Louisiana Hospital to Terminate Its IRS Nonprofit Status

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March 3, 2016; Franklin Sun (Winnsboro, LA)

Many people might see this as a man-bites-dog story. Tax exemption as a nonprofit—especially as a 501(c)(3) public charity—is a cherished goal for many organizations. They fight to comply with the rules and regulations accompanying that IRS recognition because charities receive two valuable benefits: their mission-related activities are generally exempt from federal income taxes and donors can give tax-deductible gifts to support the organization’s missions.

Franklin Medical Center’s decision to forego nonprofit tax exemption has a lot to do with the specific requirements placed on nonprofit hospitals by the Affordable Care Act. Under the ACA, nonprofit hospitals need to conduct community health needs assessments every three years. They also need to follow financial guidelines, especially including collection practices for patient accounts. Failure by a nonprofit hospital to comply can result in the imposition of significant federal excise taxes.

Franklin’s Board of Governors decided that the costs of compliance were too great. They are a government hospital under the authority of Louisiana’s Franklin Parish. As such, they can accept deductible charitable gifts and are generally exempt from taxation. While some government-owned hospitals establish 501(c)(3) management in order to provide preferential investment of retirement funds, Franklin Medical Center assures staff and the community that renouncing its IRS tax exemption will not affect employees and retirees.

There are approximately 1,000 state and local government-run hospitals in the U.S., representing just under one out of five U.S. hospital facilities. Hospital executives and boards of some government-run hospitals have been looking at the cost-benefit analysis of tax exemption for some time, but the firm decision to abandon tax-exemption is still rare.

As a former nonprofit hospital, Franklin will no longer have to file a Form 990 for its employee benefit plan, will no longer need to perform a CHNA, and will have greater latitude to pursue collection of patient accounts more aggressively. Will the loss of community accountability affect Franklin’s patients and taxpayers, or will its Board of Governors and other leaders step up to develop new forms of transparency and accountability for its stakeholders and the public?—Michael Wyland