What are the requirements for nonprofit hospitals, how is it regulated?

What are the regulations for hospitals, like IU Health, to have nonprofit status? A listener in Columbus was curious.

Beth Gazley is a professor at the O’Neill School of Public and Environmental Affairs. She said there are three designations a hospital can have: for-profit, government-owned or nonprofit. She said nonprofit hospitals have to apply for their status.

“All not-for-profit organizations have to apply for recognition to the Internal Revenue Service,” Gazley said. “So there's tax law written by Congress, recognizing certain activities is charitable, and any organization that decides to provide one of those recognized activities, then they fill out some forms and they seek recognition from the IRS.”

Gazley said the majority of hospitals are nonprofits. Although they do not pay income taxes and sometimes do not pay property taxes, she said these hospitals still pay some taxes.

“If they employ people, they're going to still pay Social Security and unemployment,” she said. “And, they probably are going to pay sales tax on stuff that they purchase.”

In order to establish nonprofit status, hospitals must file a form with the Internal Revenue Service. Once they are recognized as a nonprofit, they must check in with the IRS every year to ensure they are maintaining this status. Part of this involves completing Form 990, an annual report, to show they continue to meet these guidelines.

“It would be filing the annual information return, the 990 form, and all of its schedules,” Gazley said. “And it would also be following up if the IRS has any additional questions for the health care institution, they might have to provide some additional information.”

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Hospitals must also be organized and operated exclusively for specific tax-exempt purposes and meet other IRS-specific requirements. For example, operating a full-time emergency room open to everyone and having a community board.

They must also provide a list of additional community benefits they provide – Gazley said these benefits may come in many ways.

“For instance, providing health care to people who can't pay for it,” she said. “It also might be giving financial assistance to people.”

Gazley said this also may include community outreach, preventative health programs, workshops, clinics and education.

“By law, you can't be turned away from an emergency room but for-profit hospitals do have some limits on on the care that they're required to provide by law,” Gazley said. “So, they could kick somebody who can't pay out the door again at some point in time.”

She said there are additional accreditation activities these hospitals must do outside of their requirements with the IRS.

Gazley said nonprofit hospitals may still have high prices due to lack of competition in health care.

“So hospitals, of course, are multi-hundreds-of-million-dollar enterprises, and very hard to set up,” she said. It is also very hard to have more than one in a community.”

Hospitals are still eligible to be tax-exempt if their revenues exceed their profits. According to the IRS, this extra revenue can help promote “improvements in quality of patient care, facilities and equipment” as well as expanded education, research and medical training programs.

Contact reporter Violet at vcomberwilen@wfyi.org or follow her on Twitter at @ComberWilen.

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