Non-profit hospitals have traditionally been exempt from federal income taxes as charitable organizations. The Internal Revenue Service, relying on the common law definition of charity, has long agreed that the promotion of health is a charitable endeavor.1 Thus, organizations such as hospitals could qualify for a federal income tax exemption under Section 501(c)(3) of the Internal Revenue Code because they were engaged in the promotion of health. Operating in the black does not affect a hospital's tax exempt status so long as its surplus funds are used "to improve the quality of patient care, expand its facilities, and advance its medical training, education, and research programs, the hospital is operating in furtherance of its exempt purposes."
The IRS has also generally required that tax exempt hospitals have independent boards of trustees, maintain an open medical staff with privileges available to all qualified physicians and operate an active and generally accessible emergency department. With respect to their emergency departments, the IRS has required hospitals to provide care to those without insurance or who cannot otherwise pay for their care.2 While this can be expensive, it is also required under the Emergency Medical Treatment and Active Labor Act3 so the tax requirements are not uniquely onerous. Though required to provide the emergency care, hospitals could bill for the care and attempt to collect it, as not all patients who lack insurance are indigent. Moreover, while most non-profit hospitals provided uncompensated care outside of the emergency department, there was generally no requirement that they do so.
However, much of the established way of dealing with uninsured patients changed with the enactment of the Patient Protection Affordable Care Act,4 also colloquially known as "ObamaCare." The PPACA created a new provision in section 501 of the Internal Revenue Code, subsection (r). That subsection, which applies to facilities licensed as hospitals under state law, contains new requirements for uncompensated care. The law also imposed new reporting requirements on hospitals.5 The four new requirements that hospitals must meet in order to maintain their tax exempt status are:
1. The community health needs assessment,
2. Financial assistance policy,
3. Limitations on charges, and
4. Billing and collections practices.
Under the new PPACA provisions, hospitals that fail to meet the requirements of Section 501(r) are subject to a new $50,000 annual excise tax.6 The IRS has yet to publish guidance on the consequences of failing to meet one or more of the requirements of Section 501(r). This guidance will be critical, as the cost of complying with these requirements for larger hospitals will far exceed the $50,000 excise tax imposed for not complying. In July 2011, the IRS published Notice 2011-52, which provides draft regulations and guidance on the community health needs assessment of Section 501(r). In June 2012, they followed with draft regulations and guidance on financial assistance and collection activities.
Interestingly, the proposed regulations do not mandate a particular eligibility requirement. Also, there is no link between the community health needs assessment and the financial assistance plan. In other words, at present, a hospital does not have to tailor its financial assistance plan to the findings of the community health needs assessment.
The proposed regulations provide for two methods which can be used to determine amounts generally billed. The first is a "look back" method based on actual past claims paid to the hospital facility by either Medicare fee-for-service or Medicare FFS together with all private health insurers paying claims to the hospital facility. The second method is prospective, requiring a hospital to estimate the amount it would be paid by Medicare and a Medicare beneficiary for the emergency or other medically necessary care at issue if the eligible individual were a Medicare FFS beneficiary. These two methods are mutually exclusive, and once a hospital chooses one method it must continue to use it.
In addition, the proposed regulations provide that the prohibition on using "gross charges" (i.e., "chargemaster" rates) only applies to individuals who are eligible for financial assistance. In other words, hospitals can still bill for gross charges where the individual does not qualify for financial assistance.
Finally, the proposed regulations allow hospitals to charge gross charges to an individual if that individual has not yet submitted a completed application for financial assistance.
The regulations require a hospital to make reasonable efforts to determine whether an individual qualifies under the financial assistance plan before engaging in extraordinary collections efforts. "Reasonable efforts" is defined as: (1) notifying the individual about the financial assistance plan, (2) providing information to an individual who submits an incomplete financial assistance application on how to complete it and (3) with respect to an individual who submits a completed financial assistance application, making and documenting a determination of whether the individual qualifies under the plan. The hospital must notify an individual that he or she can submit an application for financial assistance within 120 days after care is provided.
After the hospital has properly notified an individual of his or her rights to apply for financial assistance and has either accepted or rejected the application, the hospital may use extraordinary collections actions.
Finally, a hospital may not rely on a written waiver of an individual's right to financial assistance. Rather, the hospital must make reasonable efforts to determine whether the individual is eligible for financial assistance.
