Description
Please use the references provided to answer. APA format in text citations.
Question 1 – Corporate Documents for compliance
In the Law of Health Care Administration, 9th Edition. Read:
Ch. 12 Taxation of Healthcare Institutions (pages 459 – 487) (ATTACHED)
Part 1: Critical Analysis of the Law
Evaluate the laws listed and explain how it applies to corporate risk. Evaluate the legal risks and consequences that can arise for failing to comply with the laws that govern corporate practices.
Non-Profit Tax Law
Evaluate the corporate document from the list below. Indicate the type of risk the corporate document will mitigate and how you would use it.
Corporate Code of Ethics
Review and discuss the legal and other issues in the The Tracks We Leave, Chapter 10 Failed Hospital Merger: Richland River Valley Healthcare System (ATTACHED). How would an Enterprise Document Management (EDM) system limit corporate compliance risk and the problems? How would an Enterprise Document Management (EDM) system prevent problems? Be specific and demonstrate understanding of the risks and how the compliance tool can be used specifically to control the risks.
Tip: Demonstrate analysis by doing the following in responding to the Ch 10 Failed Merger: (1) explain the legal risk in the scenario (2) discuss the enterprise document management (EDM) system and how it applies to limit contract risk and prevent problems in the scenario. Be specific!
Part 2: Strategic Compliance with the Law
You are an administrator in a very busy clinic in the same managed care organization (MCO) as the local hospital. Five of your providers (Dollar Docs) have office space in the hospital and they regularly refer to a nearby home health agency including five they own. The Dollar Docs give you data from their practice in order for you to prepare an SEC report each year. You find out they have been “inflating” numbers to show even more profit than they have actually earned. They also refuse to provide charity care for those who come into for services they provide.
What laws (from the list in part 1 for your group) does this arrangement violate? Why? What are the consequences of the violation(s)?
State Incorporation Laws
Non-Profit Tax Law
Sarbanes Oxley Law (SOX)
Create an action plan with three actions you could take to correct the problem including the specific compliance strategy selected.
References
Showalter, S. (2020). The law of healthcare administration. (9th ed.). Health Administration Press. Chapter 5 (pages 176 – 177, 187 – 189), Chapter 12 (pages 459 – 469), Chapter 13 (pages 491, 495 – 498, 500, 502), and Chapter 15 (pages 571-572, 576 -579, 580 – 584, 588 – 590)
Perry, F. (2020). The tracks we leave: Ethics and management dilemmas in healthcare. (3rd ed.). ACHE Management Series. Chapter 4 (pages 45 – 63) and Chapter 10 – Failed Hospital Merger: Richland River Valley Healthcare Systems (pages 149 – 159)
Legal Risk Analysis (4:59)
HHS OIG Guidance (6:34)
Starting a Non-Profit: Compliance Basics (3:28)
Question 2 – Medicaid & Information Blocking
Part 1: Critical Analysis of the Law
Medicaid is a joint federal-state plan with funding from the federal government and state implementation.
Evaluate the role of state waivers in Medicaid. Compare and contrast two chosen different types of waivers. What are the state consequences of not meeting waiver requirements?
How could these waivers impact a long-term care organization?
State the specific legal risks related to Medicaid waivers. Discuss the COSO framework for internal controls and evaluate how it could be used to meet Medicaid waiver requirements. Be specific and demonstrate understanding of the risks and how the compliance tool can be used specifically to control the risks.
Part 2: Strategic Compliance with the Law
You work for a small managed care organization (MCO) “Splendid Healthcare” that owns a hospital and two provider clinics in. Your MCO just received notice that it will be subject to an HHS OIG evaluation of your electronic health information (EHI) practices because there was a complaint that your organization was engaged in information blocking because you did not release information to the state Medicaid office when they requested it. Honestly, your technology is out of date and you can’t transfer encrypted EHI to meet the state’s request.
Name and describe and give the code section that gives Medicaid the right to access your EHI. Name and describe and give the code section that gives the HHS OIG have the right to access your medical records to evaluate information blocking. (Give the legal source of the right)
Discuss information blocking requirements and exceptions. How do these apply to this situation? What could you do to bring your EHI up to date so that you don’t face an information blocking complaint in the future?
