The Patient Protection and Affordable Care Act enacts a number of new requirements for non-profit hospitals under section 501(r) of IRS code. The new provisions require 501 (3)(c) hospitals to:
Hospitals must report their meeting of these requirements on a facility-by-facility basis. The Affordable Care Act, as well as the IRS' Form 990 Schedule H for tax-exempt hospitals, provides some preliminary guidance to help hospitals comply with these new requirements. However, the IRS has yet to release specific guidance on these new requirements or information about what will happen in regards to a hospital's tax-exempt status if it fails to meet them.
What we know
Community health needs assessment. Hospitals and health systems must perform a community needs assessment for each individual facility at least every three years. This assessment must take into account broad interests of the community the hospital serves and be made publicly available. Hospitals must report to the IRS the findings of this report, including how it meets health needs, which needs are not addressed and why and its plans for addressing these needs. Schedule H provides a number of elements the IRS assumedly believes should be included as part of a health needs assessment, which can serve as a sort of checklist as hospitals develop these.
Hospitals will also continue, as they had before the ACA, to report community benefit, including community building activities, on Schedule H.
Written financial assistance policy. Hospitals must have written financial assistance policies containing eligibility criteria (e.g., a percent of the Federal Poverty Guidelines needed to receive free or discounted care) and methods of calculating and applying for assistance. The hospital must widely publicize its policy within the community it serves. Schedule H provides a number of ways the hospital might publicize its policy, including posting it on the hospital's website, attaching it to billing invoices and posting it in the ER and waiting rooms, etc.
Charges to the uninsured. Hospital cannot charge the uninsured or patients receiving financial assistance prices higher than it would bill for insured patients. According to the Joint Committee on Taxation's Technical Explanation of the ACA, hospitals can meet this requirement by charging these patients:
Hospitals may also determine this rate using other methods, but if it chooses this route, it must describe its method in detail on its Schedule H.
New debt collection practices. Lastly, hospitals must show they have taken reasonable efforts to inform patients of their financial assistance policies before they can begin "extraordinary" collection practices. The Technical Explanation defines "extraordinary" practices as lawsuits, liens on residences, arrests, body attachments or other similar collection processes. It defines "reasonable efforts" as "notification by the hospital of its financial assistance policy upon admission and in written and oral communications with the patient regarding the patient's bill, including invoices and telephone calls, before collection action or reporting to credit agencies is initiated."
What we don't know
While these provisions provide hospitals with a general idea of the new requirements, many questions remain as to how the IRS or other governmental agencies will enforce these new requirements. The IRS has yet to issue detailed guidance around these issues.
The IRS has delayed the 2010 990 filing date for certain hospitals so it can develop additional guidance for hospitals in these areas, says Milton Cerny, JD, an attorney with McGuireWood's Washington, D.C., office and the former technical advisor to the Assistant Commissioner on Employee Benefits and Tax Exempt Organizations for the National Office of the IRS.
"The critical question is how the IRS will approach certain provisions of 501(r) reporting," says Mr. Cerny. "While the IRS has issued the 990 Schedule H, it put a delay date on it because it doesn't have all the answers yet."
As mandated by the ACA, information reported on Schedule H will be shared with the Department of Treasury and HHS, which will jointly develop an annual report to Congress. The idea behind this measure is to allow Congress the opportunity to examine the data and interpret whether hospitals have provided an appropriate level of community benefit to maintain tax-exempt status, says Mr. Cerny.
Currently, the IRS, through its schedule H, is simply assessing whether a hospital has met the new requirements or not on a binary basis (i.e., "Did the hospital facility conduct a health needs assessment? Check 'yes' or 'no'). Thus, hospitals can, for the near future, protect their tax-exempt status by ensuring they can "check yes" on each of the reported measures.
How at risk are hospitals for losing tax-exempt status?
However, what about hospitals that can't "check yes" to each requirement? Will they lose their status if they fail to meet just one requirement? A majority of requirements? These questions have not yet been answered, says Mr. Cerny. The IRS and HHS are expected to release rules recommending certain minimum requirements for hospitals as well as consequences if these are not met. For example, would the 501(c)(3) hospital be able to transition to a 501(c)(4) organization (i.e., from a charitable to a social welfare organization)?
