Tax-Exempt Hospitals: What Are the Requirements?

A tax-exempt hospital is a non-profit organization granted exemption from most federal, state, and local taxes. This status is conferred upon hospitals that demonstrate they provide a significant benefit to the community they serve. In exchange for tax relief, these institutions are expected to operate for charitable purposes, directing surplus funds toward their mission of providing healthcare and improving community health.

This tax status carries substantial responsibilities governed by the Internal Revenue Code, which outlines the standards these hospitals must meet. The financial advantages of tax exemption must be reciprocated with tangible benefits to the public. This includes providing medical care, actively working to address the broader health needs of their populations, and operating with transparency.

Core Requirements for Federal Tax Exemption

To maintain their tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, hospitals must comply with four requirements added by the Affordable Care Act and codified in Section 501(r). These rules apply on a facility-by-facility basis, meaning an organization operating multiple hospitals must ensure each one meets these standards. The regulations are designed to ensure that charitable hospitals fulfill their obligation to the community.

A requirement is the completion of a Community Health Needs Assessment (CHNA) at least once every three years. This process involves identifying the significant health needs of the community and must take into account input from persons who represent the community’s interests, including those with public health expertise. Following the CHNA, the hospital’s board must adopt a written implementation strategy detailing how it plans to address the identified needs.

Hospitals must also establish and widely publicize a Financial Assistance Policy (FAP). This written policy must specify the eligibility criteria for receiving free or discounted care, the basis for calculating amounts charged to patients, and the method for applying for financial assistance. The hospital is required to make the FAP, its application form, and a plain language summary of the policy widely available on its website, in public areas of the hospital, and on billing statements.

Another requirement imposes limitations on the amounts that tax-exempt hospitals can charge patients eligible for assistance under the FAP. For any emergency or other medically necessary care, these patients cannot be charged more than the amounts generally billed (AGB) to individuals who have insurance coverage. This provision prevents hospitals from charging their most financially vulnerable patients the highest rates, a practice often referred to as “chargemaster” billing.

Finally, Section 501(r) establishes rules regarding billing and collection. Before taking extraordinary collection actions (ECAs), a hospital must make reasonable efforts to determine whether a patient is eligible for assistance under its FAP. This includes providing patients a window of at least 240 days from the first post-discharge bill to apply for financial aid. ECAs include selling a patient’s debt, reporting adverse information to credit agencies, or taking legal action like placing liens on property or garnishing wages.

Public Disclosure and Reporting Obligations

Hospitals fulfill transparency obligations through public disclosure and reporting. The annual information return filed with the IRS, Form 990, provides a detailed overview of the organization’s finances, governance, and activities. For hospitals, an attachment, Schedule H, is required to report on community benefit activities and compliance with federal requirements.

Schedule H of Form 990 is where a hospital provides facility-specific information related to the Section 501(r) rules. The hospital reports on its community benefit activities, quantifying the costs of financial assistance and other services. The schedule also addresses compliance, requiring the hospital to answer questions about its CHNA, FAP, charge limitations, and collection practices, and must include its most recently audited financial statements.

The public has multiple avenues to access these filings. The IRS makes these documents available through its Tax Exempt Organization Search tool on its website. Hospitals are also required to make their Form 990 and its schedules widely available, often by posting them on their own websites. Independent, third-party databases also collect and publish this information.

Consequences of Non-Compliance

Failure to meet the requirements of Section 501(r) can lead to penalties, ranging from financial assessments to the complete loss of tax-exempt status. The severity of the consequence depends on the nature and extent of the non-compliance. The IRS distinguishes between minor, inadvertent errors and more significant, willful failures.

For minor and inadvertent omissions, a hospital may avoid the most severe penalties. If an organization can demonstrate it has established practices to promote compliance and has corrected the failure promptly after discovery, the IRS may treat the lapse with more leniency. This framework encourages hospitals to self-police and remedy issues as they arise.

More substantial failures can trigger specific penalties. For instance, a hospital organization that fails to conduct a CHNA and develop an implementation strategy for a given three-year cycle is subject to a $50,000 excise tax. Other failures, such as not adhering to the billing and collection rules for a specific patient, must be corrected and can be considered part of a pattern of non-compliance.

The most severe consequence is the revocation of the hospital’s 501(c)(3) tax-exempt status, which is reserved for situations where non-compliance is willful or egregious. Losing this status means the hospital’s income becomes subject to federal corporate income tax, altering its financial structure. The IRS can apply this penalty at the individual facility level or to the entire hospital organization.

State and Local Tax Exemption Considerations

Securing federal tax exemption under Section 501(c)(3) is only one piece of the puzzle for non-profit hospitals. These institutions are also exempt from a variety of state and local taxes, including state corporate income tax, sales tax on purchases, and local property taxes. These state and local exemptions often represent a substantial financial benefit.

While achieving federal 501(c)(3) status is a necessary first step, it does not guarantee exemption from state and local taxes. Many states have established their own distinct and sometimes more stringent standards for what a hospital must do to qualify as a charitable institution. These requirements are separate from the federal rules and must be independently satisfied.

These state-level standards for charity care or community benefit can vary widely. Some jurisdictions may set a minimum percentage of a hospital’s revenue or operating expenses that must be dedicated to free or discounted care. Others may have specific requirements for the types of community benefit activities that qualify or impose different reporting obligations. A failure to meet a state-mandated charity care threshold could jeopardize a hospital’s exemption from property taxes, even if it remains in full compliance with federal requirements.