Will the new IRS rules affect competition between nonprofit and for-profit hospitals?

Due to reports of some nonprofit hospitals in the country garnishing uninsured and low-income patients' wages for unpaid medical bills, the Internal Revenue Service in December released new rules for tax-exempt hospitals' collection practices.

Under the regulations, which take effect in 2016 and are the final piece of the Patient Protection and Affordable Care Act's rules [section 501(r)] for nonprofit hospitals, hospitals may not charge 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 nonprofit hospitals already followed these guidelines, but the regulations released in December finalized the rules.

Here are other requirements under the finalized regulations:

  • Hospitals must establish and widely publicize their financial assistance policies that clearly describe eligibility criteria and the method for applying for assistance.
  • Hospitals are prohibited 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.
  • Each hospital must conduct and publish a community health needs assessment at least once every three years and disclose on annual tax forms how it is addressing the health needs identified in said assessment.

Nonprofit hospitals that don't follow the finalized IRS rules risk losing their tax-exempt status. Nonprofit hospitals do not pay state or local property taxes or federal income taxes, and must meet certain community benefit requirements, such as providing emergency care to patients who aren't able to pay. Tax-exempt hospitals using aggressive collection techniques and failing to even establish whether a patient is eligible for financial assistance before trying to collect goes against their underlying purpose.   

On the other hand, for-profit hospitals are owned by private investors or publicly by shareholders, and their collection processes remain less regulated.

The new rules raise a few questions. Will patients take notice of the different regulations for for-profits and nonprofits, affecting market competition? And secondly, if nonprofit hospitals must scale back aggressive collections, does this lend for-profit hospitals a financial advantage?

How will the new rules impact competition?

The IRS rules will not considerably, if at all, impact the volume of patients at for-profit vs. nonprofit hospitals because a majority of people have no way to differentiate whether the hospital they go to is a nonprofit or for-profit organization, says Patricia Hennelly, who serves as a director at CohnReznick Advisory Group, a national professional services firm headquartered in New York City. "They're walking into the closest emergency room they can find regardless of status."

Patients are also likely to choose a hospital based on where their physician is located — whether that hospital happens to be a for-profit or nonprofit. Additionally, the uninsured, which are most affected by the rules, will deal with similar processes at both for-profits and nonprofits. Those processes typically include discussions about bill responsibility, options for payment and the patient's ability to pay.

The new IRS rules fill a void, but they also leave some room for interpretation. Further, the IRS isn't known for aggressive enforcement. "That's always been the problem with the charitable hospital rules," Corey Davis, an attorney with the National Health Law Program, a nonprofit patient advocacy organization, told ProPublica. "The IRS doesn't enforce them and nobody else can enforce them."

Some experts agree that the rules will change little about how hospitals collect payment. Jessica Curtis, an attorney with national nonprofit consumer organization Community Catalyst, is welcoming the new rules. But she told ProPublica there will still be significant variation between hospitals — even nonprofits — in how generously they treat lower-income patients. "It will come down to: How seriously does the hospital take this issue?"

Discrepancy in hospital collections is not only between for-profit and nonprofit hospitals. There is plenty of variation among nonprofit hospitals alone. As it is, a patient may face more aggressive collection processes from a nonprofit than a for-profit hospital in their market.

Earlier this year, U.S. Sen. Charles Grassley (R-Iowa) called out Heartland Regional Medical Center in St. Joseph, Mo., part of Mosaic Life Care for what he considered harsh collection practices. The hospital has its own debt collection agency and has sued more of its patients than any other hospital in the state, according to a ProPublica report.

"As a nonprofit hospital, Mosaic is required to offer community benefit in exchange for its tax-exempt status," Sen. Grassley wrote in a letter to Mosaic's president and CEO. He said a news article about the hospital gave him "cause to believe that Mosaic's financial assistance, billing, and collection practices may fail to live up to the community benefits standard and/or fail to adhere to the additional requirements for charitable hospitals."

Tama Wagner, the hospital's chief brand officer, said in a ProPublica report that 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. In a response letter, Mosaic said that wage garnishment is "always treated as a last resort," according to a St. Joseph News-Press report.

In recent months, the hospital announced that it would look into its debt collection practices. Ms. Wagner said in a ProPublica report that the hospital anticipated that new recommendations would be presented to the hospital's board this month. 

 

Will the new rules impact hospitals' revenue?

But on the revenue side, there will be some differences between for-profit and nonprofit organizations in light of these rules, Ms. Hennelly says. For instance, due to the rules, a nonprofit hospital is now limited on how far it can go to get a patient to pay his or her bill. The new IRS rules prohibit nonprofit hospitals from reporting debt to a credit agency or garnishing wages until they reasonably try to determine whether an individual is eligible for financial assistance under the hospital's policy. Therefore, nonprofit hospitals may see less revenue under the rules since they won't be able to use aggressive collection practices.

There also will be some nuances between states that have expanded Medicaid and nonexpansion states. In states that have or will expand Medicaid — there are 28 plus Washington, D.C. — more people are eligible for the program, and the hospital is able to collect from Medicaid without having to collect reimbursement from the patient.

But Ms. Hennelly says, overall, the new rules won't have much of a dramatic affect, such as increasing the number of hospital bankruptcy filings.

Ms. Hennelly says nonprofit hospitals will be held more accountable thanks to the IRS rules, although most already have robust financial assistance programs to help patients explore all options for gaining insurance coverage. Or if a patient is not qualified for insurance coverage, the financial assistance program team will set up a payment plan using a sliding scale based upon income and ability to pay. "Hospitals and patients both benefit when patients are aware of what financial assistance is available to them and take advantage of it," Ms. Hennelly says.

It remains to be seen the exact impact these finalized rules will have on competition between for-profit and nonprofit hospitals. However, once data is available, it will paint a clearer picture.

 

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