If a hospital is deemed to not have met the requirements, "a whole slew of other potential issues arise," says Mr. Cerny. For example, the hospital may no longer be able to receive charitable contributions or issue tax-exempt bonds.
While the IRS has said it will look at each hospital separately (i.e., "If one fails to meet requirements it doesn't necessarily mean the parent would lose its whole tax exempt status," says Mr. Cerny), many uncertainties remain, especially for non-profit organizations involved in for-profit joint ventures, as is not uncommon in the hospital industry.
Not a great deal of guidance exists for hospital to gauge the risk their joint ventures present to their tax status. However, there is case law suggesting that whole hospital or ancillary joint ventures can threaten the tax-exempt status of an organization if the tax-exempt organization 1) does not exert meaningful control over the venture, 2) participation does not further exempt purposes and 3) the venture exposes the organization to unnecessary risk for the benefit of the for-profit entity. (See Redlands Surgical Services v. Commissioner of Internal Revenue)
In the future, there is some threat to hospitals if Congress were to mandate minimum thresholds of community benefit. While the ACA does not require specific spending percentages on charity care or community benefits, these requirements are something Congress could revisit in the future. That is, instead of putting hospitals that can say "yes, I did this" in a safe zone, it could require that hospitals provide a certain level of community benefit, perhaps defined by a minimum rate of charity care by revenue or a variety of other measures, such as commitments to health education and research.
The big question, here, however, is if Congressional leadership will continue to take an interest in non-profit hospitals.
"Will Sen.[Orrin] Hatch [R-Utah, Ranking Member of the Senate Finance Committee], take the same level of interest Sen. [Charles] Grassley [R-Iowa] did?" asks Mr. Cerny. "Will the House Committee on Ways and Means take a deep interest in non-profit earnings? Currently they're so involved in tax restructuring and plugging holes in the tax code that I don't see an immediate discussion or delving into this [non-profit hospital] issue."
View the IRS 990 Schedule H (pdf).
- Conduct a health needs assessment at least every three years (effective after March 23, 2012; hospitals that don't comply face a $50,000 fine);
- Develop a written financial assistance policy and distribute it to patients;
- Limit charges to uninsured or patients receiving financial assistance to amounts generally billed to insured patients; and
- Follow new debt collection practices limiting "extraordinary" collection practices.
Hospitals must report their meeting of these requirements on a facility-by-facility basis. The Affordable Care Act, as well as the IRS' Form 990 Schedule H for tax-exempt hospitals, provides some preliminary guidance to help hospitals comply with these new requirements. However, the IRS has yet to release specific guidance on these new requirements or information about what will happen in regards to a hospital's tax-exempt status if it fails to meet them.
What we know
Community health needs assessment. Hospitals and health systems must perform a community needs assessment for each individual facility at least every three years. This assessment must take into account broad interests of the community the hospital serves and be made publicly available. Hospitals must report to the IRS the findings of this report, including how it meets health needs, which needs are not addressed and why and its plans for addressing these needs. Schedule H provides a number of elements the IRS assumedly believes should be included as part of a health needs assessment, which can serve as a sort of checklist as hospitals develop these.
Hospitals will also continue, as they had before the ACA, to report community benefit, including community building activities, on Schedule H.
Written financial assistance policy. Hospitals must have written financial assistance policies containing eligibility criteria (e.g., a percent of the Federal Poverty Guidelines needed to receive free or discounted care) and methods of calculating and applying for assistance. The hospital must widely publicize its policy within the community it serves. Schedule H provides a number of ways the hospital might publicize its policy, including posting it on the hospital's website, attaching it to billing invoices and posting it in the ER and waiting rooms, etc.
Charges to the uninsured. Hospital cannot charge the uninsured or patients receiving financial assistance prices higher than it would bill for insured patients. According to the Joint Committee on Taxation's Technical Explanation of the ACA, hospitals can meet this requirement by charging these patients:
- Medicare rates;
- The contracted rate of its lowest-paying commercial insurer; or
- The average contracted rate of its three lowest-paying commercial insurers.
Hospitals may also determine this rate using other methods, but if it chooses this route, it must describe its method in detail on its Schedule H.
