The Patient Protection and Affordable Care Act (the "Affordable Care Act") imposes four new requirements that Section 501(c)(3) "hospital organizations" operating "hospital facilities" must meet to keep their tax-exempt status.
- Each "hospital facility" must conduct a "community health needs assessment" ("CHNA") at least once every three years;
- Each hospital facility is required to adopt both a written financial assistance policy and a written emergency medical care policy that comply with certain statutory criteria;
- Hospital facilities may not charge patients eligible for financial assistance more than "amounts generally billed" to insured patients and are prohibited from using "gross charges" for patients eligible for financial assistance; and
- Hospital facilities may not commence certain "extraordinary collection actions" before making "reasonable efforts" to determine if the patient involved is eligible for financial assistance under the financial assistance policy.
The requirements were added to the Internal Revenue Code (the
"Code") under new Section 501(r). Failure to meet these
requirements can have significant consequences, ranging from the
$50,000 excise tax for each hospital facility that fails to perform
a timely community health needs assessment and adopt a
corresponding implementation plan, to taxing all of a hospital
facility's revenue for one or more years, to loss of exempt
status for that hospital and for the interest on its bonds. If the
hospital organization is part of a joint venture that operates one
or more hospitals, Section 501(r) can apply to those hospitals as
well.
The Treasury Department and the IRS have now issued final
regulations implementing these requirements. The regulations go
into effect for taxable years beginning after December 29, 2015,
giving tax-exempt hospitals time to ensure they are in compliance
with the specific requirements.
WHO IS SUBJECT TO THE SECTION 501(r)
REQUIREMENTS?
Hospital Organizations. Section 501(r) applies to
"hospital organizations," which include any Section
501(c)(3) organization that operates one or more "hospital
facilities." Thus, the term includes not only health systems
but also other Section 501(c)(3) organizations that primarily
qualify for Section 501(c)(3) status under a non-health care
category (e.g., colleges and universities) that operate
"hospital facilities." Governmental hospitals, with one
exception, are generally not subject to these requirements because
their exclusion from tax comes under Section 115 of the Tax Code,
not Section 501(c)(3). A "dual status" governmental
hospital that has received a Section 501(c)(3) status determination
letters from the IRS, however, is subject to Section 501(r) unless
it voluntarily relinquishes its exemption under Section
501(c)(3).
Hospital Facilities. The Section 501(r) rules are
applied on a facility-by-facility basis. A "hospital
facility" is any facility required under state law or the law
of the District of Columbia to be licensed, registered, or
otherwise recognized as a hospital. Foreign facilities are not
subject to Section 501(r) because they are not required to be
licensed by a state. Multiple buildings operated under a single
license are considered to be one hospital facility. The final
regulations clarify that if a single building houses operations
with multiple licenses, each separately licensed hospital operation
will be considered a separate facility. If state law exempts a
hospital from generally applicable licensing requirements, it may
still be subject to Section 501(r) if the terms of the state law
"recognize" it as a hospital.
Operation of Hospital Facilities Through Management
Contracts, LLCs and Other Joint Ventures
A hospital organization is responsible for meeting the four new
requirements for each hospital facility that it operates. A
hospital organization that hires a management company to operate a
hospital facility is still considered to be operating that
facility. Thus, the hospital organization is at risk if the
management company fails to comply with Section 501(r) with respect
to the managed hospital.
Consistent with guidance in other areas under the Code, the
operation of a hospital facility through a single-member LLC that
is treated as a disregarded entity under the Code will be treated
as operation of the facility directly by the hospital organization
that holds the membership interest in the LLC. Thus, while the
single-member LLC will have a separate existence from the sole
member for federal employment tax purposes and for certain state
law purposes, the hospital organization will be treated as directly
operating the facility for purposes of Section 501(r).
Consistent with prior IRS guidance on joint ventures between
Section 501(c)(3) organizations and for-profit entities, a hospital
organization "operates" a hospital facility if the
hospital organization is a partner in a partnership or a member of
an LLC treated as a partnership that operates the hospital
facility. However, there are two exceptions to this general
rule.
The first exception is for circumstances where the operation of the
hospital owned by the joint venture is treated as an unrelated
trade or business by the tax-exempt participant in the joint
venture. If the hospital organization does not have control over
the operation of the joint venture's hospital facility
sufficient to ensure that the operation of the hospital facility
furthers an exempt purpose and, as a result, treats the operation
of the hospital, including the facility's provision of medical
care, as an unrelated trade or business, then the hospital
organization will not have to comply with Section 501(r) with
respect to that facility.
