s 2011 annual survey, of the 5,724 U.S. registered hospitals, 2,903 are nongovernment nonprofit community hospitals.  Over half of the U.S. registered hospitals are nonprofit organizations.

A hospital may qualify for tax-exempt status under 501(c)(3) of the Internal Revenue Code provided it is organized and operated for charitable purposes.  Engaging in health care activities does not necessarily fulfill a charitable purpose, but the promotion of health for the benefit of the community is a charitable purpose.  In order for a hospital to be considered tax-exempt it must meet the community benefit standard, as well as other requirements of a 501(c)(3) organization.

Issued in 1956, the financial ability standard or charity care standard required hospitals to admit and treat patients who were unable to pay, either by offering free services or at rates below cost.  In 1969, the standard was modified by introducing additional considerations known as the community benefit standard.  The following factors are used to determine if a hospital meets the community benefit standard.

  1. Does the hospital have a community board of directors comprised of a majority of independent civic leaders rather than exclusively members who are practicing physicians and hospital employees?
  2. Is admission to the hospital’s medical staff open to all qualified physicians in the area?
  3. Does the hospital operate a full-time emergency room open to everyone, regardless of ability to pay?
  4. Does the hospital provide non emergency care to everyone in the community who is able to pay either privately or through third parties, including Medicare and Medicaid?
  5. Does the hospital serve a broad cross section of the community through research or charity care (free or reduced cost care)?
  6. Does the hospital offer other activities that serve the community (medical training, free health education programs, seminars or community health fairs)?

In recent years, there has been much concern about whether tax-exempt hospitals have an unfair advantage over for profit hospitals.  Under the community benefit standard, nonprofit hospitals are judged on whether they are operating for a charitable purpose.  In addition, hospitals with tax-exempt status are required to provide additional information on Schedule H of the Form 990.  This additional schedule contains six parts requesting details about the hospital’s charity care program and expenditures, community building activities, costs due to Medicare shortfalls and bad debts, joint ventures, and health care facilities.  As with any nonprofit organization, a tax-exempt hospital must also meet the requirements of a 501(c)(3) organization.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

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