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A Hospital That Wants to Maintain Its Tax-Exempt Status Must Now Comply With the New Patient Protection and Affordable Care Act

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Gary J. McRay
Foster Swift Health Care Law E-News
April 7, 2010

Since 1969, hospitals have been able to claim an exemption from federal income taxes under § 501(c)(3) of the Internal Revenue Code ("Code") based upon meeting the "community benefit" standard articulated by Revenue Ruling 69-545.  Typically, a hospital was engaged in the promotion of the health of a class of persons broad enough to benefit the community when it operated an emergency room open to all persons and provided care for all persons in the community without discrimination, even if such persons were covered by government programs such as Medicare or Medicaid.

There has been skepticism in Congress about whether exempt hospitals could justify the benefits of their exempt status by their delivery of charitable health care.  One result of this skepticism was the IRS collecting more extensive information from hospitals through its new Form 990.  In fact, the IRS has, by its Form 990 and without the benefit of regulations, requested hospitals to justify their exempt status by showing the existence of charity caHeare, conflict of interest, whistleblower, document retention and destruction, compensation and joint venture policies governing their activities.  This skepticism of hospitals doing sufficient charity also resulted in Section 9007 of the Patient Protection and Affordable Care Act ("Act") that added new Code § 501(r) and § 4959 to create additional requirements for exempt hospitals.  Under Code § 501(r), a hospital shall lose its tax exemption unless the hospital meets:  (i) the community health needs assessment; (ii) the financial assistance policy; (iii) the limitations on charges; and (iv) the billing and collection restrictions of this Code Section.

Community Health Needs Assessment.  This requirement forces each hospital to conduct a community health needs assessment in the current tax year or within two years immediately preceding the current tax year and the hospital must adopt an implementation strategy to actually meet the needs that were identified through the community assessment.  The community needs assessment that is required must take into account input from persons who represent the broad interests of the community served by the hospital, including those with special knowledge of or expertise in public health and this assessment must be made widely available to the public.  How a hospital collects this broad input is not defined and one would hope that IRS regulations would provide needed guidance at a later date.  However, failure to conduct such a community health needs assessment and to pursue a strategy to implement these identified community needs results in an excise tax equal to $50,000 under § 4959.

Financial Assistance Policy.  Under the financial assistance policy, the hospital must include:  (i) eligibility criteria for financial assistance (whether such assistance includes free or discounted care); (ii) the basis for calculating amounts charged to patients; (iii) the method for applying for financial assistance; (iv) if the hospital does not have a separate billing and collections policy, the hospital must list the actions it may take in the event of nonpayment, including collections actions and reporting to credit agencies; and (v) the hospital's measures to widely publicize its financial assistance policy within the hospital's community.

Most hospitals have adopted charity care policies, which include billing and collection policies, so this requirement may only cause refinements to existing hospital policies.  The financial assistance policy must also include a written policy that requires the hospital to provide emergency medical care, without discrimination, to all individuals regardless of their eligibility under the financial assistance policy.  This does not seem to be any different than the hospital's existing mandated EMTALA obligations.

Limitations on Charges.  Under this requirement, the hospital must not charge persons eligible under its financial assistance policy for emergency or other medically necessary care an amount greater than the lowest amount charged to individuals who have insurance covering such care.  Therefore, if the largest discount is given to Blue Cross enrollees, the same discount must be the basis for the charges assessed against the recipients of the financial assistance policy for emergency or other medically necessary care.  Plus, this requirement prohibits the use of gross charges.  Apparently hospitals will have to change how their bills look with regard to those who enter their emergency rooms and receive other medically necessary care since those persons may later qualify for financial assistance.

Billing and Collection Restrictions.  In addition, the hospital may not engage in "extraordinary collection actions" before the hospital has made reasonable efforts to determine whether the individual is eligible for assistance under the financial assistance policy.  Other than giving patients notice of the financial assistance and having them acknowledge that they have notice of and an opportunity to apply for such a charity care policy, what other reasonable efforts does the hospital have to engage in?  The IRS is directed to issue regulations to provide guidance on what constitutes reasonable efforts to determine the eligibility of a patient under the financial assistance policy, but the adoption of regulations is a slow and uncertain process and hospitals will be implementing this policy long before receiving any regulatory guidance.

The Secretary of the Treasury, or its delegate, shall review at least once every three years the community benefit activities of each hospital to determine if the $50,000 excise tax will apply or, presumably, if the hospital's exemption would be jeopardized.  See Code § 4959(c).  In addition, the annual return filed by hospitals under Form 990 will require:  (i) a description of how the hospital is addressing the community needs assessment and a description of any needs that are not being addressed with the reasons why those needs are going unsatisfied; and (ii) enclosing copies of the audited financial statements of the hospital (or the consolidated financial statements, if applicable).

The Secretary of the Treasury, in consultation with the Secretary of Health and Human Services, shall submit to the Committees on Ways and Means, Education and Labor, and Energy and Commerce of the House of Representatives and to the Committees on Finance and Health, Education, Labor, and Pensions of the Senate an annual report involving tax-exempt, taxable and government-owned hospitals regarding:  (i) their levels of charity care; (ii) bad debt expenses; and (iii) certain unreimbursed costs for services provided, plus information with respect to private tax-exempt hospitals regarding their costs incurred for community benefit activities.  The Secretary of the Treasury, in consultation with the Secretary of Health and Human Services, shall conduct a study on trends based on the reports mentioned above, and then, not later than five years after the date of the enactment of the Act, the Secretary of the Treasury, in consultation with the Secretary of Health and Human Services, shall submit a report on annual the studies previously collected to the various congressional and senate committees.

Effective Date of the Act.  Except for the implementation of the community health needs assessment, which is postponed until the hospital's taxable year beginning after the date which is two years after the date of the implementation of the Act (March 23, 2010), the balance of these changes, which require various policies and changes in operations, are effective for the tax year following March 23, 2010.  Therefore, if the hospital tax year begins July 1, 2010, all of these policies, with the exception of the community health needs assessment, must be in place by that date to protect the hospital's tax exemption.

All of those additional requirements by the federal government demonstrate that hospitals now need to go way beyond the open ER to demonstrate community benefit and the justification of their tax exemptions.