When thinking of end-of-life choices, one’s thoughts will inevitably turn to hospice, a compassionate option focused on comfort and quality of life rather than curing illness. As each patient’s situation varies, where end-of-life care occurs can also vary widely. In addition to a patient’s own home, hospice care can be offered in nursing homes and other long-term care facilities, in specifically designed hospice centers, and in hospitals.
While the medical and emotional impact of hospice care understandably comes to mind first, financial issues are also crucial and warrant consideration.
For example, who pays for hospice care? Most of these services are covered by hospice benefits through Medicare. This covers practically all parts of such care with very little payment responsibility to the patient themselves or their family. Fortunately, for terminally ill patients, the financial burdens are minimal. Also, in most states, as well as in the District of Columbia, Medicaid, and many private health insurance plans will pay for hospice care.
That said, and for readers of our blog—which covers accounting and tax issues often focused on the healthcare industry—understanding how to navigate tax regulations related to hospice care can be helpful. Indeed, hospices (or other facilities offering hospice services) must be attentive to their ongoing financial strategies and tax situations, particularly if they have tax-exempt status.
In this piece, we highlight important tax considerations for hospices and offer our readers a bit of guidance on how to achieve compliance and secure long-term financial health.
Understanding Tax-Exempt Status: Not All Are Created Equal
To start, some hospices are classified as non-profit organizations, while many are not. The key difference is that for those classified as “non-profit hospices,” no taxes are required to state or federal tax coffers for monies received from Medicare for offering hospice services. Interestingly, this tax exemption is standard for all non-profits and is not specific to hospice care facilities (an important point that will be explored in more detail in this article).
Roughly 40 years ago, Medicare began reimbursing for hospice care. At the time, most hospice entities were community, non-profit organizations that had to depend on volunteers to care for patients and even handle the organizational and administrative sides of the business. Fast forward to today, and hospice care has instead shifted to an industry mostly dominated by for-profit businesses. Indeed, over time, it has become a growing industry.
However, returning to non-profit hospices, I see that their dual role is as care providers and non-profit entities. The Internal Revenue Service is clear in its indication that under the IRS Code Section 501(c)(3) with guidance by the Revenue Ruling 69-545 PDF, hospices can operate as tax-exempt with purposes such as charitable, religious, educational, or scientific aims. This was a shift to a “community benefit” standard versus the IRS’s earlier classification of healthcare facilities offering free or below-cost care.
So, prior to the 69-545 Ruling, healthcare facilities (including hospices) that wanted to establish and maintain tax-exempt status had to offer “charity care.” This status, established in 1956, demanded that a healthcare entity such as a hospital could not operate solely for patients who were expected and capable of paying. Rather, healthcare facilities maintained their tax-exempt status by providing free or below-cost care to those who couldn’t pay themselves. (This regulation is mitigated to some degree by the entity’s financial ability to handle such burdens.)
Since the late 1960s (and currently today), the Internal Revenue Service has mandated that in order for hospices to retain their tax-exempt status, they must demonstrate a “substantial community benefit.” Basically, this means that the entity promotes health to a “sufficiently” broad class of people.
Financial Assistance and Surplus Funds
As end-of-life care is a vital public service and vital to those who have the ability to pay, hospices often provide care to patients in need of help, either with full payment or a partial subsidy. It’s a way for hospices to demonstrate their “community benefit,” again, an important factor for the entity to keep their tax-exempt status.
Surplus funds or monies left over after taking into consideration expenses are generally reinvested by non-profits into future changes in patient care, technology upgrades, facility expansion, and other service improvements. It is important to note that funds in non-profits may have certain restrictions. Literally called “restricted funds,” these may come from donations that include specific instructions for their use. As many hospices fall under the non-profit designation, it may be necessary to ensure the correct usage of funds to stay within IRA compliance by tapping into outside expertise, such as an accounting firm well-versed in such details.
Tax Planning Strategies
Smart and effective tax planning is another area to consider. By being proactive, healthcare entities that offer hospice care can reduce their tax burden; hospices must think about the full impact of expenses and can improve their long-term financial situations by looking at it in a holistic way. For instance, premiums paid by hospices for employee health insurance can be deducted. By offering employees truly comprehensive healthcare packages (and other job-related benefits), hospices can not only encourage employee wellness but boost their tax situations. Other tax benefits hospices should be aware of include credits and depreciation schedules for capital investments, such as new healthcare equipment or changes to their facility real estate portfolio.
As there are many such tax-saving strategies available to both non- and for-profit hospice entities, seeking appropriate tax guidance is recommended.
Compliance and Additional Resources
As in most industries, particularly ones as powerful and growing as the healthcare industry in the United States, lobbying and political activities are a factor. To remain compliant with the IRS, hospices should be mindful of substantial lobbying activities. That said, the IRS offers guidance to organizations so they fully understand the scope and responsibilities of such political activities.
Additionally, tax professionals with relevant expertise can play a role in helping hospices plot a course mindful of these laws in a legally responsible manner. Importantly, Medicare policies do change. Qualified outside assistance can be invaluable in staying informed about changes and navigating these complex matters. This is also true due to the fact that headline-grabbing stories of Medicare fraud by hospices have come to light, increasing scrutiny of the industry on both the state and Federal levels.
Deductible Medical Expenses and Tax Deductions
One consideration for hospice care and the US tax code is what tax deductions are eligible for expenses that are incurred by caregivers themselves (which can also include family members of the hospice patient). This is important as these expenses and subsequent tax deductions can provide truly significant relief. So, federal laws do give caregivers the ability to deduct certain medical costs as long as they are not reimbursed by another entity (such as an insurance company). The costs related to caregiving are often not immaterial and, if anything, can significantly impact the finances of both the receiver and giver of services.
Caregivers must decide whether to itemize deductions or take the ‘standard deduction’. This typically depends on calculations of total adjusted gross income and the amount of aggregated medical expenses. Understanding and tracking medical expenses accurately is important for deductions to be correct for qualifying costs associated with hospice care and other nursing services.
Final Thoughts
For hospices, knowing how to apply tax laws is not only about legally required compliance but also about resource optimization. When hospices are financially stable, they are better equipped to serve patients and their families. By keeping up to date on tax issues such as leveraging deductions and tax credits, as well as best managing monies provided either by donation or block grants, hospices can use their internal resources to focus on their mission to offer compassionate end-of-life care.
Fortunately, certified tax professionals can help those who help others in this fundamentally crucial public service.