Answer this question.
What management actions would you take to work effectively with HHS OIG to avoid information blocking problems in the future?
References
Showalter, S. (2020). The law of healthcare administration. (9th ed.). Health Administration Press. Chapter 2 (pages 38 -40, 46-47, and 52-56)
Perry, F. (2020). The tracks we leave: Ethics and management dilemmas in healthcare. (3rd ed.). ACHE Management Series. Chapter 19 (pages 291-308)
50th Anniversary of Medicare and Medicaid: 50 Years, Millions of Healthier Lives (3:37)
Medicare and You: Understanding Your Medicare Choices (3:29)
HHS OIG Guidance (6:34)
Question 3 – Cybersecurity
Read In the Tracks We Leave, 3rdEd. Ch. 9 Information Technology Setback: Heartland Healthcare System (ATTACHED)
Part 1: Critical Analysis of the Law
Evaluate HIPAA security requirements for a security risk assessment (SRA). Name and describe the law and give a code section.
How would you complete a security risk assessment that meets HIPAA security requirements? Outline it.
What physical, administrative, and technical safeguards would you recommend to keep data secure?
Evaluate HIT audits as a compliance tool. Describe an audit process you recommend that would meet the following criteria.
The audit is fair and unbiased and free from conflict of interest (1-2 points).
The audit results are effectively communicated to senior levels of the organization (1-2 strategies).
There is a process in place to correct any problems identified in the audit (1-2 actions).
Describe HIPAA privacy requirements for mental health and HIV patients, What management actions would you take to ensure compliance with HIPAA mental health privacy requirements?
Review and discuss the legal risks and other risks in the situation described in The Tracks We Leave: Chapter 9 Information Technology Setback: Heartland Health care System. How could a (1) strong HIT audit system and (2) strong compliance officer serve to prevent the situation described in Ch 9 ? Evaluate how the (3) HIMSS Code of Ethics would apply in this situation. Be specific and demonstrate understanding of the risks and how the compliance tool can be used specifically to control the risks.
Part 2: Strategic Compliance with the Law
You work for a large managed care organization (MCO) that includes 5 hospitals, 25 providers clinics, 1 health insurance company, and 10 pharmacies. The MCO is using electronic health records (EHR). Your organization is not using 2015 CEHRT. Your organization has been subject to medical identity theft through 3 recent cyberattacks that compromised the data of 2,000 patients. The cyberattacks all used a known vulnerability with poor data encryption during data transfer and poor security on the patient portal. All cyber-attacks removed the encryption or security safeguards to obtain patient data. The breach included a list of 20 HIV patients whose HIV status was being reported to the state as part of infectious disease reporting.
Evaluate what you need to do to respond to the cyberattack. How does it apply to this scenario? Recommend a cyberattack response. Your response should include:
Methods to secure stolen data and mitigate harm (two).
Actions to correct the problem that allowed for the cyberattack (two).
Evaluate the breach notification requirements under HIPAA. How does it apply to this scenario?
What breach notice actions do you recommend? (1-2) When do they need to be completed?
What actions would you take to bring the organization back into compliance after the breach?
References
Showalter, S. (2020). The law of healthcare administration. (9th ed.). Health Administration Press. Chapter 9
Perry, F. (2020). The tracks we leave: Ethics and management dilemmas in healthcare. (3rd ed.). ACHE Management Series. Chapter 9
Security 101: Security Risk Analysis (8:06)
Question 4 – Employee Evaluation
Read In The Law of Health Care Administration, 9th Ed, read: Ch. 7 Liability of the Health Care Institution.
Read The Tracks We Leave Ethics and Management Dilemmas in Healthcare, 3rd Ed.: Ch. 8 Nurse Shortage: Metropolitan Community Hospital
Part 1: Critical Analysis of the Law
Evaluate and discuss the requirements of the following law. Give the code citation. How does it apply to employee management? What does a manager need to do or not do to comply with it?
Sexual Harassment
Evaluate the following tool for compliance in employee evaluation. How would it limit legal risk related to employee evaluation? Discuss the pros and cons of it.
