How the new IRS rules affect nonprofit hospitals' collection practices

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Nonprofit hospitals across the country are garnishing uninsured and low-income patients' wages for unpaid medical bills, but new Internal Revenue Service rules for tax-exempt hospitals' collection practices may lower the occurrences of this practice.

Nonprofit hospitals' aggressive collection practices

Nonprofit hospitals in Alabama, Kansas, Missouri, Nebraska and Oklahoma routinely engage in the practice of suing patients for unpaid medical bills, according to a ProPublica report.

Looking specifically at Missouri, nonprofit Heartland Regional Medical Center in St. Joseph, part of Mosaic Life Care, has its own debt collection agency and has sued more of its patients than any other hospital in the state, according to the report.

Tama Wagner, the hospital's chief brand officer, told ProPublica patients are given multiple opportunities to qualify for financial assistance. However, if those resources aren't utilized, action is taken to get payment for medical bills.

Although other hospitals in the Missouri sue patients to collect on medical bills, they do not do so with the same frequency as Heartland. For instance, in 2013, Northwest Financial Services, which is owned by Mosaic Life Care, filed roughly 2,300 lawsuits against patients in Missouri courts, while St. Louis-based BJC HealthCare, the largest system in the state, only filed 26 lawsuits, according to the report.

On Dec. 30, due to reports of widespread use of aggressive collection tactics, such as those used by Heartland, the IRS published new rules that address collections practices used by tax-exempt hospitals, including garnishing patient wages.

IRS rules change how much nonprofit hospitals can charge certain patients

Under the finalized IRS rules, hospitals are prohibited from charging individuals eligible for financial assistance more for emergency or other medically necessary care than amounts generally billed to patients with Medicare, Medicaid or commercial insurance.

Many of the patients who were sued over unpaid bills by Heartland from 2009 to 2013 were eligible for financial aid "that would have eliminated or drastically cut their bills," according to the ProPublica report. However, those patients received no discounts for their care and were charged full price for the medical services they received.

Although the new IRS rules will likely lead to a reduction in the number of patients Heartland takes to court for unpaid medical bills, the practice isn't likely to disappear.

Heartland's Media and Community Relations Coordinator Tracey Clark says, "To manage and control healthcare costs for all, it is our obligation to attempt to collect from those who have the ability to pay, but choose not to."

IRS rules impose requirements on certain nonprofit hospital collection actions

The new IRS rules prohibit tax-exempt hospitals from engaging in certain collection methods — such as reporting debt to a credit agency or garnishing wages — until they make a reasonable effort to determine whether an individual is eligible for financial assistance under the hospital's policy.

 Patients earning up to 200 percent the federal poverty level qualify for free care at Heartland, and patients making up to 300 percent the federal poverty level qualify for a 50 percent reduction in the cost of care. However, there are patients who qualify but never receive charity care because they never applied, according to the ProPublica report. However, once the collection agency files a lawsuit against a Heartland patient and legal fees are incurred, the hospital's policy states that patient is deemed ineligible for charity care, even if they meet the qualifications.

Although disqualifying patients for charity care regardless of earnings seems harsh, there are multiple ways for Heartland patients to get information on the hospital's charity care program before being taken to court, according to Ms. Clark. She says information on financial assistance as well as how to apply for it is located on the hospital's website, on the back of every billing statement and is provided to all uninsured and underinsured patients.

Under the new rules, Heartland would have to not only publish its financial assistance policy but also make a reasonable effort to determine whether a patient is eligible for the hospital's financial assistance program before suing the patient.

Charity care and the IRS rules for tax-exempt hospitals

Nonprofit hospitals are required to provide charity care, but the individual hospitals determine who that care is provided to. For instance, hospitals get to decide how poor patients need to be to qualify for charity care.

Many hospitals, including St. Louis-based BJC HealthCare and Burlington, Vt.-based Fletcher Allen Health Care, have made changes to their charity care programs in the past year.

At BJC HealthCare facilities, patients are required to contribute to the cost of their care, regardless of their income level. BJC HealthCare now offers a 25 percent discount on services to patients earning up to three times the federal poverty level, while the system formerly offered the discount to patients making up to four times the poverty level.

At Fletcher Allen Health Care, patients who earn as low as twice the poverty level receive reduced financial assistance.

In Missouri, where BJC HealthCare is scaling back its charity care program, Medicaid hasn't been expanded. According to Kaiser Family Foundation data from April 2014, there are more than 193,000 people in Missouri that fall into a coverage gap, which means they make too much to qualify for Medicaid but too little to qualify for Patient Protection and Affordable Care Act subsidies. 

Although falling into a coverage gap leaves patients with no options for healthcare coverage, lack of Medicaid expansion also places pressure on hospitals. For instance, concerning Heartland, Ms. Clark says, "Lack of Medicaid expansion in Missouri and further reimbursement cuts will continue to put pressure on individuals seeking care as well as hospitals to maintain quality and services provided."

 Under the PPACA, the IRS is permitted to require hospitals to publicize charity care details. The IRS rules require each tax-exempt hospital to conduct and publish a community health needs assessment at least once every three years and disclose on annual tax forms how it is addressing needs identified in said assessment. As part of the community health needs assessment, nonprofit hospitals collect input from a variety of individuals, including public health experts and leaders of low-income and medically underserved populations, to identify the needs of their communities.

If hospitals continue to scale back their charity care programs, especially in states that haven't expanded Medicaid, the results of their assessments will likely show they are not adequately addressing the health needs of their communities.

More articles on healthcare finance:

Tennessee lawmakers looking for permanent fix to funding problem
OSU Wexner asks hundreds of vendors to discount prices by 20%
Medicaid expansion update: 5 must-read stories

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