Christopher J Armstrong is a Partner in our Washington DC office.
Nicole M Elliott is a Partner in our Washington DC office.
Lisa V Tofil is a Partner in our Washington DC office.
- Based on a new review of nonprofit hospitals by Senate Finance Committee Chairman Charles Grassley (R-Iowa), a congressional investigation is expected that directly requests a number of specific hospitals to answer questions about Section 501(r).
- Nonprofit hospitals need to ensure that they are in compliance with Section 501(r) and other requirements because of the heightened scrutiny surrounding enforcement by the Internal Revenue Service (IRS).
- Prior congressional scrutiny was hampered by lack of data; Section 501(r) now provides robust data upon which Congress will consider the worthiness of tax-exemption for hospitals individually and on an industrywide basis.
Senate Finance Committee Chairman Charles Grassley (R-Iowa) has launched a new review of nonprofit hospitals, continuing a longstanding oversight in the sector. On Feb. 19, 2019, the chairman wrote to Internal Revenue Service (IRS) Commissioner Charles Rettig requesting a wide range of information concerning the IRS' oversight of nonprofit hospitals and their compliance with Internal Revenue Code (IRC) Section 501(r), which established new requirements on hospitals organized under IRC Section 501(c)(3). As Holland & Knight noted earlier this month, nonprofit hospitals are likely to be a major focus of Grassley's committee leadership during the 116th Congress, given his longstanding oversight of their activities and his powerful investigative authorities as chairman of the Senate Finance Committee.
Holland & Knight is prepared to answer any questions nonprofit hospitals have about Chairman Grassley's oversight activities, assist in responding to congressional inquiries and preparing hearing testimony, answering questions about Section 501(r) and handling IRS enforcement activity. Our attorneys can also review policies and procedures to ensure compliance with Section 501(r). Should deficiencies be discovered, Holland & Knight is prepared to walk hospitals through any necessary corrective actions.
Background on Section 501(r)
The Affordable Care Act (ACA) added IRC Section 501(r), imposing significant new requirements on nonprofit hospitals. Grassley was a driving force behind Section 501(r)'s inclusion in the ACA.
At a summary level, this section requires charitable hospitals to:
- conduct a Community Health Needs Assessment (CHNA) every three years and adopt an implementation strategy to meet the needs identified
- establish a written Financial Assistance Policy (FAP) and a policy relating to emergency medical care
- limit the amounts that it can charge individuals eligible for financial assistance under the FAP
- limit the way that it collects outstanding charges prior to making a reasonable effort to determine whether an individual is eligible for financial assistance under the FAP
Section 501(r) provides that a hospital will not be treated as a tax-exempt organization as described in Section 501(c)(3) if it fails to meet these new requirements. In addition, a nonprofit hospital that fails to meet requirements around conducting a CHNA must pay an excise tax of $50,000.
Chairman Grassley's February 19 Letter
Chairman Grassley's interest in nonprofit hospitals goes back well over a decade. In 2005, during his prior chairmanship of the committee, Grassley wrote to 10 hospitals asking for detailed information on charitable activities, patient billing and ventures with for-profit entities.1 Two years later, he highlighted an IRS report critical of charity care levels2 and organized a staff roundtable on nonprofit hospital reform.3 In 2008, Grassley requested a Government Accountability Office (GAO) report examining community benefit requirements4 and sought information from two nonprofit hospitals requesting details on their practices.5 More recently, he has criticized nonprofit hospitals for seizing wages and taking other legal action against patients who are unable to pay,6 and wrote an op-ed article further criticizing the sector.7 It is important to review Grassley's new oversight activities within the context of his longstanding interest.
On Feb. 19, 2019, Grassley wrote to IRS Commissioner Charles Rettig requesting information on nonprofit hospital compliance with Section 501(r), noting that "it appears at least some of these tax-exempt hospitals have cut charity care, despite increased revenue, calling into question their compliance with the standards set by Congress." The letter follows up on a Feb. 15, 2018, letter that then-Chairman Orrin Hatch and Grassley sent to the IRS requesting information on IRS oversight of nonprofit hospitals.
Noting that his new inquiry is part of "ongoing efforts to ensure the Internal Revenue Code is enforced vigilantly," Grassley's most recent letter asks for:
- follow-up information from the 2018 letter, including the number of Section 501(r) reviews that the IRS has completed and their outcome
- the number of reviews that resulted in findings of noncompliance with CHNA, FAP, and billing and correction policies
- information on debt-collection practices of nonprofit hospitals for patients that are FAP eligible
- information on nonprofit hospital efforts to determine whether patients are FAP eligible, and what corrective actions that the IRS took against nonprofit hospitals that did not take reasonable efforts to determine eligibility
- the IRS' findings on trends concerning unreimbursed Medicaid expenses and charity-care expenses
Interestingly, Grassley's letter also contains an authorization for committee staff to receive otherwise confidential taxpayer information, pursuant to Grassley's authority under Section 6103 of the IRC. This section allows the chairman and his designees to review such information, though generally it does not allow further dissemination of that information.
Takeaways and Considerations
Given Grassley's longstanding interest in nonprofit hospitals, this letter is likely a precursor to further activity. Slightly more than a month into his second chairmanship, Grassley's recent oversight letter is among his first efforts in an aggressive oversight agenda for the committee. Given his continued interest on these issues, it is likely that his next step will be to request similar information directly from hospitals.
Accordingly, nonprofit hospitals need to ensure that they are in compliance with Section 501(r) and other requirements, and prepare to engage constructively with Grassley and his committee staff. The IRS will be under additional pressure to review nonprofit hospital activities, given that Grassley is likely to continue to press the agency for information on those efforts. The IRS was very prescriptive in its guidance under Section 501(r), and therefore, there are many pitfalls for the uninformed.
Please contact the authors for additional information or assistance.
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.