The Law of Tax-Exempt Healthcare Organizations

Thomas K. Hyatt, Bruce R. Hopkins

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118532874
• Edition: 4
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

A completely revised and expanded one-volume legal resource for tax-exempt healthcare organizations

A complete and up-to-date legal resource for tax-exempt healthcare organizations and their advisors, this Fourth Edition, equips you with a comprehensive, one-volume source of detailed information on federal law covering tax-exempt healthcare organizations. The Fourth Edition of this practical, down-to-earth book tackles complex legal issues by providing you with plain-English explanations and the appropriate legal citations for further research.

• Revised with new discussions on healthcare reform, the Affordable Care Act, IRS initiatives, executive compensation, commercial activity by tax-exempt organizations, political campaign activity, charitable reforms, governance, restrictions on supporting organizations, intermediate sanctions, and much more
• Provides detailed documentation and citations, including references to regulations, rulings, cases, and tax literature
• Includes an exhaustive index allowing for quick and easy reference
• Offers annual supplements to keep readers apprised of the latest developments affecting tax-exempt healthcare organizations

Written by leading experts in the fields of healthcare and nonprofit law, this comprehensive and vital resource has been completely revised and updated to present a clear view of complicated legal and tax issues.

Part One

Introduction to The Law of Tax-Exempt Healthcare Organizations

Chapter One

Tax-Exempt Healthcare Organizations–An Overview

§ 1.1 Constitutional Law Perspective

§ 1.2 Defining Tax-Exempt Organizations

§ 1.3 Rationales for Tax Exemption

§ 1.4 Categories of Tax-Exempt Healthcare Organizations

§ 1.5 Charitable Healthcare Organizations

§ 1.6 The Law of Charitable Trusts

§ 1.7 Relief of Poverty

§ 1.8 Promotion of Health

§ 1.9 Social Welfare Organizations

The waxing and waning of tax policy, at the federal and state levels, has pushed nonprofit healthcare organizations to the fore in terms of scrutiny and into the heart of the debate over eligibility for tax-exempt status. No category of exempt organization has its tax exemption in greater jeopardy than hospitals, health maintenance organizations (HMOs), and other healthcare providers. Few other types of exempt organizations are raising as many unrelated income issues as these entities. Moreover, when it comes to the creation of new organizations and the triggering of new tax questions, no group of nonprofit organizations can top nonprofit healthcare organizations.

This high-profile position and the resulting predicament for healthcare entities are explicable on a very fundamental basis: government regulators, legislators, and the public are finding it increasingly difficult to differentiate the practice of healthcare by nonprofit organizations from that by for-profit organizations. Part of this confusion is attributable to the evolving forms of healthcare vehicles and the dramatic changes in the places where medicine is practiced and healthcare otherwise delivered. Other elements of the confusion are traceable to the alterations in the way healthcare is funded: the enactment of the Medicare and Medicaid programs greatly expanded the universe of individuals who could, directly or indirectly, “pay” for healthcare services; the injection of healthcare services into the realm of employment benefits forced greater funding of healthcare services by employers and shifted a large part of healthcare funding to commercial insurance companies.

Much of health law evolved from the regulatory frameworks built up around government-financed healthcare benefits and the ways in which the insurance companies set about to reduce the amounts paid out to, or for the care of, benefits claimants. As these bodies of regulation grew (typified by anti-abuse and patient dumping rules) and inequitable insurance practices (highlighted by denials of coverage because of “preexisting conditions” and changes of employers) became more commonplace, the nation's healthcare system became troubled.

Consumers became first perplexed and then angered by the rapidly evolving and shifting healthcare system's institutional look. The role of freestanding hospitals declined, and massive systems took their place. The intricacies of HMOs had to be parsed, traditional private practices gave way to mysterious combinations of physicians with their ever-more-focused subspecialties, and the modern patient saw his or her illness treated through something called an “integrated delivery system.”

The last decade of the twentieth century brought much cacophony but little in the way of actual accomplishment as to healthcare legislation. Despite the frenetics of the healthcare marketplace, very little was translated into federal tax law. The Clinton Administration's massive effort to reform the healthcare delivery system failed. The 103d Congress (1993–1994) spent a major portion of its second session struggling with many versions of healthcare legislation; not much came of that. Subsequent years saw Congress talk much about healthcare delivery law revision, including a substantial focus on managed care; nothing, however, was enacted.