Corrective action policies and checklists
Part 2: Strategic Compliance with the Law
Evaluate the scenario in Ch. 8 Nursing Shortage: Metropolitan Community Hospital.
What are the legal risks? What are risks specific to staff negligence and liability?
What would management compliance tools (one) and processes (one) be incorporated in the organization to prevent this problem?
Assume there is a nursing shortage. What employee retention tools(one) and processes(one) would you incorporate to improve nursing retention in this scenario and minimize the likelihood of a negligence lawsuit? Be specific!
References
Showalter, S. (2020). The law of healthcare administration. (9th ed.). Health Administration Press. Chapter 7
Perry, F. (2020). The tracks we leave: Ethics and management dilemmas in healthcare. (3rd ed.). ACHE Management Series. Chapter 8 (pages 117-130) Nurse Shortage: Metropolitan Community Hospital
Vicarious Liability for Torts of an Agent (3:17)
https://catalyst.nejm.org/doi/full/10.1056/CAT.18.0197
Unformatted Attachment Preview
CHAPTER
TAXATION OF HEALTHCARE INSTITUTIONS
12
Copyright 2020. Health Administration Press.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
After reading this chapter, you will
• know the difference between tax-exempt and not-for-profit status,
• recognize the differences between standards for exemption from
federal income taxation and standards for exemption from state ad
valorem (property) taxation,
• be familiar with an important state supreme court decision denying
property tax exemption to a church-affiliated health system,
• appreciate the federal rules regarding lobbying and political
campaign activity and how they apply to 501(c)(3) organizations,
• understand the meaning of “used for charitable purposes,” and
• know how the Affordable Care Act may affect the tax status of notfor-profit healthcare organizations.
Introduction
To be exempt from taxation, an organization must meet the criteria of the tax
law in question. Not-for-profit status is a prerequisite to tax-exempt status, but
the two concepts are not the same. The former is based on state corporation
law, while the latter depends on the federal or state tax law from which the
organization wishes to be excused. The various tax law criteria must be examined carefully because an organization can be exempt under one statute (e.g.,
federal income, excise tax) but taxable under another (e.g., state property tax).
Nature of a Charitable Corporation
Among the organizations exempt from federal income taxation are those
described in Internal Revenue Code (IRC) section 501(c)(3):
Section 501(c)(3)
Corporations, and any community chest, fund, or foundation, [that is] organized
and operated exclusively for religious, charitable, scientific, testing for public
459
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AN: 2361947 ; Stuart Showalter.; The Law of Healthcare Administration, Ninth Edition
Account: s4264928.main.edsebook
460
T h e L aw o f H e a l th c a re A d mi n i stra ti o n
safety, literary, or educational purposes . . . no part of the net earnings of which
inures to the benefit of any private shareholder or individual, no substantial part
of the activities of which is carrying on propaganda, or otherwise attempting, to
influence legislation [with one exception], and which does not participate in, or
intervene in . . . any political campaign on behalf of (or in opposition to) any candidate for public office.1 [Emphasis added.]
Most healthcare institutions that claim tax-exempt status rely on section
501(c)(3). In particular, they claim to be organized for “charitable purposes.” This raises two important questions: What is a charity? What is a
charitable purpose?
What Is a Charity?
charity
An organization
that exists to help
those in need or to
provide religious,
educational,
scientific, or
similar aid to the
public.
Somewhat surprisingly, the IRC does not define either charity or charitable
purpose. Even though the terms have lain encysted in the tax code for many
decades and are used in various state constitutions and statutes, only since the
mid-1980s have they been subjected to any critical analysis. A passage from the
famous Dartmouth College case of 1819 is one example of language in which
the meaning of these terms is assumed to be self-evident. In the opinion, while
quoting from Blackstone’s Commentaries, Chief Justice John Marshall wrote:
[Dartmouth College] is an eleemosynary corporation. It is a private charity, originally founded and endowed by an individual, with a charter obtained for it at his
[the King’s] request, for the better administration of his charity. “The eleemosynary
sort of corporations are such as are constituted for the perpetual distributions of
the free-alms or bounty of the founder of them, to such persons as he has directed.
