Defining ‘patient’ key to determining 2022 healthcare UBIT


The COVID-19 pandemic has changed not-for-profit hospital operations – including new ways of generating unrelated business income tax. From telemedicine to patients moving between practices, it can be difficult to determine what revenue is considered unrelated business income and subject to tax (UBIT).


In a recent webcast, Grant Thornton’s Mary Torretta, tax leader and principal for National Healthcare Tax, and Erin Couture, a managing director specializing in NFP Healthcare and Higher Education, discussed how defining what a “patient” is and effectively tracking patient- and nonpatient-related revenue and expenses is key to accurately calculate an organization’s UBIT. 




The definition of ‘patient’ is changing



Unrelated business activities are defined as those coming from a trade or business, regularly carried on and not substantially related to the organization’s exempt purposes. In healthcare settings, unrelated business income is often sourced from services including pharmacy and lab services to nonpatients, fitness facilities, management and administration services and joint ventures. Patient services are generally considered related and not subject to UBIT. However, defining “patient” has become trickier since the height of the pandemic.


The IRS definition of “patient,” which hasn’t changed since its 1968 codification, includes: 

  • Person receiving inpatient care
  • Person receiving outpatient care
  • Person refilling a prescription they were previously prescribed as a patient
  • Person receiving a hospital-administered home care program
  • Person receiving treatment at a hospital affiliated extended care facility


This “patient” definition historically describes a person who is treated at a healthcare facility or is physically seen by a medical professional. However, recent healthcare policies and procedures seem to indicate this definition needs an update.  


“This definition poorly fits new ways patients access medical care today, particularly in the field of telemedicine,” Torretta said. “When the IRS created this definition in 1968, no one imagined people would be performing at-home tests, consulting with their doctor over their phone or computer and getting prescriptions delivered to their home.”


It’s important to take a close look at the context around patient and nonpatient expenses to determine “patient” status, and thus better define UBIT due from the organization.




Context matters when defining revenue streams



Torretta and Couture advise not-for-profit healthcare systems to re-examine their current assumptions around patient and nonpatient revenue streams. Sometimes, individuals can be viewed as patients even if they’re not treated at your facility, such as at a “minute clinic” or an offsite pharmacy.


“The taxability issue arises when you have pharmacies that look more like a CVS or Walgreens and less like a tax-exempt system pharmacy,” Torretta said. “Intent matters – is this truly a commercial enterprise created to make a profit, or is this another way to serve your patients?”


Telemedicine is another gray area – here, “patients” aren’t physically treated in person, but medical professionals consult with them remotely.


“If you take the position that people served during telemedicine are ‘patients’ for tax purposes, you are on the ledge. This is something everyone is struggling with,” Torretta said. “The biggest thing I consider when determining if something is ‘patient’ or ‘nonpatient’ in a telemedicine scenario is making sure you have a professional medical advisor who is using professional judgment of a medical condition.” 


Couture noted it is common for many people receiving telemedicine to have already met the “patient” qualification and are following up on care that was conducted at a facility. She recommends creating a medical record in your system to ensure proper documentation that the person continues to be a “patient.”




Bring in the finance team 



“When setting up a revenue system, the finance team should be involved,” Torretta said. “Tracking related and unrelated expenses is tricky, and they can determine how best to approach that. Often, a small change can mitigate adverse tax considerations and help reduce taxable income.”


A healthcare organization’s system should also indicate whether a service was patient- or nonpatient-related. That distinction is particularly helpful when tracking prescriptions, where it can be difficult to tell whether a prescription was filled for a patient or nonpatient. A company’s finance team can help distinguish these and document why a position was taken. 



About one-third of respondents to polls in Grant Thornton’s webcast said their accounting software can track revenue for “patients” or nonpatients, and most don’t feel confident being able to accurately track expenses for nonpatients.


“Documentation is crucial,” Couture said. “When taking the position that a certain group are ‘patients,’ document that conclusion, and educate parties that are creating these revenue streams to make sure they understand the guidelines they need to follow,” Couture said.


Watch the full webcast, “2022 UBIT scenarios: today’s ‘patient’ definition,” here.




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