IRS Seeks Comments on the New Requirements for Tax-Exempt Hospitals Under PPACA Alert - July 8, 2010
IRS Seeks Comments on the New Requirements for Tax-Exempt Hospitals Under the Patient Protection and Affordable Care Act
July 8, 2010
Kathleen Nilles - Washington
On May 27, 2010, the Internal Revenue Service (IRS) issued Notice 2010-39. The notice provides an overview of the new legislative requirements imposed on tax-exempt hospitals. It also seeks comments on IRS guidance needed for hospitals to comply with the new requirements. The deadline for comments is July 22, 2010; details for their submission can be found at the end of this alert.
Background on the New Requirements
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA). PPACA section 9007(a) added new Internal Revenue Code (“Code”) Section 501(r). The provision imposes the following new requirements that a hospital must satisfy to maintain its tax exemption:
- prepare a community health needs assessment (CHNA) every three years
- adopt a financial assistance policy
- limit charges for medical care to those qualifying for financial assistance
- refrain from engaging in “extraordinary” collection efforts before making reasonable efforts to determine whether the patient qualifies for financial assistance
The provisions are generally effective for taxable years beginning after March 23, 2010. This means that if a hospital is on a July 1 to June 30 taxable year, the provisions go into effect July 1, 2010. However, the new CHNA requirement is not effective until taxable years beginning two years after March 23, 2010.
Below is a review of the new law, its specific requirements and some initial comments on the areas that appear to be most in need of further regulatory guidance by the IRS.
Applicability of the New Requirements to Charitable Hospital Organizations
In general, the new requirements apply only to hospital organizations seeking to qualify (or retain their qualification) under Code Section 501(c)(3). New Code Section 501(r)(2)(A) states that the new requirements apply to organizations that operate “a facility which is required by a State to be licensed, registered, or similarly recognized as a hospital.” In addition, the legislation states that the requirement may also apply to “any other organization which the Secretary [of Treasury] determines has the provision of hospital care as its principal function or purpose constituting the basis of its exemption” under Code Section 501(c)(3).
The Joint Committee on Taxation’s Technical Explanation of the Revenue Provisions of the Reconciliation Act of 2010, as amended, in combination with the Patient Protection and Affordable Care Act (JCS-18-10) (March 21, 2010) (the “Technical Explanation”) states that the new requirements generally apply to any 501(c)(3) organization that operates at least one hospital facility. It further clarifies that a hospital facility includes: (1) any facility that is, or is required to be, licensed, registered or similarly recognized by the state as a hospital; and (2) any other facility or organization that the Treasury Secretary, “in consultation with the Secretary of HHS and after public comment, determines has the provision of hospital care as its principal purpose.” The Technical Explanation also states that “[t]o qualify for tax exemption under Code Section 501(c)(3), an organization subject to the [new] provision is required to comply with the requirements with respect to each hospital facility operated by such organization.”
Comments:
A number of hospitals have already raised the issue as to whether the new law’s definition of “hospital” includes those hospitals that have a dual status, such as county or municipal hospitals that have applied for recognition as charitable hospitals under Code Section 501(c)(3) – even though they are exempt as governmental entities.
Others have raised concerns that some states have a very broad definition of the term “hospital.” For instance, in New York, the term “hospital” includes nursing homes and diagnostic and treatment centers (clinics) that do not provide emergency care.
The American Hospital Association has urged the IRS to allow hospital systems to file a consolidated Schedule H. See Letter of Melinda Reid Hatton, General Counsel, American Hospital Association to the Honorable Douglas Shulman, Commissioner, Internal Revenue Service (March 5, 2010)(copy available through Tax Analysts, Doc. 2010-4911). Under the current instructions to the Form 990 Schedule H, each hospital that has a separate employer identification number (EIN) must file its own Schedule H. It can report data relevant to other facilities it owns, but only those that share the same EIN. The trend appears to be headed toward even more separate reporting, as PPACA requires hospital organizations with more than one facility to meet each of the four requirements separately with respect to each facility.
Requirement #1: Community Health Needs Assessment
Under Code Section 501(r)(5), hospitals must prepare a CHNA every three years and adopt an implementation strategy to meet the identified needs. The CHNA must (1) include input from a broad spectrum of individuals throughout the community served by the hospital facility, including those with public health knowledge or expertise, and (2) be made widely available to the public. Further, Code Section 6033(b)(15)(A) requires hospital organizations to include in their Form 990 a description of how the organization is addressing the needs identified in each CHNA and a description of any needs that are not being addressed, along with the reasons why the needs are not being addressed.
The Technical Explanation states that the CHNA “may be based on current information collected by a public health agency or non-profit organizations and may be conducted together with one or more organizations, including related organizations.”
