New Requirements for Tax Exempt Hospitals

September 30, 2010 | Health Services

The Patient Protection and Affordable Care Act (PPACA) created several new requirements for tax-exempt hospitals which must be compiled with in order to maintain federal tax-exempt status.  The PPACA creates a new IRS Code Section 501(r) which imposes four requirements on tax-exempt hospitals (these requirements are in addition to existing law under Section 501 (c)(3), including:

Community Health Needs Assessment 501(r)(3)– Every three years, a hospital organization must conduct a community health needs assessment that takes into account input from the community served by the hospital (specifically including individuals having specialized knowledge or expertise in public health).  The hospital organization must make the community health needs assessment widely available to the public and must adopt an implementation strategy to meet the community health needs identified in the assessment.  The hospital must disclose on its Form 990 how it is addressing the needs identified in each assessment, a description of any needs not being addressed and the reasons why such needs are not being addressed.  In addition to loss of its federal tax exemption, a hospital organization that fails to comply with the community needs assessment provisions is subject to an excise tax of $50,000 per tax year. 

Financial Assistance and Emergency Care Policies 501(r)(4)- Every hospital must establish a financial assistance policy and a policy relating to emergency medical care.  The hospital must have a written financial assistance policy that includes eligibility criteria for financial assistance and whether such assistance includes free or discounted care, the basis for calculating amounts charged to patients, the method for applying for financial assistance and, in the case of an organization that does not have a separate billing and collection policy, the actions the organization may take in the event of nonpayment including collection actions and reporting to credit agencies.  The financial assistance policy must also describe the measures that the hospital organization will take to widely publicize the policy within its patient community.  The Technical Explanation states that “the  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”. 

Limitations on Patient Charges 501(r)(5)-A hospital organization must limit the amounts charged for “emergency and other medically necessary care” provided to individuals who qualify under its financial assistance policy to the amounts generally charged to individuals having insurance coverage for such care.  The hospital may not use “gross charges” when billing individuals who qualify for financial assistance.  The term “gross charges” is not defined by the new law.  Gross charges are generally considered the full posted amount a hospital charges for services, prior to any allowances, discounts or reductions.  The Treasury’s technical Explanation states that “it 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”

Limits on Billing and Collection Practices 501(r)(6)–  A hospital must forego engaging in extraordinary collection actions before making “reasonable efforts” to determine whether a patient is eligible for assistance under the hospital financial assistance policy.  According to the Technical Explanation “extraordinary collections include lawsuits, liens on residences, arrests, body attachments or other similar collection processes”. 

Hospital Definition

Section 501(r) applies to “hospital organizations.”  Hospital organizations are defined to be an organization that operates a facility that requires hospital licensing or registration under the laws of any state.  The definition also includes organizations that are determined by the secretary of the Treasury Department to be providing hospital care as the basis for its tax exemption.  Section 501(r) applies to hospital organizations on a facility by-facility basis.  Accordingly, if a hospital organization operates more than one hospital facility, the organization is required to meet the additional requirements of section 501(r) separately with respect to each facility.

Effective Dates

The requirements to establish financial assistance and emergency care policies, limitations on  patient charges and limit billing and collection practices are effective for tax years beginning after March 23, 2010.  The requirement to complete a community health needs assessment is scheduled to be effective for tax years beginning after March 23, 2012.  However, the IRS issued a Request for Comments regarding the appropriate requirements for the Community Health Needs Assessment and what constitutes “reasonable efforts” to determine eligibility for assistance under a financial assistance policy for purposes of the billing and collection requirements.  In addition, comments were also requested concerning the requirement  that an organization that operates more than one hospital facility “shall not be treated as described in with respect to any such facility for which such requirements are not separately met,” including the tax consequences of a failure with respect to some, but not all, facilities and the proper tax treatment in future periods in such a case

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