The second exception is for circumstances where the tax-exempt
hospital has a very small interest in the joint venture. This
exception applies to preexisting (as of March 23, 2010 when
the ACA was enacted) joint ventures of certain academic medical
centers that are operated as part of colleges and universities. To
qualify for this exception, the hospital organization must be
organized primarily for educational or scientific purposes, cannot
be engaged primarily in the operation of a hospital, must own no
more than 35 percent of the capital or profits interest in the
partnership, must not have a general partner or managing member or
similar interest, and must not have control over the operation of
the hospital facility sufficient to ensure that the facility
complies with Section 501(r).
WHAT IS REQUIRED FOR COMPLIANCE WITH SECTION
501(r)?
Community Health Needs
Assessment
A community health needs assessment ("CHNA") is a
document compiling the results of a process including community
representatives that evaluates the health needs of the community
the hospital facility serves. The implementation strategy is a
separate document that describes, with respect to each significant
health need identified through the CHNA, how the hospital facility
plans to address the health need or why the hospital facility does
not intend to address the health need. Each hospital facility must
complete a new CHNA once every three years, and each hospital
organization must adopt an implementation strategy in connection
with the CHNA.
Required Contents and Process for Developing a
CHNA. As its name implies, a CHNA assesses the health
needs of the community served by the hospital. The hospital has
discretion to define the community it serves. The community may
take account of special areas of focus such as certain populations,
like children or women, or certain specialized services such as an
eye hospital or a cancer hospital. However, the definition of the
hospital's community may not be designed to exclude the
medically underserved, the low-income, minority populations who
live in the geographic area the hospital serves, individuals who
are not insured at all or are insured by particular payors, or
individuals who are eligible for financial assistance under the
hospital's policy.
The CHNA must identify the community's significant health
needs, prioritize those needs, and identify resources available to
address those needs. Health needs include whatever the community
needs to improve or maintain its health, including but not limited
to better access to care, better nutrition, and ways to address
social, behavioral, and environmental factors. The hospital has
discretion to determine which needs are significant based on all
facts and circumstances. The hospital also may use whatever
criteria it thinks best to prioritize the need though it must
describe the criteria in the assessment.
In performing the assessment, the hospital must solicit input on
identifying and prioritizing community health needs from at least
one governmental public health department and from members of
medically underserved, low-income, and minority members of the
community. The hospital has the option of soliciting input from
other community sources as well. The final regulations make clear
that the hospital is responsible for soliciting the input but will
not fail to meet the requirement if input is not in fact received.
The CHNA must take account of written comments submitted in
response to the last CHNA the hospital conducted and
released.
The CHNA must be documented in a report that describes the
community, the needs identified, the prioritization and criteria
used to set the priorities, a description of resources available to
meet the needs, and an evaluation of the impact of any actions
taken to address community health needs since the last CHNA was
conducted. The report must also describe the process and methods
used to conduct the CHNA, including the community input solicited
and received and the data collected, though the final regulations
allow hospitals that use data from external sources to cite to
those sources rather than describing how the data was collected.
The community input may be summarized. It is not necessary to
describe each piece of input or written comment received.
Each hospital facility may conduct its own CHNA or it may conduct
the CHNA in concert with other hospital facilities. If two or more
hospital facilities serve the same community, they may issue a
joint CHNA. If two or more hospitals have parts of the community in
common, the parts of their separate CHNAs addressing the shared
portion of the community may be identical.
The CHNA is complete when it is released to the public. The
hospital organization must make the CHNA, and the last two
preceding it, widely available to the public on a web site. Paper
copies must be available for public inspection upon
request.
