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Will Hospitals Fund Healthcare Coalitions?

Will Hospitals Fund Healthcare Coalitions?

If hospital executives understood that healthcare coalitions could help them with their taxes, they’d get on board; if coalition leaders understood how to frame the discussion, they’d find a willing ear in the C-Suite; AND if the Assistant Secretary for Preparedness and Response (ASPR) and the American Hospital Association (AHA) approached the Internal Revenue Service (IRS) to obtain targeted interpretive guidance, hospitals and healthcare coalitions might just be peas in a pod.

Yes, if the stars align, the term ‘self-sustainability’ might not cause a collective groan.

And such astrological alignment is not as crazy as it seems courtesy of the Internal Revenue Service (IRS), which changed the “community benefit” requirements hospitals must meet to retain their tax-exempt status.

Before I explain, let’s take a brief detour to understand why this matters to healthcare coalitions.

sustainability

‘Seed money’ and ‘sustainability’ are the buzz words coming out of ASPR these days. That is, states and their healthcare coalitions should use Hospital Preparedness Program (HPP) funding as ‘seed money’ to build out healthcare coalitions that can one day generate enough revenue to be financially self-sustaining.

bParati Sustainability Icon

History proves that one never knows when Congress will shutdown the cash flow to any program. Just ask the EMS folks what happened to them in 1981 and those that lost Metropolitan Medical Response System (MMRS) funding in 2011.

The problem with ASPR’s buzz words is that they're missing a key word – how. How does a healthcare coalition become ‘self-sustaining?’ How can a healthcare coalition appropriately use its ‘seed money’ to build a well run nonprofit or quasi-nonprofit organization eligible to receive and manage unrestricted funding? How does a healthcare coalition make the case to hospital executives that investing in their coalition provides community benefit?

Community benefit? Hmmm... We'll get back to that.

ASPR’s conundrum is that they know independent nonprofit (or quasi-nonprofit) healthcare coalitions have the greatest likelihood to be effective and ‘self-sustaining,’ but they’re a bit hamstrung when it comes to making them happen. You see, they have four clear problems.

  1. The agency is not loaded with nonprofit development gurus, so they are short on the expertise and experience necessary to help coalitions become what they know they need to be.
  2. When it comes to the legislative authorization behind the cooperative agreement, there’s a chasm between activities prohibited/not specifically authorized and those ASPR would like to require.
  3. Far too many healthcare coalitions are using local governmental agencies as third-party fiduciary agents to apply for and manage state HPP sub grants, which greatly restricts, if not eliminates, the ability for them to accept funding outside the grant.
  4. The HPP cooperative agreement is between ASPR and the states, not directly with healthcare coalitions. So, the filter that sub grants and associated deliverables must pass through is all over the map – literally and figuratively. Each state’s preparedness director has a different opinion; each is subject to their state laws; and each has their own legal council who issue their personal ‘legal opinion’ of what’s allowable or prohibited.

Now, with reauthorization of the Pandemic and All Hazards Preparedness Act (PAHPA) on the table in 2017, ASPR may find success convincing lawmakers to make tweaks that empower them to chip away at numbers one, two and three. But, number four is beyond the scope of Congress’ authority. And that’s a huge impediment.

So, you ask, “what does this have to do with the community benefits standard, and why would hospitals want to fund my healthcare coalition?” I’m glad you asked.

Let's start with understanding the community benefit requirements of nonprofit hospitals under the Internal Revenue Code.

community benefit

In 1954, the IRS added Section 501(c)(3) to the Internal Revenue Code, providing for an exemption from the federal income tax for organizations that operated exclusively for religious, charitable, scientific, or educational purposes. This exemption was and is applicable to nonprofit hospitals, provided they meet associated regulatory requirements.

bParati IRS 501c3 Icon

In their February 2016 Health Policy Brief, Nonprofit Hospitals’ Community Benefit Requirements Under the Affordable Care Act (The Brief), the Robert Wood Johnson Foundation (RWJ) wrote extensively on new requirements nonprofit hospitals must meet to retain their tax-exempt status. The Brief explains that prior to 1969, to qualify for federal tax-exempt status, a hospital only had to provide, “to the extent of its financial ability, free or reduced-cost care to patients unable to pay for it.”

Pretty basic – the benefit being provided for the tax exemption was for individual patients through the reduction or waiver of hospital bills for those that lacked the means to pay. The benefit was only inward-looking, on-campus, if you will. To maintain its tax exemption, a hospital simply needed to provide an annual report of how much indigent care they had provided during the year.

