Tax Exempt Issues
Requirements for obtaining and maintaining exemption (for hospitals and health systems) from federal income tax under §501(c)(3) of the Internal Revenue Code:
1. exempt purpose and the “community benefit” standard;
-principle standard applied by the Service today in determining whether a healthcare organization qualifies as charitable.
-an organization must establish the presence of significant factors demonstrating that the organization promotes the health of a class of person that is broad enough so that the community as a whole benefit.
-one highly significant factor – an emergency room that is open to all persons, regardless of their ability to pay.
-another significant factor – having a board of trustees comprise of prominent citizens drawn from the community
2. unrelated business income tax (UBIT);
3. standalone exempt status;
4. integral-part exempt status;
5. private inurement;
6. more-than-incidental private benefit; and
7. public charity status
Benefits of being tax-exempt:
-exempt from paying federal income tax on its net income
-eligibility to borrow funds by issuing tax-exempt bonds under §103 of the Code
-§501(c)(3) organizations are more attractive to donors than other forms of federal tax-exempt organization’s because a donor’s contribution qualifies for a charitable deduction.
-enhances an organization’s ability to qualify in some states and localities for exemption from taxes such as property tax and sales tax
To qualify for tax-exempt status under §501(c)(3) of the Code, an organization must be organized and operated exclusively for religious, charitable, scientific, literary, educational, or other specified purposes.
-charitable purpose (public benefit v. private benefit)
-no private benefit
Serving charitable purpose that has certain activities that benefit the community as a whole. Tests IRS do to ensure entity maintains tax exempt status:
1. Organizational – purpose of hospital meets exempt purpose (charity – doing good v. private benefit) – What are they going to do?
2. Operational – are you in fact still providing the benefit claimed?
3. Exempt Purpose Standard – ensure that community benefit standard is meet and not for private benefit
Organizational Test – An organization is organized exclusively for one or more exempt purposes only if its articles of organization:
1. limit the purposes of such organization to one or more exempt purposes;
2. do not expressly empower the organization to engage, other than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes;
3. do not expressly empower the organization to:
a. devote more time than an insubstantial part of its activities to attempting to influence legislation by propaganda or otherwise
b. directly or indirectly participate or intervene in (including the publishing or distributing of statements) any political campaign on behalf of or in opposition to any candidate for public office, or
c. have objectives and engage in activities that characterize it as an “action” organization
4. permit distribution of the organization’s assets, upon dissolution, only for one or more exempt purposes or to the federal, state or local gov’t for a public purpose, or as may otherwise be determined by a court or competent jurisdiction
Operational Test – Requirements:
1. the organization engage primarily in activities that further one or more recognized exempt purposes (the exempt purposes requirement)
2. such activities serve a public rather than a private purpose (the public benefit requirement). Any benefits that flow from corporate activities to private interests must be incidental.
3. no part of the net earnings of the organization may inure to the benefit of any private shareholder or individual (the prohibition against private inurement); and
4. the organization may not engage in political activity, and no more than a insubstantial part of its activities may be to influence legislation (the political activity prohibition and lobbying limitation)
Government Enforcement & Regulation
-all states regulate the operation of hospitals in order to protect the public
-almost all hospitals participate in gov’t funding programs so they are also regulated by the fed. gov’t
1. healthcare clearing houses (3rd party billers)
3. health insurance companies
1. Licensure -NJAC 8:43G
2. Patient Safety and Rights – protect citizens from harm in the course of receiving hospital care
-patient restraints, hospital infection rates, proper use of equipment
-govern how hospitals may relate to physicians and other health professionals who practice within the hospital
-power of state must be used to protect the individual medical practitioner against the perceived market power of a local hospital
-regulates specific medical treatments
-to ensure that all patients w/ specific conditions receive particular elements of medical care, regardless of the patient’s ability to pay and regardless of the decisions of the patient’s practioners
-also to protect patients from particular procedures that are perceived as being more dangerous when the condition of the patient may make it impossible for the patient to fully understand the risks and benefits of the treatments or when family members may be making treatment decisions that potentially might not always reflect the best interest of the patient.
-protection of the privacy of medical records
-availability of hospital facilities through CON laws and regulations
-CON law prohibit construction of new hospitals, est. of major hospital services, sale or transfer or ownership, etc. w/o obtaining prior approval of the state.