Implementation Strategy. The board of the hospital
organization (or a committee or person delegated responsibility as
permitted under state law) must adopt an implementation strategy
that describes what the hospital plans to do in response to the
health needs identified and the resources the hospital will bring
to bear. If the hospital is not going to address one or more
significant health needs identified, it must say why. Resource
constraints or a lack of competence to address the need are
satisfactory reasons. The final regulations extended the deadline
for adopting the implementation strategy. Rather than requiring
that it be done by the end of the taxable year in which the CHNA is
completed, the final regulations give the hospital until the
fifteenth day of the fifth month after the taxable year ends. That
is the date the hospital's Form 990 is due for the taxable year
if no extension is taken. If a new hospital facility is acquired or
placed in service during the year, the facility has until the last
day of the second taxable year beginning after the hospital
facility is acquired, placed into service, or becomes subject to
Section 501(r) to conduct the CHNA and adopt the implementation
strategy for that facility. For example, if a hospital organization
that is a calendar year taxpayer acquires a hospital facility on
February 1, 2015, it will have until December 31, 2017, to complete
the CHNA and adopt the implementation strategy for the newly
acquired hospital facility. The hospital organization must also
attach a copy of the most recently adopted implementation strategy
for each hospital facility it operates to its Form 990 or provide
the specific URL on the Form 990 of the web page on which it has
made each implementation strategy widely available.
Form 990 Reporting. On every year's Form 990,
the hospital must describe the actions it has taken to address the
significant health needs identified in its last CHNA. If no actions
were taken, it must indicate why. The hospital is prompted to
provide the information on the 2014 version of Schedule H, by Part
V, Section B, line 11. It must enter the information in Part V,
Section C.
Tax for Failing to Complete Timely CHNA. A
hospital organization that operates a hospital facility that fails
to complete a CHNA, make it widely available and adopt an
implementation strategy on a timely basis becomes liable for a
$50,000 excise tax under Section 4959 of the Internal Revenue Code.
The tax is due by the fifteenth day of the fifth month after the
end of the taxable year in which the hospital facility was required
to complete the CHNA. The tax is reported and paid with a separate
return (Form 4720) but the amount of the tax is also required to be
disclosed on Form 990.
Financial Assistance Policy
A hospital organization's governing board (or a committee or
person delegated responsibility as permitted under state law) must
adopt a written financial assistance policy ("FAP") for
each hospital facility and consistently carry out the
policy.
Required Contents. The FAP must state the criteria
for awarding financial assistance, the method of application for
financial assistance, the nature of the financial assistance, and
the basis for calculating charges for patients who qualify. The
policy must state that those eligible for financial assistance will
be charged no more than amounts generally billed. If the hospital
does not have a separate billing and collection policy, the FAP
must describe the actions the hospital may take in the event bills
are not paid. Under the final regulations, if the hospital facility
uses information separate from the FAP application to determine
eligibility, it must describe what it uses and how. The policy must
also describe whether and how it presumes certain individuals to be
FAP-eligible. The policy must apply to all care provided by the
hospital facility and—new to the final regulations—care
provided in the hospital facility by a partnership or LLC in which
the hospital owns a capital or profits interest. If a hospital
organization operates more than one hospital facility, it may use
the same policy for multiple facilities. The hospital retains full
discretion to determine the eligibility criteria for financial
assistance.
The final regulations require the FAP to list nonemployee
third-party providers who deliver emergency or other medically
necessary care in the hospital facility and indicate whether or not
each such provider is covered by the hospital's FAP. The
regulations do not define "provider," leaving the
hospital to exercise reasonable judgment about how providers are
listed. The hospital may choose to list the names of the medical
groups or professional corporations with whom it contracts rather
than individual practitioners, particularly where the practitioners
in the group change regularly and services are billed in the name
of the group. If a third-party provider operates the hospital's
emergency room and is not covered by the FAP, the IRS has said that
the hospital facility "may not be considered to operate that
emergency room, which in turn could have an effect on whether the
hospital satisfies the factors for exemption under the community
benefit standard long applied to hospitals under Revenue Ruling
69-545, 1969-2 C.B. 117." Note that under published IRS
guidance, a specialty hospital is not required to operate an
emergency room in order to meet the community benefit standard.
Neither the regulation nor the preamble comments on consequences
from having consulting specialists who are not subject to the FAP
on call for the emergency room.
Widely Publicizing the Policy. The hospital
facility must widely publicize the FAP using specified procedures,
including a couple added in the final regulations. It must post the
FAP, the FAP application form and a plain language summary of the
FAP in downloadable form on its web site or a web site linked to
the hospital's web site. If the hospital has a separate billing
and collection policy, it must post that as well. The plain
language summary has to include a number of specified elements
including contact information for a hospital office, a government
agency or a nonprofit organization that assists patients with the
financial assistance application process. The posted documents must
be provided on request for free in paper form in the emergency
room, admitting office, and by mail. Notices and applications may
be provided electronically if the patient consents to using the
electronic format. A paper copy of the plain language summary of
the FAP must be offered to patients as part of intake or discharge.