Of this are all hospitals for the maintenance of the poor, sick and impotent; and all
colleges both in our universities and out of them.” 1 Bl. Com. 471.2
The chief justice then proceeded to discuss eleemosynary (philanthropic)
corporations and their legal history as they were viewed about 200 years ago:
Eleemosynary corporations are for the management of private property, according to the will of the donors; they are private corporations. A college is as much
a private corporation as [a] hospital; especially, a college founded as this was,
by private bounty. A college is a charity. “The establishment of learning,” says
Lord HARDWICKE, “is a charity, and so considered in the statute of Elizabeth. A
devise [a testamentary gift] to a college, for their benefit, is a laudable charity, and
deserves encouragement.” 1 Ves. 537. The legal signification of a charity is derived
chiefly from the statute 43 Eliz., c. 4. “Those purposes,” says Sir. W. GRANT, “are
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C h ap ter 12: Taxation of H ealthc are Institutions
considered charitable, which that statute enumerates.” 9 Ves. 405. Colleges are
enumerated as charities in that statute. The government, in these cases, lends its
aid to perpetuate the beneficient [sic] intention of the donor, by granting a charter,
under which his private charity shall continue to be dispensed, after his death.
This is done, either by incorporating the objects of the charity, as, for instance, the
scholars in a college, or the poor in a hospital; or by incorporating those who are
to be governors or trustees of the charity.3 [Emphasis added.]
These passages have some notable aspects. The first concerns the use
of the word hospital itself. According to the Oxford English Dictionary, it
comes from the Latin hospitalis—the root of our English words hospitality
and hospitable—and originally referred to an institution for welcoming and
housing travelers and persons who were needy, infirm, or aged. For example,
London’s Foundling Hospital was established in 1739 for the “education and
maintenance of exposed and deserted young children,” not for the purpose
of providing medical care.4 Today we might call such an institution a “home”
or an “orphanage” rather than a “hospital.” The sense of hospital as an establishment providing medical or surgical treatment developed only gradually
with the advancement of modern medicine (see chapter 1, part 2).
The second salient point in Marshall’s opinion is to note the authorities
he cites: “Bl. Com.”—short for Sir William Blackstone’s eighteenth-century
treatise, Commentaries on the Laws of England—and various statutes dating
back to the reign of Queen Elizabeth I including the Statute of Elizabeth,
also known as the Charitable Uses Act, which was enacted in 1601. Thus, the
Dartmouth College case is both a good example of how English common law
carried over to the United States and evidence that courts and legislatures
have struggled with the concept of charity for more than four centuries.
Third, Chief Justice Marshall equated hospitals and colleges, assumed
without discussion that they are charities, and cited them as examples of
organizations “constituted for the perpetual distributions of . . . free-alms or
bounty.” Is this description characteristic of today’s healthcare institutions—
or today’s colleges, for that matter?
Fourth, the chief justice assumed that the beneficiaries of hospitals
were poor in addition to being “sick and impotent” (by which he meant
“infirm”). His concept of a hospital echoes the description in chapter 1 of the
almshouses in the Middle Ages—pits of misery and horror—and is consistent
with the meaning of the word in Marshall’s time.
Fifth, research reveals that hospitals per se were not among the enumerated charities in the Statute of Elizabeth; the sole reference to healthcare
in that law was “maintenance of sick and maimed soldiers and mariners.”5
The final notable point, which confirms the premise of our current
discussion, is Chief Justice Marshall’s failure to provide a clear definition of
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461
462
T h e L aw o f H e a l th c a re A d mi n i stra ti o n
the very term that is at the heart of the case. Apparently, charity could only
be described, not defined, in 1819.
Two centuries later, a clear definition of the word remains elusive. For
example, in Provena Covenant Medical Center v. Department of Revenue,6
the Supreme Court of Illinois quoted with approval an 1893 case that had
quoted an 1867 case from Massachusetts:
A charity, in a legal sense, may be more fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either
by bringing their hearts under the influence of education or religion, by relieving
their bodies from disease, suffering or constraint, by assisting them to establish
themselves for life, or by erecting or maintaining public buildings or works, or
otherwise lessening the burthens of government.7
suspect class
A group of people
often subjected
to discrimination
because of
stereotyping;
criteria for suspect
classification
and thus careful
judicial review
include race,
religion, national
origin, gender, and
so on.