Footnotes:
1Rev. Rul. 69-545, 1969-2 C.B. 117 (“In the general law of charity, the promotion of health is considered to be a charitable purpose. Restatement (Second), Trusts, sec. 368 and sec. 372; IV Scott on Trusts (3rd ed. 1967), sec. 368 and sec. 372. A nonprofit organization whose purpose and activity are providing hospital care is promoting health and may, therefore, qualify as organized and operated in furtherance of a charitable purpose.”)
2IRS Announcement 92-83.
342 U.S.C. § 1395dd.
4 4Section 9007, Pub. L. No. 111-148, 124 Stat. 119 (March 23, 2010).
5 26 U.S.C. § 6033(b)(15)(A).
6 26 U.S.C. § 4959.
Mr. Metcalf is a partner in Lewis and Roca LLP's Litigation Practice Group in Tucson, Ariz. His focus is on tax law, litigation in state and federal courts, and representing clients before administrative agencies. Mr. Metcalf formerly served as a trial attorney in the Tax Division of the United States Department of Justice in Washington, D.C., where he specialized in prosecuting tax cases. A graduate of Drake University Law School with a Master of Law from Georgetown, Mr. Metcalf is listed in the 2013 edition of The Best Lawyers in America®, by Woodward/White, Aiken, S.C. in the category of Tax Law.
The IRS has also generally required that tax exempt hospitals have independent boards of trustees, maintain an open medical staff with privileges available to all qualified physicians and operate an active and generally accessible emergency department. With respect to their emergency departments, the IRS has required hospitals to provide care to those without insurance or who cannot otherwise pay for their care.2 While this can be expensive, it is also required under the Emergency Medical Treatment and Active Labor Act3 so the tax requirements are not uniquely onerous. Though required to provide the emergency care, hospitals could bill for the care and attempt to collect it, as not all patients who lack insurance are indigent. Moreover, while most non-profit hospitals provided uncompensated care outside of the emergency department, there was generally no requirement that they do so.
However, much of the established way of dealing with uninsured patients changed with the enactment of the Patient Protection Affordable Care Act,4 also colloquially known as "ObamaCare." The PPACA created a new provision in section 501 of the Internal Revenue Code, subsection (r). That subsection, which applies to facilities licensed as hospitals under state law, contains new requirements for uncompensated care. The law also imposed new reporting requirements on hospitals.5 The four new requirements that hospitals must meet in order to maintain their tax exempt status are:
1. The community health needs assessment,
2. Financial assistance policy,
3. Limitations on charges, and
4. Billing and collections practices.
Under the new PPACA provisions, hospitals that fail to meet the requirements of Section 501(r) are subject to a new $50,000 annual excise tax.6 The IRS has yet to publish guidance on the consequences of failing to meet one or more of the requirements of Section 501(r). This guidance will be critical, as the cost of complying with these requirements for larger hospitals will far exceed the $50,000 excise tax imposed for not complying. In July 2011, the IRS published Notice 2011-52, which provides draft regulations and guidance on the community health needs assessment of Section 501(r). In June 2012, they followed with draft regulations and guidance on financial assistance and collection activities.
1. Community health needs assessment
The IRS now requires that hospitals create a written community health needs assessment based on an assessment done every three years. This document must provide a description of the process and methods used in its preparation, including the sources used to conduct the assessment, the analytical methods applied to identify community health needs, how the hospital took into account the input of persons who represent broad interests in the community, a prioritized description of the community's health needs and a description of existing local healthcare facilities and other resources. The IRS also requires that this written community healthcare assessment be widely available. The community health needs assessment is effective for tax years beginning after March 23, 2012.The IRS next requires that the hospital facility adopt a written implementation strategy to meet the needs identified in the community health needs assessment, explaining how it will meet the community health needs, or if not, why it cannot do so.2. Written policies related to financial assistance
The PPACA also requires hospitals to create a written financial assistance policy. This policy must include the following elements: (a) eligibility criteria for financial assistance, and whether such assistance includes free or discounted care, (b) the basis for calculating amounts charged to patients and the permitted methods used to determine amounts generally billed, (c) the method for applying for financial assistance and what documentation will be used to determine qualification, (d) the actions the organization might take in the event of nonpayment and (e) measures to widely publicize the financial assistance policy within the community. These requirements apply to all medically necessary care, not just care provided in the emergency department.Interestingly, the proposed regulations do not mandate a particular eligibility requirement. Also, there is no link between the community health needs assessment and the financial assistance plan. In other words, at present, a hospital does not have to tailor its financial assistance plan to the findings of the community health needs assessment.