Conspicuous public displays about the FAP must be placed in the
emergency room, admitting office, and other public locations in the
hospital. A conspicuous written notice must be placed on all
billing statements alerting the recipient to the availability of
financial assistance and providing contact information for the
office that can help provide information about the FAP and the
application process. The requirement for a conspicuous notice was
substituted for the provision in the proposed regulations requiring
a plain language summary of the FAP on billing statements. To
widely publicize the FAP, the hospital must also notify members of
the community served by the hospital about the FAP in a way that
has a high probability of reaching the individuals most likely to
need assistance.
The FAP, FAP application form, and plain language summary must be
accessible to individuals who do not speak English. The final
regulations require the documents to be translated into any
language spoken by a group of 1000 or more individuals in
communities of 20,000 people or larger and by five percent or more
of the community in communities smaller than 20,000 people.
Hospitals that participate in Medicaid and Medicare must already
address comparable parameters as part of their compliance with
nondiscrimination requirements under Title VI of the Civil Rights
Act.
Finally, the regulations make clear that the hospital must not only
have the policy in place, it must consistently carry out the
policy. The IRS acknowledged that errors may occur, but also said
that the hospital facility will have met the requirement to
establish a policy if resources have been provided and diligent
effort made at implementation.
Emergency Medical Care Policy
A hospital organization governing board (or a committee or person
delegated responsibility as permitted under state law) must also
adopt a written emergency care policy for each facility that
requires the facility to provide emergency care without
discrimination regardless of whether the patient is eligible for
financial assistance. A policy that requires operation consistent
with the requirements of the Emergency Medical Treatment &
Labor Act ("EMTALA") will be satisfactory. Under the
final regulations, the policy must explicitly prohibit debt
collection or other actions that discourage individuals from
seeking emergency medical care such as demanding payment for unpaid
balances or prepayment before providing treatment. Although a
policy that requires compliance with EMTALA should implicitly
prohibit such activities, hospitals may want to add an explicit
provision to their emergency care policy prohibiting such
activities for avoidance of doubt. Activities related to payment
that do not create obstacles to treatment, such as inquiring about
insurance coverage or method of payment, are permitted. As with the
FAP, the regulations require the hospital not only to adopt the
emergency medical care policy but also to consistently carry it
out.
Limitation on Charges
For those eligible for financial assistance under the
hospital's FAP, charges for emergency medical care and
medically necessary care may be no more than amounts generally
billed ("AGB"). Two methods are offered for computing AGB
for emergency or other medically necessary care. One is a look-back
method based on the average charge allowed by Medicare
fee-for-service programs (i.e., Medicare Part A or Part B,
Medicaid, and private insurers (including in their capacity as
administrators of Medicare Advantage plans)). The other is a
prospective method using amounts that Medicare's
fee-for-service programs or Medicaid (fee for service or managed
care) reimburse for the services. The final regulations added
charges allowed by Medicaid to the permitted methods and also
eliminated a reference to "primary payors." For the
lookback method, charges allowed by both primary and secondary
insurers are included. Both methods result in the calculation of a
percentage reflecting the average amounts allowed by payors for
emergency and medically necessary care during a 12-month period by
the payors included in the method relative to the gross charges for
the care. The final regulations confirm that the hospital has
discretion to determine what is medically necessary care. The final
regulations also allow the hospital to change the method used at
any time. They also permit the hospital to use all charges allowed
rather than just those for emergency and medically necessary care.
A hospital may also use different percentages for different
categories of care such as inpatient and outpatient or for separate
items or services.
Although the IRS offers only two methods for now, it left open the
possibility of publishing future guidance offering other methods as
knowledge is gained about other possible approaches. As
reimbursement methodologies change with an increase in risk-based
contracting, value-based billing, bundled payments and the like,
additional methodologies are likely to be necessary. The IRS
acknowledged in the preamble to the regulations that it was not
clear how capitated payments could be associated with episodes of
care. The preamble does say, though, that "if a hospital
facility can reasonably allocate a capitated (or other lump-sum)
payment made by an insurer to care received by particular patients
during a 12-month period and has also tracked the gross charges for
that care, it may be able to reasonably incorporate such payments
into its calculation of one or more AGB percentages."