New debt collection practices. Lastly, hospitals must show they have taken reasonable efforts to inform patients of their financial assistance policies before they can begin "extraordinary" collection practices. The Technical Explanation defines "extraordinary" practices as lawsuits, liens on residences, arrests, body attachments or other similar collection processes. It defines "reasonable efforts" as "notification by the hospital of its financial assistance policy upon admission and in written and oral communications with the patient regarding the patient's bill, including invoices and telephone calls, before collection action or reporting to credit agencies is initiated."
What we don't know
While these provisions provide hospitals with a general idea of the new requirements, many questions remain as to how the IRS or other governmental agencies will enforce these new requirements. The IRS has yet to issue detailed guidance around these issues.
The IRS has delayed the 2010 990 filing date for certain hospitals so it can develop additional guidance for hospitals in these areas, says Milton Cerny, JD, an attorney with McGuireWood's Washington, D.C., office and the former technical advisor to the Assistant Commissioner on Employee Benefits and Tax Exempt Organizations for the National Office of the IRS.
"The critical question is how the IRS will approach certain provisions of 501(r) reporting," says Mr. Cerny. "While the IRS has issued the 990 Schedule H, it put a delay date on it because it doesn't have all the answers yet."
As mandated by the ACA, information reported on Schedule H will be shared with the Department of Treasury and HHS, which will jointly develop an annual report to Congress. The idea behind this measure is to allow Congress the opportunity to examine the data and interpret whether hospitals have provided an appropriate level of community benefit to maintain tax-exempt status, says Mr. Cerny.
Currently, the IRS, through its schedule H, is simply assessing whether a hospital has met the new requirements or not on a binary basis (i.e., "Did the hospital facility conduct a health needs assessment? Check 'yes' or 'no'). Thus, hospitals can, for the near future, protect their tax-exempt status by ensuring they can "check yes" on each of the reported measures.
How at risk are hospitals for losing tax-exempt status?
However, what about hospitals that can't "check yes" to each requirement? Will they lose their status if they fail to meet just one requirement? A majority of requirements? These questions have not yet been answered, says Mr. Cerny. The IRS and HHS are expected to release rules recommending certain minimum requirements for hospitals as well as consequences if these are not met. For example, would the 501(c)(3) hospital be able to transition to a 501(c)(4) organization (i.e., from a charitable to a social welfare organization)?
If a hospital is deemed to not have met the requirements, "a whole slew of other potential issues arise," says Mr. Cerny. For example, the hospital may no longer be able to receive charitable contributions or issue tax-exempt bonds.
While the IRS has said it will look at each hospital separately (i.e., "If one fails to meet requirements it doesn't necessarily mean the parent would lose its whole tax exempt status," says Mr. Cerny), many uncertainties remain, especially for non-profit organizations involved in for-profit joint ventures, as is not uncommon in the hospital industry.
Not a great deal of guidance exists for hospital to gauge the risk their joint ventures present to their tax status. However, there is case law suggesting that whole hospital or ancillary joint ventures can threaten the tax-exempt status of an organization if the tax-exempt organization 1) does not exert meaningful control over the venture, 2) participation does not further exempt purposes and 3) the venture exposes the organization to unnecessary risk for the benefit of the for-profit entity. (See Redlands Surgical Services v. Commissioner of Internal Revenue)
In the future, there is some threat to hospitals if Congress were to mandate minimum thresholds of community benefit. While the ACA does not require specific spending percentages on charity care or community benefits, these requirements are something Congress could revisit in the future. That is, instead of putting hospitals that can say "yes, I did this" in a safe zone, it could require that hospitals provide a certain level of community benefit, perhaps defined by a minimum rate of charity care by revenue or a variety of other measures, such as commitments to health education and research.
The big question, here, however, is if Congressional leadership will continue to take an interest in non-profit hospitals.
"Will Sen.[Orrin] Hatch [R-Utah, Ranking Member of the Senate Finance Committee], take the same level of interest Sen. [Charles] Grassley [R-Iowa] did?" asks Mr. Cerny. "Will the House Committee on Ways and Means take a deep interest in non-profit earnings? Currently they're so involved in tax restructuring and plugging holes in the tax code that I don't see an immediate discussion or delving into this [non-profit hospital] issue."
View the IRS 990 Schedule H (pdf).