-opening and closing of hospital
-change of ownership
-new/different/delete a service
-Certificate of Need (CON)
-any healthcare facility has to be license & generally process that licensing occurs is through certificate of need process.
-they have to demonstrate that it is warranted and also need to demonstrate for closures
-CON goals – restraining costs and coordinate planning of care
-CON laws and regulations are intended to protect the public from an oversupply of hospital services that would unnecessarily escalate the cost of hospital care, as well as the entry of unqualified operators owning essential healthcare facilities within the state.
-NJ – Dept. of Health and Senior Services and Dept. of Human Services for Medicaid
-started w/ Medicare establishment in 1966
-established in order to promote the provision of nondiscriminatory, cost-effective, and cost-efficient services to Medicare and Medicaid beneficiaries
-The Centers for Medicare and Medicaid Services (CMS) developed complex series of regulations affecting almost every aspect of hospital operations
1. -HIPAA (see below section for more details)
-Privacy – PHI – protected health info
-Electronic [billing] submission
2. EMTALA – Emergency Medical Treatment and Active Labor Act (also under duty to treat)
-requires participating hospitals to provide emergency treatment to all persons who arrive at the hospital, regardless of whether the individual is covered by Medicare, Medicaid, or any other health plan or program
-requires all hospitals to perform a medical screening exam to persons who arrive at the hospital in need of emergency treatment
-Must not be delayed to determine whether the patient has insurance
-if the screening reveals that the patient is suffering from an emergency medical condition (including active labor) then the hospital must treat the individual and either stabilize her condition or provide an appropriate transfer to another facility
–Reaches physician when treating in hospital but can’t reach them in their office.
-Has to be seen in ER within 4 hours or have EMTALA complaint.
-regulated by Office of Ins
-a partially integrated provider-controlled network (IPA) is a combination of its members rather than a single entity so Sec. 1 applies to its activities
-if two parties merge they become a single entity for antitrust purposes
-conspiracy for antitrust purposes is a conscious commitment by 2 or more parties to a common scheme designed to achieve an unlawful objective, or a meeting of the minds in an unlawful agreement.
-Sec. 1 does not prohibit every restraint on competition, but rather only those that unreasonably restrain competition
-Agreements that are per se illegal are among competitors that facially appear to be of a type that always (or almost always) tends to restrict competition by decreasing output or increasing prices, rather than an agreement designed to increase economic efficiency or otherwise generate precompetitive effects.
-If not per se than apply the “rule of reason”
-Agreements that might violate Sec. 1:
1. Horizontal Price-Fixing Agreement – agreement among competitors that directly affect the prices they charge for their goods or services.
2. Horizontal Agreements to Exchange Pricing Information – can lead to #1 and also can result in price stabilization
3. Horizontal Market-Allocation Agreements – agreement among competitors by which they allocate designated geographical areas, the sale of particular goods or services, or particular types of customers among themselves.
4. Horizontal Concerted Refusals to Deal or Group Boycotts – agreement among competitors not to deal, or to deal only on agreed-upon terms, with another firm.
5. Tying Agreements – result when a seller and buyer agree that the seller will sell the buyer one product or service (the tying product) but only if the buyer purchases a second separate product or service (the tied product).
6. Exclusive-Dealing Agreements – results when a buyer and seller agree either (1) that the seller will sell to only the buyer, and not to that buyer’s competitors; or (2) that a buyer will buy only from that seller, and not from its competitors.
-prohibits monopolization, attempted monopolization and conspiracies to monopolize
-monopolization requires proof of two essential elements:
1. monopoly power and
2. the willful acquisition, maintenance, or addition to monopoly power by “predatory” or “unreasonably exclusionary” conduct, as opposed to a superior product, business acumen, or historical accident or competition on the merits.
-legally – monopoly power is the power to control prices or exclude competition
-economically – monopoly power is simply a substantial degree of market power
2. Clayton Act, §7 (including Robinson-Patman Act)
-prohibits all types of merger and other forms of acquisitions that may lessen competition substantially
3. Federal Trade Commission Act (FTC Act), §5
-declares conduct that violates either the “letter” or any of the antitrust laws or their “spirit” to be an unfair method of competition.
Licensure & Regulation of Health Care Professionals
NJSA 45:9-5.1 – definition of practice of medicine within state
State Mandated Requirement:
-regulated by Board of Medical Examiners
-graduate from accredited institution
-residency – requisite hours
-passing standardize tests