Computation of AGB. Each hospital facility using
the method that includes all payors must compute its AGB (or AGBs
if distinguishing categories of care or items and services)
separately unless multiple facilities are covered under the same
Medicare provider agreement, in which case they may perform a
combined calculation. The hospital facility must compute its AGB
percentage at least once a year. The final regulations extended the
amount of time the hospital has to implement the results of its AGB
calculation, allowing it to take up to 120 days to implement the
new AGB percentage once calculated.
Resulting Charges to the Patient. When an
individual is eligible for financial assistance, the hospital may
bill the individual no more than the AGB percentage multiplied by
what would otherwise be the gross charges for the care provided.
The limitation applies only to the amount the patient is being
asked to pay. Therefore, if a FAP-eligible patient is insured and
must pay the hospital's charges until he meets his deductible,
and must pay coinsurance beyond that point, the hospital may not
charge the individual more than amounts generally billed for the
services received, but the combination of the amounts billed to the
individual and the amounts billed to the insurer may exceed amounts
generally billed. This rule could provide meaningful assistance to
individuals who have high-deductible plans and need help covering
potentially thousands of dollars in costs before their insurance
coverage absorbs any of the expenses.
FAP-eligible patients must be charged something less than gross
charges for any medical care that is not emergency medical care or
medically necessary. Individuals not eligible for financial
assistance under the FAP may be billed more than AGB (indeed they
may be billed gross charges), and hospitals may continue to offer
discounts to patients who are not eligible for the FAP. However,
the IRS takes the position that any such discounts do not count as
community benefit activities for purposes of the community benefit
standard for exemption.
Requirements Before Engaging in Extraordinary Collection
Actions
A hospital facility must make reasonable efforts to determine
whether someone is eligible for financial assistance before
proceeding to Extraordinary Collection Actions ("ECAs")
for unpaid bills. If a hospital's financial assistance policy
covers only emergency and medically necessary care and does not
cover elective care, then the requirement for reasonable efforts
does not apply to bills for elective care. However, it may not be
practical to have different billing policies for different types of
care.
Extraordinary Collection Actions. In keeping with
the proposed regulations, the final regulations define ECAs to
include reporting individuals to credit agencies; legal or judicial
processes such as filing liens, foreclosures, attachments, and
garnishments; and selling debt. The final regulations create
exceptions for liens on the proceeds of judgments resulting from
personal injuries, claims filed in bankruptcy, and sales of debt to
third parties subject to a binding agreement that requires the debt
purchaser to refrain from ECAs, limit interest to the rate for tax
underpayments established under the Internal Revenue Code, allow
the hospital to recall the debt if the debtor is found eligible for
financial assistance, and ensure that if the debtor is found to be
eligible for financial assistance, the debt is reduced or
eliminated to reflect the financial assistance. The final
regulations add one more ECA: to defer or deny medically necessary
care because of failure to pay for previously provided care or to
require payment before providing medically necessary care because
of an unpaid bill for previously provided care. (The care being
deferred or denied would not be emergency care because EMTALA
requires a hospital to stabilize the patient.) The hospital may
still require payment of copays or other payments in advance of
providing care as long as those are required regardless of any past
nonpayment of the hospital's bills.
Reasonable Efforts to Determine Eligibility for Financial
Assistance. To make reasonable efforts to determine FAP
eligibility, hospitals must refrain from taking ECAs for the first
120 days after the date of the first bill sent postdischarge unless
the patient in question has submitted an application for financial
assistance with the bill and an eligibility determination has been
made. (Special rules described below permit the hospital to defer
or deny medically necessary care during this 120-day period based
on an unpaid bill if certain procedures are followed.) Reasonable
efforts also require the hospital to provide notice to patients at
least 30 days before the hospital initiates one or more ECAs. The
notice must tell the patient that financial assistance is
available, alert the patient to the ECAs that the hospital intends
to take, and provide a plain-language summary of the financial
assistance policy that must contain a number of specific elements,
including information on how to apply for financial assistance and
a contact that can help with the process. The hospital must also
make a reasonable effort to notify the patient orally about the
financial assistance policy and how to apply for financial
assistance. The written notice is in addition to the conspicuous
statement alerting patients to the availability of financial
assistance the hospital must place on all billing statements as
part of widely publicizing its financial assistance
policy.
