Electronic Health Records (EHRs) or Regional Health Information Organization (RHIOs)
EHRs and RHIOs are healthcare organizations that coordinate electronic health records for hospitals or other major healthcare systems.
IRC Sections and Treas. Regulation:
IRC Section 501(c)(3) – Charitable Organizations
IRC Sections 509(a)(1) and 170(b)(1)(A)(vi) – Public Charity
IRC Section 509(a)(2) – Fee for Services
Treas. Reg. Section 1.501(c)(3)-1(d)(2) – Charitable includes “Lessening the Burdens of Government”
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources): Federal Statutes and Congressional Reports:
The American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111-5, enacted February 17, 2009, includes the provision of various economic incentives to encourage the use of health information technology.
The Conference Report to ARRA, H.Rept. 111-16, 111th Cong. 1st Sess., 2/12/09, provides rationale for exemption at 488-9:
“As a result of the incentives and appropriations for health information technology provided in this bill, it is expected that nonprofit organizations may be formed to facilitate the electronic use and exchange of health-related information consistent with standards adopted by HHS, and that such organizations may seek exemption from income tax as organizations described in IRC sec. 501(c)(3). Consequently, if a nonprofit organization otherwise organized and operated exclusively for exempt purposes described in IRC Sec. 501(c)(3) engages in activities to facilitate the electronic use or exchange of health-related information to advance the purposes of the bill, consistent with standards adopted by HHS, such activities will be considered activities that substantially further an exempt purpose under IRC sec. 501(c)(3), specifically the purpose of lessening the burdens of government. Private benefit attributable to cost savings realized from the conduct of such activities will be viewed as incidental to the accomplishment of the nonprofit organization’s exempt purpose.”
Rev. Rul. 77-69, 1977-1 C.B. 143, provides that a Health Systems Agency (HSA) organized and operated pursuant to the National Health Planning and Resources Development Act of 1974 qualifies for exemption under Section 501(c)(3). Similar rational for exemption of RHIOs formed according to ARRA.
Rev. Rul. 85-1, 1985-1 C.B. 178 and Rev. Rul. 85-2, 1985-2 C.B. 178, provide an organization is lessening the burdens of government if (a) its activities are activities that a governmental unit considers to be its burdens; and (b) the activities actually lessen such governmental burden.
- Is the organization organized and operated for exempt purposes within the meaning of Section 501(c)(3)?
- Is the organization described as a public charity described in Sections 509(a)(1) & 170(b)(1)(A)(vi) or Section 509(a)(2)?
Exempt Status under 501(c)(3)
If an organization is otherwise organized and operated exclusively for an exempt purpose, and its activities facilitate the electronic use or exchange of health-related information to advance the purposes of ARRA and are consistent with standards adopted by HHS, its activities will be considered as furthering an exempt purpose under Section 501(c)(3), i.e., lessening the burdens of government under 1.501(c)(3)-1(d)(2).
When processing an application for exemption, you refer to the Conference Report for the following factors:
- Organizations that facilitate the electronic use and exchange of health-related information may seek exemption.
- Must be operating consistently with HHS standards.
- Rationale for exemption: lessening the burdens of government under IRC Section 501(c)(3).
- Private benefit that results from cost savings is deemed incidental.
The Conference Report requires the IRS to ensure that the organization is operating in a manner consistent with HHS standards. Under the representational process, this requires an Applicant to provide a representation that its activities have been consistent with and will continue to be consistent with standards adopted by HHS.
Remember to also check for the other 501(c)(3) organizational/operational considerations:
- Organizational Test (Purpose Clause; Dissolution Clause)
- Private Benefit/Inurement
- Unrelated Business Activity
- Commercial Purpose
Public Charity Status – Sections 509(a)(2) or 170(b)(1)(A)(vi) depends on source of income
- Sections 509(a)(1) and 170(b)(1)(A)(vi) if organization is and will continue to be funded by state or federal grants and individual donations, made without receiving the Health Information Exchange (HIE)/RHIO services in return.
- Section 509(a)(2) if organization expects to receive income primarily from user fees for its HIE/RHIO.
Issue Indicators and/or Audit/Determinations Tips:
What is source of funding? If it is a government contract, see Section 170(b)(1)(A)(iv) or if fees for services from users, see Section 509(a)(2). Also review the average over three years, as this is an aggregate, prospective analysis, not just at time of HIE start-up, which is often funded by a public grant.
Is there impermissible private benefit, such as an insider’s Information Technology software contract not made as part of an arms-length transaction? Note that the Conference Report specifically dismisses incidental private benefit, stating “Private benefit attributable to cost savings realized from the conduct of such activities will be viewed as incidental” to the 501(c)(3)’s exempt purpose.
Determination and/or Audit Tips:
Because of language in House Conference Report to ARRA, analysis for “lessening the burdens” is explicitly assumed for RHIOs. Do not greatly develop this part of your memorandum except for referencing the Conference Report language.
To ensure Organization will act in a manner consistent with HHS Standards, as required by the ARRA Conference Report, we must obtain the following representation:
“We represent that from the date of formation, our activities to facilitate the electronic use and exchange of health related information have been, and will continue to be, consistent with standards adopted by the U.S. Department of Health and Human Services.”
HIEs and RHIOs have a Form 990 filing requirement.