Health Law Monitor
Under prior law, charitable hospitals established tax-exemption under Internal Revenue Code (“IRC”) § 501(c)(3) by providing a community benefit. Most hospitals established a community benefit by providing health care regardless of a patient’s ability to pay (including payment through Medicare or Medicaid), by providing charitable (unreimbursed) care to the community, by maintaining an emergency room, by not restricting use of its facilities to a particular group of physicians, and/or by utilizing excess funds to improve the quality of patient care, expand facilities, and advance medical education and research.
Despite the significant contributions made in all of these areas by charitable hospitals over the years, there has been a long-running debate about whether charitable hospitals have done enough to merit the benefits and privileges of exempt status. As a result, increased reporting and transparency in the Form of Schedule H was added to the Form 990 in 2009. PPACA continues this trend by imposing additional requirements upon charitable hospitals.
PPACA establishes four new mandates to maintain charitable tax-exemption under Internal Revenue Code Section 501(c)(3). These new mandates are set forth in new Internal Revenue Code Section 501(r), and require charitable hospitals to be more proactive in reaching out to the community for care. Unlike most provisions of PPACA, these new requirements for charitable hospitals generally are effective for any tax year beginning after March 23, 2010.
Under Section 501(r), in order to maintain tax-exempt status, charitable hospitals must:
A. comply with community health needs assessment requirements;
B. comply with financial assistance policy requirements;
C. comply with limits on patient charges; and
D. comply with limits on billing and collection practices.
These new community benefit standards apply to any organization, exempt under IRC § 501(c)(3), that is either: (i) required to be licensed, registered, or similarly recognized as a hospital by the state; or (ii) any other facility that the IRS determines has the provision of hospital care as its principal purpose. For any organization operating more than one hospital, each facility must satisfy the new community benefit standards independently.
A. Community Health Needs Assessment
To satisfy this PPACA requirement, a charitable hospital must (i) conduct a community health needs assessment either in the current year or either of the two immediately preceding tax years (i.e., one assessment every three years), and (ii) adopt an implementation strategy to meet the community health needs identified through the assessment and make it widely available to the public. In making the assessment, a hospital must take into account input from persons who represent the broad interests of the community served, including those with special knowledge of or expertise in public health. In recognition that the needs assessment is to be completed by hospitals triennially, this requirement is effective for tax years beginning after March 23, 2012.
B. Financial Assistance Policy
PPACA also requires a charitable hospital to adopt a written financial assistance policy that commits to providing care for emergency medical conditions to all individuals, regardless of their ability to pay. That policy must also address the following
elements: (i) eligibility criteria for financial assistance, and whether such assistance includes free or discounted care; (ii) the basis for calculating amounts charged to patients (see Limits on Charges below); (iii) the method for applying for financial assistance; (iv) the actions an organization may take in the event of non-payment, including collection actions and reporting to credit agencies (see Limits on Billing and Collection below); and (v) measures to widely publicize the policy within the community served.
C. Limits on Charges
In addition to the financial assistance policy, PPACA requires a charitable hospital to limit amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy to not more than “amounts generally billed” to individuals who have insurance coverage. A charitable hospital must prohibit the use of gross charges. While there is no definition of “gross charges” under PPACA, many commentators believe this term means the full cost of hospital charges for services, without taking into account any discounts negotiated with insurance providers. The legislative history behind PPACA suggests that under this requirement, a charitable hospital must limit the amounts charged to eligible individuals to no more than either: (i) an average of the three best negotiated commercial rates; or (ii) Medicare rates.
Generally, hospitals negotiate insurance-based rates with a discount because they are certain of receiving reimbursement and the insurer agrees to list the hospital as a preferred provider. The rates for emergency services under the financial assistance policy will not have any of these benefits. The rates may resemble Medicare or other commercial insurance reimbursement arrangements for the most part without Medicare or some commercial carrier to stand behind them. However, as universal coverage comes to more individuals, presumably, fewer individuals will need to avail themselves of the financial assistance policy.
D. Limits on Billing and Collection
Finally, PPACA requires a charitable hospital to implement a process which prohibits it from engaging in “extraordinary collection actions” (even if otherwise permitted by law) before making “reasonable efforts” to determine if the individual is eligible for financial assistance under its financial assistance policy. The term “extraordinary collection actions” is generally understood to include lawsuits, liens, attachments, or other similar collection processes. Further information as to what will constitute “reasonable efforts” will come from future Treasury regulations.
Compliance
In order to promote compliance with the new community benefit standards, PPACA contains certain additional provisions applicable to charitable hospitals. The first tool for compliance is a $50,000 penalty for failure to undertake a community needs assessment once every three years.
Hospitals are also subjected to additional reporting requirements. First, a charitable hospital must report in its Form 990 how it is addressing the needs identified in its community needs assessment, and a description of any community needs that are not being addressed with an explanation as to why they are not being addressed. Second, a charitable hospital must also submit its audited financial statement (or if consolidated, a consolidated audited financial statement). These requirements will be in addition to (or as part of) Schedule H, which already includes questions relating to charity care, community benefits, etc.
Perhaps the most significant compliance hammer that the IRS may wield is the possible revocation of tax-exempt status for any charitable hospital that fails to comply with all of the above new requirements. In this regard, it is important to note that PPACA requires the IRS to review every hospital’s community benefit activities at least once every three years.
Conclusions
Charitable hospitals must begin now to implement these new standards, especially the financial assistance policy, as it should be in place with the beginning of the hospital’s new tax year. Many current policies might satisfy these requirements, but hospitals should make every effort to ensure that their policy is in full compliance. In addition, the community needs assessment must be undertaken once every three years, and one will have to have been completed within three years of any tax year beginning after March 23, 2012.
These new requirements under PPACA are not as wide-ranging as some had feared. For example, Section 501(r) does not contain a minimum charity care requirement. Such a requirement was included in a Senate Finance Committee paper, but did not make it into the final bill. In addition, one Senate bill would have limited emergency charges to patients eligible for financial assistance to an amount no greater than the lowest amount charged to patients with insurance covering such care. Instead, PPACA only requires that such charges be limited to the “amounts generally billed.” Despite dodging these potential bullets, there is no reason to conclude that the debate over appropriate standards for tax-exempt hospitals has been finally resolved. We believe that as universal coverage is approached nationally, charitable hospitals will face further legislative challenges to their exempt status. PPACA even anticipates further changes by requiring the Treasury Department and HHS to complete a study of the trends in charity care, bad debts, and community benefits. This study must be completed and submitted to Congress in five years.
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