3. Limitations on charges
Hospitals must now limit charges for emergency or medically necessary care to the rates generally billed to insured individuals. That is, hospitals cannot charge uninsured individuals who quality for financial assistance more than what is charged for insured patients. The limitation on gross charges applies to all hospital care, not just emergency care.The proposed regulations provide for two methods which can be used to determine amounts generally billed. The first is a "look back" method based on actual past claims paid to the hospital facility by either Medicare fee-for-service or Medicare FFS together with all private health insurers paying claims to the hospital facility. The second method is prospective, requiring a hospital to estimate the amount it would be paid by Medicare and a Medicare beneficiary for the emergency or other medically necessary care at issue if the eligible individual were a Medicare FFS beneficiary. These two methods are mutually exclusive, and once a hospital chooses one method it must continue to use it.
In addition, the proposed regulations provide that the prohibition on using "gross charges" (i.e., "chargemaster" rates) only applies to individuals who are eligible for financial assistance. In other words, hospitals can still bill for gross charges where the individual does not qualify for financial assistance.
Finally, the proposed regulations allow hospitals to charge gross charges to an individual if that individual has not yet submitted a completed application for financial assistance.
4. Billing and collections practices
The PPACA prohibits hospitals from engaging in extraordinary collections actions in certain instances. The proposed regulations define "extraordinary collections actions" as actions taken by a hospital against an individual relating to obtaining payment of a bill for care covered under the hospital's financial assistance plan that require legal or judicial process. In addition, the proposed regulations prohibit hospitals from reporting adverse information to consumer credit reporting agencies for persons who qualify under the financial assistance plan. The proposed regulations also prohibit hospitals from selling debt of individuals under the financial assistance plan.The regulations require a hospital to make reasonable efforts to determine whether an individual qualifies under the financial assistance plan before engaging in extraordinary collections efforts. "Reasonable efforts" is defined as: (1) notifying the individual about the financial assistance plan, (2) providing information to an individual who submits an incomplete financial assistance application on how to complete it and (3) with respect to an individual who submits a completed financial assistance application, making and documenting a determination of whether the individual qualifies under the plan. The hospital must notify an individual that he or she can submit an application for financial assistance within 120 days after care is provided.
After the hospital has properly notified an individual of his or her rights to apply for financial assistance and has either accepted or rejected the application, the hospital may use extraordinary collections actions.
Finally, a hospital may not rely on a written waiver of an individual's right to financial assistance. Rather, the hospital must make reasonable efforts to determine whether the individual is eligible for financial assistance.
Conclusion
The proposed regulations under the PPACA impose significant new requirements on how hospitals bill and collect for services provided to those who do not have insurance. Unfortunately, the proposed regulations do not provide helpful guidance on who should be eligible for financial assistance. Thus, it is left to hospitals to establish eligibility criteria. If a hospital set the standard too low so that many of those without insurance do not qualify for financial assistance, the hospital's status as a charity will be questioned. On the other hand, setting the standard too high will cause hospitals to limit their charges to those who may be able to pay the gross charges, and will disincentive those individuals from obtaining insurance.Footnotes:
1Rev. Rul. 69-545, 1969-2 C.B. 117 (“In the general law of charity, the promotion of health is considered to be a charitable purpose. Restatement (Second), Trusts, sec. 368 and sec. 372; IV Scott on Trusts (3rd ed. 1967), sec. 368 and sec. 372. A nonprofit organization whose purpose and activity are providing hospital care is promoting health and may, therefore, qualify as organized and operated in furtherance of a charitable purpose.”)
2IRS Announcement 92-83.
342 U.S.C. § 1395dd.
4 4Section 9007, Pub. L. No. 111-148, 124 Stat. 119 (March 23, 2010).
5 26 U.S.C. § 6033(b)(15)(A).
6 26 U.S.C. § 4959.
Mr. Metcalf is a partner in Lewis and Roca LLP's Litigation Practice Group in Tucson, Ariz. His focus is on tax law, litigation in state and federal courts, and representing clients before administrative agencies. Mr. Metcalf formerly served as a trial attorney in the Tax Division of the United States Department of Justice in Washington, D.C., where he specialized in prosecuting tax cases. A graduate of Drake University Law School with a Master of Law from Georgetown, Mr. Metcalf is listed in the 2013 edition of The Best Lawyers in America®, by Woodward/White, Aiken, S.C. in the category of Tax Law.