With respect to applications for financial assistance, if notice
has been provided no application for financial assistance is
submitted, the hospital may proceed with ECAs beginning on the
121st day after the date of the first bill sent postdischarge.
However, if an application is submitted anywhere up to 240 days
after the date of the first bill sent postdischarge, ECAs must be
suspended while the application is processed. If the hospital waits
to send the notice informing the patient of its intent to begin
ECAs until 210 days or more have passed from the first
postdischarge billing statement, the hospital must give the patient
at least 30 days after notice is sent to submit an application for
financial assistance before beginning ECAs.
The hospital must process any complete application filed within 240
days of the date of the first bill sent post-discharge, or if
later, within a reasonable period of time after the notice
informing the patient of the hospital's intent to pursue ECAs.
ECAs must be suspended while the hospital reaches a decision on
eligibility. The patient must be notified of the decision in
writing. If the patient is found eligible for financial assistance
but still owes the hospital something for the care, the hospital
must provide a billing statement showing how the financial
assistance has been applied and what is owed. The hospital must
also make refunds of any amounts (over a $5 de minimis
threshold) already paid that are not owed once financial assistance
is applied and reverse any ECAs already taken. The hospital may
proceed with ECAs once the application has been processed.
If a hospital receives an incomplete application, it must suspend
any ECAs and provide the individual with written notice describing
what must be provided to complete the application and a contact who
can help with the application process. The hospital must give the
patient at least 30 days to respond and complete the application
before initiating ECAs. If the patient completes the application
during the time allowed, the hospital must suspend any ECAs while
the application is processed. Once a complete application is
submitted, the hospital must follow the process for completed
applications described above. Note that if an application for
financial assistance is submitted more than 240 days after the
first postdischarge bill and after a reasonable period of time has
elapsed since the hospital sent a notice of its intent to pursue
ECAs, the hospital will not have to suspend ECAs while it
processes the application. However, even if the hospital continues
with ECAs, it must process the application, and if the application
shows that the patient is eligible for financial assistance, it
must reduce the charges to no more than the lesser of AGB or the
amount provided in the FAP, and refund any amount paid in excess of
the restated charges.
Deferring or Denying Care Due to Unpaid Bill.
There are special rules for compliance with the reasonable efforts
requirement if the hospital is going to defer or deny medically
necessary care to a patient because of unpaid bills for one or more
prior episodes of care. Under these circumstances, if the patient
were to come back for more care, the hospital might not be able to
give at least thirty days notice before denying the care, which, as
noted above, is considered an ECA. To make reasonable efforts to
determine eligibility for financial assistance before denying care
based on a past unpaid bill, the hospital must provide the patient
with written notification that financial assistance is available
and that care is being deferred or denied as a result of the prior
unpaid bill. The hospital must also give the patient a financial
assistance application form and clear notice of the deadline for
filing the application which can be no earlier than 240 days after
the first unpaid postdischarge bill. The deadline will need to be
later than the 240 day mark if necessary to give the patient
reasonable time (generally 30 days) to submit the application. If
an application is submitted by such a patient, it must be processed
on an expedited basis. If a patient with an unpaid bill returns for
additional medically necessary care after a financial assistance
determination has already been made for the unpaid bill, or more
than 30 days after notice has been provided about ECAs the hospital
intends to take regarding that bill, and that notice has alerted
the patient that the unpaid bill means the patient could be denied
care, the hospital may deny the care without providing additional
notices or applications.
The final regulations confirm that a hospital cannot satisfy the
reasonable efforts requirement by soliciting waivers of financial
assistance from patients, even those patients who clearly will not
qualify. The hospital may use information from sources other than
an application for financial assistance to determine eligibility
for financial assistance, but those determinations are considered
final only where the individual in question is determined eligible
for the maximum level of financial assistance the hospital offers.
If the individual is determined eligible for a lower level of
financial assistance, reasonable efforts include telling the
individual what was decided, what information was used to reach the
presumption, and how the individual can apply for more generous
financial assistance. Any application submitted thereafter must be
processed promptly.
The final regulations eliminate the requirement to keep
documentation of all notices provided. However, hospitals must
describe whether and how they made reasonable efforts to determine
eligibility for financial assistance in response to question 20 of
Part V of the 2014 version of Form 990, Schedule H, and keep the
records necessary to substantiate their answers.
