Question: Under what circumstances, if any, would the subsidized losses of a medical practice (owned by the hospital) qualify as a subsidized health service?

Recommendation: The Internal Revenue Service instructions for Form 990, Schedule H note the following regarding subsidized health services:

1. In order to qualify as a subsidized health service, the service must meet an identified community need. Criteria for demonstrating community need include:
   1. If the organization no longer offered the service, it would be unavailable in the community
   2. If the organization no longer offered the service, the community's capacity to provide the service would be below the community's need; or
   3. If the organization no longer offered the service, the service would become the responsibility of government or another tax-exempt organization.
2. For qualifying services, the subsidized loss reported as community benefit must not include the cost of charity care, bad debt and losses from Medicaid and other means-tested government programs

In addition to the IRS criteria, the task force recommends the following if medical practices are reported as subsided health services:

1. The organization can justify that the medical practice benefits the community more than it does the organization. For example, it is not operated primarily to increase referrals of patients with 3rd party coverage, and
2. The medical practice is operated efficiently and payment to physicians is reasonable. Use benchmarks from the Medical Group Management Association to assess efficiency and prevailing community rates to assess reasonable payment.

Additional considerations:

1. Schedule H requires that if services or care provided by physician clinics are included as subsidized services, the hospital must describe that it has done so and report in Part VI such costs included in Part I, line 7g, line 1.
2. Only medical practices that are part of the hospital’s EIN may be included as part of the hospital’s subsidized services on the Schedule H.
3. Faculty practices that are part of academic medical centers may have special considerations. Contact Ivy Baer at the AAMC for guidance.

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