Comments:
An independent research firm that partners with tax-exempt hospitals to conduct CHNAs has offered its opinion that the statute and legislative history provide “too much flexibility” in conducing a CHNA and requests “clearer standards.” Most hospitals would not agree with this comment. Many are likely to welcome the provision’s flexibility because it allows hospital organizations to best tailor the study to the local community needs and available resources. Hospitals particularly appreciate the Technical Explanation’s additional clarification regarding the use of data generated by public health agencies and nonprofit organizations, as well as the Explanation’s suggestion that related or unrelated hospitals may be able to collaborate on a needs assessment. Another comment submitted by a hospital chief financial officer suggests that CHNAs should be required once every five years, instead of once every three years. However, the IRS would not be able to respond favorably to this comment since the frequency of the CHNAs (once every three years) is a statutory requirement mandated by Congress.
Requirement #2: Financial Assistance Policy
New Code Section 501(r)(4) requires a hospital organization to establish a financial assistance policy and a policy relating to emergency medical care. The required financial assistance policy is broader than the “charity care” policy formulated by many hospitals, and the emergency medical care policy seems to be broader than most hospital “emergency room” policies.
Specifically, charitable hospital organizations must adopt, implement and widely publicize a financial assistance policy that includes eligibility criteria (including whether free or discounted care is available); the basis for calculating amounts charged to patients; application procedures for obtaining assistance; and (if the organization does not have a separate billing and collections policy), the potential collection actions in the event of non-payment. Section 501(r)(4) also specifies that the hospital must have a written policy for the provision of “emergency medical conditions” (a term that the legislation defines by cross-reference to 42 U.S.C. 1395dd) to individuals regardless of their eligibility under the hospital’s financial assistance policy.
The Technical Explanation states that the emergency care policy must prevent discrimination in the provision of emergency medical treatment, including denial of service, against those eligible for financial assistance under the facility’s financial assistance policy or those eligible for government assistance.”
Comments:
This requirement will need some further clarification. The terms “widely publicize” and “denial of service” are both undefined. Further, the provision seems to imply that a tax-exempt hospital can never refuse service to an individual that qualifies for financial assistance or is eligible for government assistance, even if there are valid reasons. What happens if a hospital is unequipped to provide the needed service (e.g., the hospital does not have the needed equipment or is at capacity with other patients)?
Requirement #3: Limitation on Charges
Code Section 501(r)(5) limits the amount hospitals may charge for emergency or other medically necessary treatment provided to individuals who qualify for financial assistance.
The Technical Explanation states that “[i]t is intended that amounts billed to those who qualify for financial assistance may be based on either the best, or an average of the three best, negotiated commercial rates, or Medicare rates.”
Comments:
As clarified by the legislative history, this provision allows hospitals to base the amount billed to those qualifying for financial assistance on any one of three types of rates – the best commercial rate, the average of the three best commercial rate, or Medicare rates. The IRS administrative guidance should simply follow and adopt this approach. However, at least one hospital has asked the IRS for further clarification on what is meant by the “best” rate.
Requirement #4: Billing and Collection Policy
Code Section 501(r)(6) prohibits hospitals from engaging in extraordinary collection actions without first making reasonable efforts to determine whether the individual is eligible for financial assistance.
The Technical Explanation states that “extraordinary collections include lawsuits, liens on residences, arrests, body attachments, or other similar collection processes.” It also states that “[i]t is intended that for this purpose, ‘reasonable efforts’ includes 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.”
Comments:
The billing and collection provision requires further guidance. New Code Section 501(r)(6) provides that a hospital must forego extraordinary collection actions until it has made reasonable efforts to determine whether an individual is eligible for financial assistance. However, the Technical Explanation states that “reasonable efforts” to notify the individual about the hospital’s financial assistance policy must be made before starting collection action or reporting to credit agencies. The Technical Explanation seems to be inconsistent with the statutory language. Can a hospital begin ordinary collection actions before determining whether an individual is eligible for financial assistance? The answer appears to be “yes” under the statutory language but “no” under the Technical Explanation. What happens if ordinary collection efforts are started before the hospital makes a reasonable effort to determine whether an individual is eligible for financial assistance? Is the hospital foreclosed from ever taking extraordinary actions?
Next, further clarification is needed on what constitutes “extraordinary collection” efforts. The Technical Explanation indicates that reporting an individual to a credit agency is considered an extraordinary collection effort for these purposes. However, reporting an individual to a credit agency is not generally seen as an extraordinary collection effort.
Lastly, the phrase “other similar collection processes” is vague and undefined. This phrase requires clarity, or it will lead to inconsistent application and spawn litigation.
Procedures for Submission of Comments
Notice 2010-39 specifically requests comments on the appropriate requirements for a CHNA, what constitutes “reasonable efforts” to determine eligibility for assistance under a financial assistance policy for purposes of billing and collection, and how to treat for-profit hospitals that are owned by a nonprofit hospital organization. In addition, the notice also requests comments on the new requirements and the need for guidance on application of those requirements.
Comments should refer to Notice 2010-39 and be submitted by July 22, 2010, to:
Internal Revenue Service CC:PA:LPD:PR (Notice 2010-39) Room 5203 P.O. Box 7604 Ben Franklin Station Washington, DC 20044
Alternatively, taxpayers may submit comments electronically to notice.comments@irscounsel.treas.gov. The subject line should include “Notice 2010-39.”
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