This ancient description has been repeated, rephrased, reinterpreted, and
regurgitated many times, but as venerable as it is, its clarity has not improved
and it is little help in deciding real-life cases. As demonstrated later in this
chapter, antediluvian language can be problematic when applied to twentyfirst-century circumstances.
At the least, it seems that a charity must benefit a large segment of the
public (“an indefinite number of persons”) and not restrict its offerings to
a privileged few. Thus, charities are distinguished from the broader category
of not-for-profit organizations; that is, charitable corporations are not-forprofit, but not all not-for-profit organizations are charities. Countless not-for-
profits—for example, social clubs, fraternal organizations, and labor unions—
may extend a significant degree of social service and community benefit
without operating for purposes that would exempt them from taxation.
A charity’s benefits can be restricted to a particular type of beneficiary.
In healthcare, prominent examples are children’s hospitals and women’s
hospitals. In other words, organizations do not jeopardize their charitable
status by confining their activities to a particular purpose and restricting
benefits to a particular category of people (as long as the restriction does not
discriminate against a suspect class of people) or by restricting their activities
because they lack particular types of staff and facilities. Whether the benefits
of a charity may be restricted to the members of a particular church, lodge,
or labor union or to the employees of a particular company depends on the
issue involved in the particular case.
If state law requires tax-exempt organizations to be “purely public
charities,” their beneficiaries usually may not be restricted to the members of
a specific church denomination, fraternal order, or similar group. An old but
still respected case is City of Philadelphia v. Masonic Home of Pennsylvania
(1894), which denied real estate tax exemption to a home for aged Masons
because it served only them, not the general public, and therefore was not
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C h ap ter 12: Taxation of H ealthc are Institutions
“purely public.”8 Nine decades later, the court in the 1982 case West Allegheny
Hospital v. Board of Property Assessment, Appeals and Review relied on Masonic
Home when it decided that a community hospital was tax exempt because it
was open to all without regard to “race, color, creed, national origin or sex”
and was not restricted to members of a particular social organization.9
By way of comparison, Kansas does not require a charity to be “public” in the same sense that Pennsylvania does. Therefore, in Kansas, a hospital may be considered tax exempt even if it serves only specific groups—for
example, Masons, Methodist clergy, or members of Roman Catholic religious
orders.10 The definition of and limitations on the class of persons to be served
by a “charity” thus depend on local law and are open questions in many
jurisdictions. The point comes into focus with respect to specialized institutions, such as hospitals that care only for patients with a particular disease or
disability. Discrimination on the basis of indigence or suspect classification
is still prohibited, but an institution does not forfeit its charitable status by
restricting benefits on the basis of its purpose, facilities, staff, or ability to
serve particular conditions.
As discussed in chapter 10, a hospital may not restrict its provision of
emergency care to those able to pay. A related question concerns whether the
organization must render some amount of free care to maintain its charity
status. This issue has become contentious in recent years, particularly in the
context of whether the hospital must pay ad valorem taxes on the property it
owns. This question will be revisited later in this chapter.
Pretermitting property tax issues for the moment, the question
becomes: Is the provision of medical care in itself a charitable purpose? For
many years, the answer was beyond peradventure, as reflected in the following language from a 1944 New York decision:
Hospitals which are devoted to the care of the sick and injured, which aid in main-
463
peradventure
Chance or
uncertainty;
doubt; question.
taining public health and which make valuable contributions to the advancement
of medical science are rightly regarded as benevolent and charitable. A hospital . . .
which devotes all of its funds exclusively to the maintenance of the institution is
a public charity and this is so irrespective of whether patients are required to pay
for the services rendered.11
That case was decided during World War II, however, and a lot has
changed in three-quarters of a century. The assumption that a hospital is a
charity has come into question lately, as litigants and policymakers challenge
whether not-for-profit hospitals are in any significant way different from their
for-profit counterparts. This question is a serious public policy issue given the
fiscal pressures facing state and local governments and the potential property
tax revenues that could be generated by placing hospital property on the tax
assessor’s rolls.
