United States: Proposed Tax-Exempt Hospital Responsibility Act Creates Charity Care Requirements

On January 23, 2006, the Illinois Attorney General (AG) proposed two pieces of legislation, that, if passed, will have a significant impact on all hospitals in Illinois, particularly tax-exempt, nonprofit hospitals. The bills also may have broader implications for tax-exempt hospitals nationwide.

The first of these, the Tax-Exempt Hospital Responsibility Act (the act), sets forth charity care requirements for Illinois tax-exempt, nonprofit hospitals and exempts only critical access hospitals. Nonprofit hospitals are required to comply with the act in order to maintain their tax-exempt status under the Illinois Income Tax Act, the Use Tax Act, the Service Use Tax Act, the Service Occupation Tax Act, the Retailers’ Occupation Tax Act and the Property Tax Code. The act also prohibits the Illinois Finance Authority from exercising any of its powers for the benefit of any hospital that is out of compliance.

The second bill, the Hospital Fair Billing and Collection Practices Act, establishes a set of detailed procedural standards for hospital billing and collections and will be discussed in a subsequent On the Subject.

The Tax-Exempt Hospital Responsibility Act mandates that Illinois tax-exempt, nonprofit hospitals provide charity care in an amount equal to 8 percent of the hospital’s total annual operating costs (as reported each year in the hospital’s most recently settled Medicare cost report). Charity care is defined as medically necessary services provided at a reduced charge or no charge to patients who meet eligibility criteria no more restrictive than the following: free care (full charity care) must be provided to uninsured Illinois residents¹ below 150 percent of the federal poverty level (FPL), and discounted care must be provided to those between 150 percent and 250 percent of the FPL. Discounts are defined as discounts from costs, not charges, and the amount charged to financially eligible families cannot exceed 35 percent of the costs of care. For example, if a patient in a family of four with income of $45,000 to $50,000 (falling between 225 percent and 250 percent of the FPL) incurs hospital charges of $5,000 representing $3,000 in cost (depending on the hospital’s Medicare cost-to-charge ratio), the patient’s bill cannot exceed 35 percent of cost or $1,050. In addition, if the cost of care exceeds $10,000 in a 12-month period, the patient is eligible for full charity care for the remainder of the 12-month period.

The proposed charity care requirements provide a fairly tight safety net for financially eligible families. However, families above 250 percent of the FPL are not required to be protected, and it is not clear from the bill that hospitals receive "credit" toward their 8 percent obligation for charity care provided to such patients. In order to make their 8 percent annual target, hospitals can count free or discounted charity care for eligible patients when care is provided within the hospital, at one or more community health centers or free clinics operated by the hospital, or in other settings as approved in advance by the AG. In addition, hospitals can include uncompensated care or payment shortfalls below cost for services rendered to Medicaid patients or those reimbursed through the Crime Victims Compensation Act. Although the act acknowledges charity care is just one subset of a hospital’s community benefit commitment, subsidized health care services as defined in the Community Benefits Reporting Act (CBRA) will not count toward the 8 percent annual target. In addition to the mandate to reach the 8 percent threshold, hospitals must:

• screen all uninsured patients before discharge from an outpatient service or inpatient stay;

• offer financially eligible patients reasonable payment plans without interest; and

• implement standard patient and community awareness strategies.

Hospitals are prohibited from billing an uninsured Illinois resident until at least 60 days after the effective date of service or discharge, sending a bill to a patient who qualifies for full charity care, and denying or delaying patient care while a patient’s application is pending.

For purposes of patient and community awareness, hospitals face mandates to:

• distribute to every patient, on or prior to the date of service or discharge, a written statement regarding charity care;

• post signage;

• use standard forms and income verification/documentation developed by the AG;

• provide notice to applicants within 14 days after receipt of a completed charity care application;

• implement procedures in accordance with the Language Assistance Services Act;

• provide notice of the availability of charity care in any patient bill, invoice statement or collection action issued by the hospital or by an agent, assignee or account purchaser;

• post notice in a prominent place on the hospital website; and

• publish notice on a quarterly basis in a newspaper of general circulation in the hospital’s service area indicating that charity care is available, and provide similar notice to all community medical centers located in the service area.

Patients have the right to apply for charity care within 60 days after the date of service or discharge and to register a complaint with the AG if any provision of the act is violated. Patients are obligated to cooperate by providing information of any significant change in financial status, engaging in reasonable payment plans, and applying to other public or private health insurance or benefit programs for which they may be eligible. Records of charity care applications and terminations are exempt from inspection and copying under the Freedom of Information Act.

The AG has broad enforcement powers under the proposed legislation and may bring an action against a hospital to obtain injunctive relief. The AG also may seek the removal and replacement of any director, officer, agent or employee who has directly or indirectly acquiesced, approved or authorized a violation of the act. In the event a circuit court grants relief against a hospital for a violation, the AG must refer the hospital to the Illinois Department of Revenue for possible revocation of the hospital’s tax-exempt status. The AG may also assess civil monetary penalties for failures to post notice or implement patient notification procedures ($1,000 per day for each day of failed notice) or for failure to provide information to the public ($1,000 per violation). Other violations can result in penalties of $10,000 each, and a circuit court can order patient reimbursement for money paid contrary to the provisions of the act. If a hospital does not meet its annual charity care obligation, it is subject to a civil penalty equal to the amount of its unpaid obligation plus interest.

The required annual allocation of 8 percent of total hospital operating costs to charity care and the defined expenditures that can be counted to reach this commitment are most certainly the hallmarks of the proposed legislation. Moreover, although the CBRA has required hospitals to report charity care as the actual cost of services provided, the proposed act definitively moves away from viewing charity care as discounts from charges. Hospitals likely will advocate for changes in the legislation as currently proposed, and they may advocate for broadening the definition of charity care so other substantive commitments in direct support of caring for the uninsured can be counted. Additionally, we expect future analysis of whether the act will have equitable effects across hospitals.

Footnotes

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