Hospitals may provide required notices and information in
electronic form if the recipient has agreed to accept electronic
communication.
Attachment of Audited Financial
Statements
The hospital must attach a copy of its audited financial statements
for the taxable year to Form 990. The final regulations confirm
that if the hospital's financial data are included in
consolidated financial statements, the consolidated financial
statements must be attached without redaction even if they include
data from related taxable entities.
IRS APPROACH TO ENFORCEMENT
The Section 501(r) requirements are described in the statute as
additional requirements for tax-exemption, suggesting that if a
hospital facility fails to meet any of them, its exemption might be
jeopardized. The IRS recognizes that hospital facilities may
experience minor compliance failures despite their good faith
efforts to comply with the Section 501(r) requirements. The final
regulations take into account the efforts made by hospital
facilities to comply with the law by using a three-tiered approach
to failures to comply with Section 501(r).
- First, minor failures are disregarded if they are inadvertent or due to reasonable cause and are corrected as promptly as is reasonable given the nature of the error.
- Second, failures that are more consequential but are not "willful or egregious" will not result in loss of tax-exempt status or liability for a penalty if they are "corrected and disclosed" in accordance with future published guidance.
- Third, failures that are "willful or egregious" can result in taxation of the income from the noncompliant facility or loss of Section 501(c)(3) status.
The IRS will disregard minor errors, or "foot faults,"
but only if they are inadvertent or due to reasonable cause.
Repeating a failure that has previously been corrected may make it
less likely the hospital can claim the failure is inadvertent.
Having appropriate policies in place and practices and procedures
reasonably designed to facilitate overall compliance with Section
501(r) helps a hospital establish that failures are due to
reasonable cause. Appropriate procedures would include, for
example, periodic monitoring to ensure that a financial assistance
policy remains posted in visible locations, copies of required
plain language summaries and applications for financial assistance
are available in the right places in the hospital, and ensuring
that all new employees in relevant departments are trained on the
hospital facility's financial assistance policy. A single
employee who fails to offer a patient a plain language summary of
the financial assistance policy is likely a foot fault, but
repeated failures to notify patients after neglecting to train
staff in Section 501(r) requirements may be viewed as outside of
the minor and inadvertent error exception.
Under the final regulations, correcting an error must include
establishment of procedures reasonably designed to achieve
compliance (or review and possibly revision if procedures already
exist).
When omissions or errors rise above the level of minor and
inadvertent, but do not reach the level of being willful and
egregious, the IRS believes that a hospital facility's prompt
discovery and correction, and public disclosure, of such omissions
or errors is in the best interests of patients and will achieve
transparency. Therefore, the final regulations excuse such failures
if they are corrected and disclosed. The IRS has issued Revenue
Procedure 2015-21 describing the required procedures for correction
and disclosure that are effective as of March 10, 2015. Correction
for the requirements other than the CHNA generally requires
restoring individuals to the position they would be in had the
failure not occurred and reviewing practices and procedures and
making changes as needed to reduce the likelihood that errors will
reoccur. Correction for CHNA errors involves making a CHNA
containing all the required elements widely available. Disclosure
must be made on Schedule H of Form 990. Dual status governmental
hospitals that are not required to file Form 990 must disclose on
the hospital facility's web site or on a site properly linked
to the hospital facility's web site. Where multiple errors have
occurred, they may be reported through a summary that aggregates
the errors and estimates the number of individuals affected and,
where applicable, the dollars involved.
The final regulations define a willful violation as one that is due
to gross negligence, reckless disregard, or willful neglect.
Correction and disclosure of a violation tends to show that an
error or omission was not willful. Failures are egregious if they
are very serious, based on the nature of the impact and number of
people affected.
If a hospital violates the Section 501(r) requirements for a CHNA,
and the violation is not minor and either inadvertent or due to
reasonable cause, the violation will result in a penalty excise tax
under Section 4959 regardless of whether the failure is corrected
and disclosed.
The Criteria for When Violations of Section 501(r)
Requirements May Result in Revocation of Section 501(c)(3)
Tax-Exempt Status
Under the final regulations, a hospital organization's failure
to comply with Section 501(r) will ordinarily result in revocation
of Section 501(c)(3) status if the organization's failures to
meet the requirements of Section 501(r) are willful or egregious.