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464
T h e L aw o f H e a l th c a re A d mi n i stra ti o n
Federal Tax Issues
Healthcare organizations’ exemption from federal income tax is based on
IRC section 501(c)(3). The following explores some significant questions
regarding exemption from federal income tax.
Basic Requirements for Federal Exemption
Charitable Purpose
Is the provision of healthcare a charitable purpose? Section 501(c)(3) does
not define the term charitable. The regulations contain the following relevant
but less-than-enlightening language:
Charitable defined. The term charitable is used . . . in its generally accepted
legal sense and is, therefore, not to be construed as limited by the separate
enumeration in section 501(c)(3) of other tax-exempt purposes which may fall
within the broad outlines of charity as developed by judicial decisions. Such
term includes: Relief of the poor and distressed or of the underprivileged;
advancement of religion; advancement of education or science; erection or
maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare by organizations designed
to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human
and civil rights secured by law; or (iv) to combat community deterioration and
juvenile delinquency.12
inure
A term used but
not defined in
IRC section
501(c)(3); in
context, it means
a charity’s income
or assets may not
benefit, accrue to,
or be distributed
to private
interests.
One thing is clear: healthcare per se is not listed among these activities.
So where does it fit? Does it lessen the burdens of the government? Would
the government necessarily need to provide healthcare as a social service if
community hospitals did not exist? Does providing care amount to relief of
the poor? Are “the poor” only the indigent, or does the term include those
poor in health or spirit? Should it be interpreted that way?
We sense that charity involves benevolence—assisting the less fortunate, doing good works, and promoting the general welfare—but an instinctive response does little to resolve the legal issues, and the answers remain
unclear. Apparently, charity—like pornography, famously—is hard to define,
but you know it when you see it.
No Private Inurement
In addition to being organized and operated for charitable purposes (whatever that means), a tax-exempt organization’s net earnings may not inure to
the benefit of any private individual or corporation. The statute and regulations do not define inure for these purposes, and the dictionary definition—
“to make accustomed”—is ill fitting. Nevertheless, the regulations’ intent is
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C h ap ter 12: Taxation of H ealthc are Institutions
465
relatively clear: A charity’s net earnings must be permanently dedicated to
exempt purposes and may not be distributed to private interests.
This requirement goes hand in hand with the concept of public benefit,
and it raises many questions. Each case must be decided on its own m
erits, and no
single factor or set of factors is conclusive in determining whether a corporation
claiming tax-exempt status is truly providing a c ommunity benefit or is merely a
shield for conferring a financial gain on proprietary interests. The courts consider
several factors, most of which flow from or relate directly to corporate control.
When control of a corporation rests exclusively with a small group of
individuals, the parties’ motives should be subject to close scrutiny. Private
gain is indicated by such factors as (1) division of income among trustees,
members, or officers of the corporation; (2) private use of corporate funds
or facilities; (3) in the case of a hospital, exclusive privileges to admit or treat
patients; and (4) failure to provide services to those unable to pay.13 Even if
tax-exempt status is granted without requiring the hospital to provide free
care, its charity record is evidence of a willingness to serve the public. In other
words, the absence or rarity of charity work may be evidence of private gain.
Because of changes in healthcare financing in the last quarter of the
twentieth century, hospitals developed various economic incentive plans
to attract physicians to the medical staff, encourage the economical use of
hospital facilities, and (one hopes) reduce overall costs. The theory is that
if physicians share in net revenues, they will have a financial incentive to be
efficient and all parties will benefit. As long as the doctors’ compensation
is reasonable and furthers the charitable
purpose of the institution, its tax-exempt
status is not jeopardized.14 Of course,
The Johnson Amendment
the institution must receive and should
document services of value in return for
The provision that prevents 501(c)(3) organizathe incentives it grants the doctors. (Note
tions from engaging in political activities (at the
risk of losing their tax-exempt status) is the sothat such arrangements implicate state or
called “Johnson Amendment.” It is named for
federal antikickback and self-referral laws,
Senator (and later President) Lyndon B. Johnson,
as discussed in chapter 15.)
who offered it as an amendment to the IRC in 1954.
