Chapter 10.B.2 (or 3.B.2)
--Charitable Tax Exemption
For a good practical overview of federal requirements for hospitals and clinics, including a discussion of joint ventures, see the IRS document Health Care Provider Reference Guide.
For a review
of varying state standards, see GAO, Nonprofit Hospitals:
Variation in Standards and Guidance Limits Comparison of How Hospitals Meet
Community Benefit Requirements (Sept. 2008).
Arguing that tax-exempt hospitals
should be responsible for promoting population health in addition to
treating individuals, see Jessica Berg, Putting the community back into
the "community benefit" standard, 44 Ga. L. Rev. 375-431 (2010).
See generally John D. Colombo, et al., Charity Care for Nonprofit Hospitals (Aspen, 2010).
The new health care reform law has a key provision (sec. 9007) that solidifies emerging IRS and industry standards requiring charitable hospitals to measure and report their community benefits and to be reasonable about charging and collecting from needy patients. Starting in 2012, tax-exempt hospitals must assess community health needs every three years and report annually how they address those needs and the reasons why any needs are not being addressed. Also they must: 1) have clear written financial assistance policies that are widely publicized; 2) limit charges to patients eligible for financial assistance to no more than the lowest amounts that insurers pay; and 3) avoid aggressive collection actions against patients who are eligible for and comply with the hospital’s financial assistance policy.
Bringing to a clase a long-running dispute in Illinois, its Supreme Court issued a major decision denying local property tax exemption to a non-profit hospital, for reasons similar to those in the Utah County decision in the casebook, namely: providing care for a fee does not constitute charity, and the hospital provided only a de minimis amount of true charity care to needy patients for free. Provena Covenant Med. Ctr. v. Ill. Dept. of Revenue, _______(Ill. App. 2010).
The 9th Cir. ruled that an organization formed to provide vision care services
to subscribers does not qualify for a 501(c)(4) exemption as a social welfare
Service Plan Inc. v. United States (9th Cir., No. 06-15269, unpublished
Payroll Taxes for Contracting Physicians. General Counsel Memorandum 39862 clarifies that compensation and payment incentives are much less controversial when they are in exchange for tangible services performed by the physician. Then, the only test is one of commercial reasonableness. Arrangements where the hospital bills directly for the services of hospital-based physicians and then compensates them with a portion of the receipts are not as uncommon as the GCM suggests; the reimbursement changes it describes relate only to Medicare, not to private insurance. Indeed, under capitation payment, bundling of hospital and physician services is becoming even more common.
This raises a different tax issue of some
importance, however, namely whether as indicated in n.3 of the GCM, these
physicians are to be considered employees rather than independent contractors.
Hospitals greatly prefer the independent contractor label, not only because
they avoid payroll taxes, but also because of vicarious liability and corporate
practice of medicine considerations. The IRS, however, cracked down on this
characterization with numerous hospital audits resulting in some very large
demands for back taxes. See Tech. Advice Memoranda 9535001-9535002 (1995).
These rulings caused great consternation. One went so far as to opine that a radiologist with an independent
practice who reads electrocardiograms part time at several different hospitals
and is paid piece work could still be classified as a part-time employee at
each hospital. The best route to avoiding this result is for a physician to
employ herself through a professional corporation which then contracts with the
hospitals. It is much harder to characterize a corporation as an employee.