This determination is made on an
"all-relevant-facts-and-circumstances" basis, including
examination of the following nonexclusive list of factors:
i. Whether the organization has previously failed to
meet the requirements of Section 501(r), and, if so, whether the
same type of failure previously occurred;
ii. The size, scope, nature, and significance of the
organization's failure(s);
iii. In the case of an organization that operates more
than one hospital facility, the number, size, and significance of
the facilities that have failed to meet Section 501(r) requirements
relative to those that have complied with the Section 501(r)
requirements;
iv. The reason for the failure(s);
v. Whether the organization had, prior to the
failure(s), established practices and procedures (formal or
informal) reasonably designed to promote and facilitate overall
compliance with the Section 501(r) requirements;
vi. Whether the practices and procedures had been
routinely followed and the failure(s) occurred through an oversight
or mistake in applying them;
vii. Whether the organization has implemented
safeguards that are reasonably calculated to prevent similar
failures from occurring in the future;
viii. Whether the organization corrected the failure(s) as
promptly after discovery as is reasonable given the nature of the
failure(s); and
ix. Whether the organization took the measures
described in (vii) and (viii) before the IRS discovered the
failures.
Facility-Level Tax Imposed on Income from Noncompliant Hospital Facilities
If a failure to meet one or more of the Section 501(r)
requirements occurs at one hospital facility in a multifacility
organization, does not result in revocation of tax-exempt status,
but is more than minor and is not disclosed and corrected so as to
be excused, the income (gross income less directly connected
expenses) from the noncompliant facility will be subject to tax at
the normal 35 percent corporate rate for the taxable year(s) during
which it is noncompliant. This calculation excludes any gross
income and deductions already taken into account in computing any
"unrelated business taxable income" derived from the
facility. If the organization has more than one noncompliant
facility, it must make reasonable allocations of items of income
and expense between and among the noncompliant facilities (the
default rule for allocating exempt and non-exempt function expenses
for unrelated business income ("UBI") purposes). The
income from the noncompliant facility is to be reported on the
organization's Form 990-T, Exempt Organization Business Income
Tax Return, which will be revised to accommodate this new
reporting.
Limiting Adverse Impact on Tax-Exempt Bonds
The final regulations make clear that if a hospital organization
operating a noncompliant hospital facility continues to be
recognized as described in Section 501(c)(3) and is otherwise
exempt from tax under Section 501(a), the fact that a
facility-level tax is imposed as a result of the facility's
failure to comply with Section 501(r) will not itself cause the
interest on the facility's bonds to be taxable. Hospital
organizations, however, should be mindful of bond covenants and SEC
Rule 15c2-12 disclosure obligations that may apply to instances of
Section 501(r) noncompliance.
When Do the New Requirements Go Into Effect?
The requirement to perform a CHNA went into effect for taxable
years beginning after March 23, 2012. Every hospital facility that
was operated by a Section 501(c)(3) organization as of the date of
enactment of the ACA (March 23, 2010) should have conducted at
least one CHNA and adopted a corresponding implementation strategy
by no later than July 2014. The requirements to adopt a written
financial assistance policy, a written emergency care policy, to
limit charges to those eligible for financial assistance to amounts
generally billed and to make reasonable efforts to determine
eligibility for financial assistance before initiating ECAs, all
went into effect upon enactment on March 23, 2010. Hospital
facilities must comply in the specific ways required under the
final regulations for taxable years beginning after December 29,
2015. That gives most hospitals at least a year to ensure they have
their policies properly publicized, they have a proper computation
of amounts generally billed, and have appropriate adjustments to
their billing and collection systems. For the time between
enactment of the ACA and the date the hospital facility becomes
subject to the final regulations, the hospital facility must still
comply with the statutory requirements, but the IRS will treat the
hospital as in compliance if it has been following a reasonable,
good faith interpretation of the statute.
Many hospitals also may be aware that Section 4959(c), added by the
ACA, requires the IRS to review the community benefit activities of
each hospital organization at least once every three years. These
reviews are typically performed without direct contact from the
IRS, e.g., by reviewing information filed on Form 990,
Schedule H. The IRS, working with the Department of Health
& Human Services, is also required by Section 4959(e)(1) to
report annually to Congress on the levels of charity care provided
by private tax-exempt, taxable, and governmental hospitals. Any of
these review activities can lead the IRS to open an audit of a
hospital organization to assess potential noncompliance with
Section 501(r).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.