In addition, federal law imposes
There have been numerous efforts to repeal this
sizable financial penalties on persons who
provision, all of which have failed for a variety of
receive “excess benefits” and on the orgareasons.
One concern is that political contributions
nizational managers who approve the
funneled
through 501(c)(3) organizations would be
transactions.15 Tax-exempt organizations
tax-deductible for donors. Another is that repeal
are advised to develop compensation and
would damage the organizations’ image and turn
conflict-of-interest policies to ensure the prothem into partisan “super-PACs.”
priety of transactions with corporate insiders,
Those who support repeal (including President Trump) claim that the prohibition violates
including physicians. Failure to abide by
First Amendment rights.
such policies puts the insiders and corporate
managers at substantial monetary risk.
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466
T h e L aw o f H e a l th c a re A d mi n i stra ti o n
lobbying
Activity intended
to influence
the outcome
of pending
legislation.
Lobbying and Political Activity
Not only does section 501(c)(3) bar private inurement; it also prohibits
exempt organizations from campaigning and electioneering on behalf of or
in opposition to candidates for political office (see The Johnson Amendment). However, they may engage in lobbying as long as that activity
does not amount to a “substantial part” of their overall operations. What
amounts to a “substantial part” is a matter of some dispute, so public charities (except certain religious organizations) are permitted to file an election
with the Internal Revenue Service (IRS) indicating their intent to engage
in lobbying. If they do so, they are subject to defined limitations on their
lobbying expenditures. The following, however, are not considered lobbying expenses:
• Publishing nonpartisan research data
• Providing testimony to a legislative body
• Sending communications to a governmental official outside the
legislative branch
Health Reform Adds New Requirements
The Affordable Care Act (ACA) adds a number of new requirements to the
tax code and imposes additional standards regarding care of the poor.16 To
qualify for the federal exemption, charitable hospitals now must
• conduct a community health needs assessment (CHNA) at least once
every three years,
• adopt an implementation strategy to meet the health needs identified
in the assessment,
• publicize and implement a written financial assistance policy (essentially
a charity care policy) for services to indigent patients,
• adopt a written policy on nondiscrimination in emergency services,
• limit the amounts charged for care to indigent patients, and
• not attempt “extraordinary collection actions” without first
determining whether the patient meets financial assistance criteria.
The CHNA must include “input from persons who represent the broad
interests of the community served by the hospital facility, including those
with special knowledge of or expertise in public health” and must be made
“widely available to the public.”17 Failure to comply subjects hospitals to a
penalty tax.
The ACA also adds new review and reporting requirements. IRC section 501(r) requires hospitals to be audited at least once every three years for
compliance with the CHNA requirement, and organizations will need to file
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C h ap ter 12: Taxation of H ealthc are Institutions
467
their audited financial statements and report annually to the IRS how they
are meeting community needs. Finally, the ACA requires the secretaries of
the departments of Treasury and Health and Human Services to report annually to Congress the levels of charity care hospitals are providing, hospitals’
bad debt expenses, unreimbursed services, and similar items.
In a nutshell, a healthcare organization seeking to maintain federal
tax exemption needs to meet these new charity care and community benefit
requirements in addition to meeting the traditional charitable purpose and
private inurement standards. Notably, these new provisions of the ACA contain a built-in irony: If more people gain insurance coverage as health reform
takes hold, fewer people will qualify for charity and hospitals will have more
difficulty meeting their charity care obligations. Furthermore, if the United
States were to achieve universal health insurance, would hospitals no longer
qualify as “charitable” institutions? Whether federal tax exemption will continue to be a viable concept for healthcare organizations remains to be seen.
Taxation of Unrelated Business Income
Even if an organization meets the requirements for tax exemption, not all its
income is tax exempt (see Legal Brief). When a 501(c)(3) charity earns revenue from a line of business that does not further its charitable purpose, that
income is subject to unrelated business income taxation (UBIT) as though it
were earned by a for-profit organization. Without UBIT, the charity would
have an unfair competitive advantage over commercial entities that provide
the same types of products or services.