As the debate in and outside Congress about the appropriateness, as a matter of tax policy, of tax exemption for nonprofit hospitals and similar entities has intensified,¹ greater attention has been given to the possibility of legislation on the topic. For example, legislation was introduced late in 2006 to deny exempt status and impose excise taxes on healthcare providers that fail to provide a minimum level of charitable medical care.² Not long thereafter, the Internal Revenue Service³ set the stage for the enactment of tax legislation concerning the exemption criteria for hospitals when it developed a wholly revamped annual information return (Form 990), including its Schedule H.⁴ This legislation emerged in 2010, as the legislative crown jewel of the Obama administration, in the form of the Patient Protection and Affordable Care Act,⁵ as amended by the Health Care and Education Reconciliation Act of 2010,⁶ bringing, among a dazzling array of new laws, additional criteria to be satisfied by exempt hospitals as a condition of retention of exempt status.⁷

The absence of substantial federal healthcare legislation (until 2010) has not slowed the ongoing revision of and expansion in health law. Experiments at the state level and the forces of the marketplace are rapidly altering the way healthcare services are being provided in this country. Of great importance, the policymakers in the Department of the Treasury and in the IRS are continuing to reshape the role of nonprofit, tax-exempt healthcare providers and funders in the healthcare delivery process.

This book concerns the law of tax-exempt healthcare organizations. For the most part, this law consists of federal health law and tax law requirements. Other relevant federal and state laws that apply to tax-exempt healthcare organizations are referenced throughout the book.

§ 1.1 Constitutional Law Perspective

There is no explicit right to healthcare embedded in the United States Constitution.⁸ This is not surprising. The Constitution is a sketch of the structure and functioning of the federal government and its relationship with the states, not a framework for the entirety of U.S. society.⁹ Indeed, one commentator noted that the “provisions of the Constitution indicate that the framers were somewhat more concerned with guaranteeing freedom from government, rather than with providing for specific rights to government services such as for health care.”¹⁰

Yet Congress has repeatedly enacted healthcare legislation. The primary source of constitutional authority for these laws are Congress's power to regulate commerce¹¹ and its power to tax and spend for the general welfare.¹² Bodies of healthcare law that have passed constitutional law muster include the Hospital Survey and Construction Act, the Emergency Medical Treatment and Active Labor Act, the Medicare program, the Medicaid program, the Children's Health Insurance Program, and many tax laws.

The most recent health care law considered by the U.S. Supreme Court¹³ led to decisions that the individual health insurance mandate was unconstitutional as a breach of Congress's Commerce Clause power, but survived constitutional law scrutiny as a valid exercise of Congress' taxing power and that Congress cannot threaten the states with loss of all federal Medicaid funding if the states decline to expand Medicaid coverage as Congress mandated.¹⁴

§ 1.2 Defining Tax-Exempt Organizations

A tax-exempt organization is a unique entity.¹⁵ Almost always, it is a nonprofit organization.¹⁶ The concept of a nonprofit organization is usually a matter of state law;¹⁷ the concept of a tax-exempt organization is principally a matter of the federal tax law.¹⁸

The universe of nonprofit organizations in the United States comprises the nation's nonprofit sector —a name that has not been a totally comfortable fit for those within the sector. Over the years, it has been called, among other appellations, the “philanthropic sector,”“private sector,”“voluntary sector,”“third sector,” and “independent sector.” In a sense, none of these terms is appropriate.¹⁹

Essentially, there are three sectors in a democratic or civil society: governmental, for-profit, and nonprofit. Governmental entities are the branches, departments, agencies, and the like, of the federal, state, and local governments. For-profit entities comprise the business or commercial sector of a society. Nonprofit organizations constitute the nonprofit sector,²⁰ which is critical for the maintenance of freedom and as a bulwark against the excesses of the other two sectors.

In addition to confining the organization's purpose to nonprofit endeavors, the rules of state law concerning the creation of nonprofit organizations usually address subjects such as the origin and composition of the organization's...