What was the percentage of total revenue required? Well, It was not defined.

In 1969, the charitable care standard was replaced with the community benefit standard. The Brief explains that the community benefit standard encouraged hospitals to consider activities that benefited the community at large – outward-looking, off-campus benefits.

“In 1969 this charitable care standard was replaced with a more general requirement that compelled hospitals to engage in activities that benefit the communities they serve. Under the “community benefit” standard, spending that promotes community health, in addition to charity care, counts toward meeting the requirements for tax exemption.”

Robert Wood Johnson Foundation

So, how was "promotion of community health" measured? Ehh...

community benefit under the affordable care act

So what’s changed with the enactment of the Affordable Care Act (ACA) that gives credence to the idea that there are both community benefits and a business case for a hospital to financially support its healthcare coalition?

To begin with, according to the IRS, the ACA brought new requirements that hospitals must meet to be described in Section 501(c)(3) of the Internal Revenue Code, and because of the changes, Section 501(r) was added to the Code. The new Section requires hospitals to meet four general requirements to retain 501(c)(3) status:

  • Establish written financial assistance and emergency medical care policies,
  • Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital's financial assistance policy,
  • Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions against the individual, and
  • Conduct a Community Health Needs Assessment (CHNA) and adopt an implementation strategy at least once every three years.

Under Section 501(r), nonprofit hospitals are required to report community benefit activities on an amended Schedule H (see images below) worksheet that must accompany their Form 990 filed annually with the IRS. The form requires extensive facility-specific information regarding Section 501(r) compliance as well as organization-specific information about its community benefit expenditures as a charitable organization.

So you say, “I’m looking at the four requirements and don’t see how my healthcare coalition fits?”

community benefit and healthcare coalitions

On December 31, 2014, the IRS published final regulations necessary to implement the community benefits standard: Additional Requirements for Charitable Hospitals; Community Health Needs Assessments for Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return. It contains final regulations that provide guidance regarding the requirements for charitable hospital organizations added by the ACA, which affect charitable hospital organizations.

The rule discusses comments made during the public comment period and what changes were made in response. It specifically identifies emergency preparedness as a concern brought forth.

“Numerous commenters asked for clarification that the term ‘health needs’ also encompasses needs in addition to access to care, such as access to proper nutrition and housing, the mitigation of social, environmental, and behavioral factors that influence health, or emergency preparedness.”

IRS Final Rule: 26 CFR Parts 1, 53, and 602

IRS Form Schedule H Page 1 Image IRS Form Schedule H Page 1 Bottom Image

Considering the profound impact the rule has on hospital organizations and the large number and scope of comments received, the fact that emergency preparedness is even mentioned in the final rule is significant. Of even greater significance is that, based on the comments, the IRS expanded its explanation and examples of what types activities could be considered to have potential community benefit.

“In response to these comments, the final regulations expand the examples of health needs that a hospital facility may consider in its CHNA to include not only the need to address financial and other barriers to care but also the need to prevent illness, to ensure adequate nutrition, or to address social, behavioral, and environmental factors that influence health in the community.”

IRS Final Rule: 26 CFR Parts 1, 53, and 602

IRS Form Schedule H Page 2 Image

And one need look no further Schedule H of Form 990 – required to be filed with the IRS by tax-exempt hospitals every year – to see some very clear examples of how hospitals can show community benefit by supporting their healthcare coalitions. Not to mention, the types of services healthcare coalitions could provide for the community at large on behalf of all hospitals. Yes, crowdsourcing revenue for all member hospitals to provide greater community benefit than any one could do on their own!

bParati Healthcare Coalition Organization Icon

That is, if healthcare coalitions were provided the tools and support necessary to build a solid organizational infrastructure, to build a nonprofit organization or quasi-nonprofit tied to a third-party fiduciary agent that could accept unrestricted funding outside the HPP grant.

To be clear, I'm not trying to claim that I'm some expert on tax law or hospital finances, but there's enough here to make one say hmmm....

Maybe someone at ASPR could reach out to the good folks at the IRS to get some interpretive guidance. No sense in coalitions chasing a squirrel unless it has a bag of gold – Just sayin'.

Giddy Up ASPR!

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Karl Schmitt, MPA

Karl Schmitt, MPA


Karl is the Passionate Founder & CEO of bParati. He is on a mission to build a national network of effective, sustainable healthcare coalitions. More...

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In all we do, we seek to reduce human suffering and loss of life caused by disasters.

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Karl Schmitt, Passionate Founder & CEO, bParati

Karl SchmittPassionate Founder & CEO

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