So long as the unrelated activities do not constitute a substantial part
of the charity’s work, unrelated income does not threaten the organization’s
underlying tax-exempt status. What constitutes a “substantial part” has not
been clearly defined, but a rule of thumb is that the IRS might challenge the
tax-exempt status of a charity if its gross income from unrelated activities
exceeds 50 percent of its total revenue. In addition, sales of goods or services
to private parties below cost may also constitute private inurement and may
jeopardize the tax-exempt status of the seller.18
Investment income—for example, income from dividends, interest, annuities, and research—is not taxable, but such operations as hospital gift
shops; restaurants; parking lots; pharmaLegal Brief
cies; physicians’ offices; and residences
for interns, nurses, and other staff may
The taxation of exempt organizations’ unrelated
generate taxable income. The fact that
business income is governed by IRC §§ 511 to 515
the income is used for hospital or chariand regulations found at 26 C.F.R. §§ 1.511-1 to
table purposes does not exempt it from
1.514(g)-1.
taxation. The test is whether the activity
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468
T h e L aw o f H e a l th c a re A d mi n i stra ti o n
itself is substantially related to the charitable purpose of the tax-exempt
institution. In other words, does it further the mission of the exempt
organization, or is it simply an extra source of revenue? All the nuances of
that question cannot be addressed here, but a hospital generally can avoid
UBIT if it can show that it is conducting the business activity primarily for
the convenience of patients. Whether sales to persons other than patients
generate taxable income is a complex question that should be addressed
with qualified tax counsel.
State and Local Property Taxes
ad valorem tax
Tax imposed in
proportion to
the value of the
property being
assessed.
Some of the most interesting and financially consequential tax cases concern
whether healthcare organizations’ property should be assessed for ad valorem
tax. A hospital, for example, typically sits on prime real estate, and given its
structures and other improvements, the campus is often the most prominent and valuable property in the neighborhood. State and local authorities
are understandably eager to generate tax revenue from those assets, but (as
shown in this section) charities and governmental organizations—which are
not taxed—do not offer a solution to communities’ fiscal woes.
Governmental Property
Federal property is exempt from state and local taxes, and so is most property
owned by state and local entities, depending on the relevant state constitution or statute. In some states, governmental ownership and control are sufficient to establish exemption, but other states require also that the property
be used exclusively for a public purpose to justify exemption.19
In a 1986 Minnesota case, a medical clinic owned and operated by
a municipal hospital was not exempt from taxation when it was staffed by
physicians engaged in private practice on a fee-for-service basis. The board of
the hospital and the physicians annually reviewed and agreed on the service
fees charged to patients. Each doctor then received 60 percent of his gross
accounts receivable. Noting that the issue hinged on whether the primary
use of the facility was for public purposes or for private gain, the Minnesota
Supreme Court denied the exemption; the facility was not being used exclusively for a public purpose.20 (Today, this arrangement would raise fraud and
abuse issues as well.)
Private Property
The exemption of private healthcare institutions’ real estate and personal
property from taxation depends on two main factors: (1) qualification as a
charity and (2) use for a charitable purpose.
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C h ap ter 12: Taxation of H ealthc are Institutions
Qualification as a Charity
Like the property of any other business, the property of a for-profit healthcare organization is fully taxable. If the owner claims to be a charity, state
constitutional or statutory provisions determine exempt status.
In many states, a constitutional provision mandates tax exemption
for property owned by charities. The legislature and courts cannot alter this
requirement, although the courts have the power to interpret its meaning.
Other state constitutions contain permissive exemptions, and a few state
constitutions are silent on the matter. In either of these latter situations, the
standards for tax-exempt status are for the legislature to determine.
The distinction between a mandatory constitutional provision and a
permissive one (or none at all) is significant when, in the search for additional revenue, there is political pressure to restrict or reduce the number of
ad valorem tax exemptions. This distinction was a factor in the iconoclastic
decision of Utah County v. Intermountain Health Care, Inc.21
The Utah constitution had exempted from taxation all property
owned by nonprofit entities and used exclusively for either religious worship
or charitable purposes. In an attempt to “clarify” the constitutional language,
the Utah legislature defined charitable purposes to mean “religious, hospital,
educational, employee representation, or welfare purposes
