May 11, 2010

This installment of Hall Render's Health Law Broadcast series on health care reform is designed to provide you with the insight, analysis and practical suggestions with respect to the various reform initiatives that will affect your organization.

NEW REQUIREMENTS FOR TAX-EXEMPT HOSPITALS

The recently enacted Patient Protection and Affordable Care Act and related amendments ("PPACA") will not only change the way in which health care is delivered in coming years, but it places four (4) new requirements on hospitals (referred to herein as "Tax-Exempt Hospitals") that seek to attain or maintain exempt status under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code").  Specifically, PPACA requires Tax-Exempt Hospitals to conduct a community needs assessment, establish a financial assistance policy, limit charges for emergency or other necessary care, and refrain from engaging in extraordinary collection efforts.   These requirements apply to each hospital facility operated by an exempt organization.  Tax-Exempt Hospitals that fail to meet the community needs assessment requirement will be subject to a newly created $50,000 excise tax.  These new requirements will generally apply for tax years beginning after the date of enactment of PPACA (March 23, 2010).  Tax-Exempt Hospitals should familiarize themselves with these requirements and take steps necessary to assure compliance. 

NEW REQUIREMENTS

Community Health Needs Assessment

Within three (3) taxable years following PPACA's date of enactment and no less than every three (3) years thereafter, Tax-Exempt Hospitals must conduct a community health needs assessment.  This assessment must take into account input from persons with a broad range of interests in the communities they serve and include individuals with expertise in public health.  The assessments must be made widely available to the public, and Tax-Exempt Hospitals must adopt an implementation strategy to address the community health needs identified in the assessments. 

Tax-Exempt Hospitals will also be required to file in each taxable year a description of how they are addressing community health needs identified in the community needs assessment and any identified needs not being addressed and the reasons why they are not being addressed, along with audited financial statements.  This description and the audited financial statements will be reported as part of the organization's Form 990.  PPACA further mandates that the IRS review the community benefit activities of each hospital at least once every three (3) years.  Presumably, the Treasury Secretary and the Internal Revenue Service ("IRS") will provide further guidance on timing, format and content of these new reporting requirements. 

Financial Assistance Policy

Tax-Exempt Hospitals must have written financial policies in place that establish: (i) eligibility criteria for financial assistance; (ii) the basis for calculating amounts charged to patients; (iii) the method for applying for financial assistance; (iv) in the event a Tax-Exempt Hospital does not have another policy addressing billing and collections, what actions the Tax-Exempt Hospital may take in the event of non-payment, including collections action and reporting to credit agencies; and (v) measures a Tax-Exempt Hospital may take to widely publicize the policy to the community it serves.

Limitation on Charges

Tax-Exempt Hospitals must limit the amount they charge for emergency or other medically necessary care to those individuals that are eligible for assistance under a financial assistance policy to no more than the amount generally billed to individuals who have insurance coverage for such care.

Billing and Collections

Tax-Exempt Hospitals may no longer engage in "extraordinary" collections efforts unless they have made "reasonable efforts" to determine whether an individual is eligible for their financial assistance policy.  Section 9007 gives authority to the Treasury Secretary to provide guidance as to what constitutes "reasonable efforts" to determine eligibility for financial assistance under this billings and collections requirement.

DEFINITION OF HOSPITAL

For purposes of PPACA, a hospital is an organization that is required by the State in which it is located to be licensed, registered or "similarly recognized" as a hospital.  In addition, a hospital includes any other exempt organization under Code Section 501(c)(3) whose principal exempt function is "hospital care."  PPACA does not address or define what "similarly recognized" means nor does it address what constitutes "hospital care" for purposes of these new requirements.  It should also be noted that if a Tax-Exempt Hospital operates more than one (1) hospital facility, then each separate facility must meet the new requirements.

FURTHER GUIDANCE WILL BE NEEDED

The addition of these new requirements for Tax-Exempt Hospitals will undoubtedly create numerous questions such as how will certain terms be defined, what will be the specific reporting procedures, and what penalties would apply for compliance failures (other than the $50,000 excise tax applicable to failures to comply with the community health needs assessment requirement).  Furthermore, while Section 9007 requires hospitals exempt from taxation under Section 501(c)(3) of the Code to comply with the new requirements of Section 9007, it does not address whether hospitals exempt from taxation under another section of the Code have the same responsibility.  For example, some hospitals (such as county or community hospitals) are exempt from taxation under Code Section 115 or via Treasury Regulation Section 1.103-1(b) but have sought and received rulings that they also qualify as exempt organizations under Code Section 501(c)(3) in order to offer certain employee benefit plans.  It is unclear whether such hospitals will be subject to the requirements and penalties contained in Section 9007 of PPACA.

Section 9007 also requires the Treasury Secretary, in consultation with the Secretary of Health and Human Services, to make an annual report on charity care to certain committees of the House and the Senate, including the Senate Finance Committee.  The annual report must contain information with respect to private tax-exempt, taxable, and government-owned hospitals regarding (i) levels of charity care provided; (ii) bad debt expenses; (iii) unreimbursed costs for services with respect to non-means tested and means-tested government programs; and (iv) costs incurred by private-tax exempt hospitals regarding costs incurred for community benefit.  While the Treasury Secretary may have such information readily available to it for private tax-exempt hospitals from the Form 990 and accompanying Schedules, it is unclear as to how the Treasury Secretary will obtain this information from taxable hospitals and government-owned hospitals that do not file returns that contain such information.  Consequently, it will be necessary for the Treasury Secretary and the IRS to issue guidance addressing questions such as these in the near future.

MORE TO COME?

The provisions of Section 9007 represent the most recent evidence of the ongoing scrutiny for Tax-Exempt Hospitals, and it comes on the heels of the Illinois Supreme Court's decision to uphold the revocation of the property tax exemption of an Illinois hospital for failure to provide sufficient charity care. Meanwhile, Senator Charles Grassley (R-IA) and Representative Bobby Rush (D-IL) announced in March of this year that they would work together to ensure Tax-Exempt Hospitals are providing sufficient charity care.  Just recently, Community Catalyst and The Access Project, which are both national non-profit organizations focused on health care reform, announced the findings of their report titled "Best Kept Secrets: Are Non-Profit Hospitals Informing Patients About Charity Care Programs."  The report concludes that many Tax-Exempt Hospitals are not adequately informing eligible patients about whether they qualify for hospital charity care programs. 

Efforts such as these will likely continue to be common in the future.  Furthermore, interested parties will have broader access to relevant information via the expanded reporting required by Tax-Exempt Hospitals on Schedule H of the Form 990 and the annual reports regarding charity care that the Treasury Secretary must now provide to Congress pursuant to the requirements of Section 9007. 

IMPACT AND NEXT STEPS

Tax-Exempt Hospitals should revise existing policies or develop new ones to ensure compliance with the requirements of Section 9007 affecting financial assistance policies, limitations on charges, and billing and collections practices that become effective immediately.  Tax-Exempt Hospitals should also begin considering who will perform community needs assessments and how they will be performed.  Finally, Tax-Exempt Hospitals should look for additional guidance from the Treasury Secretary and the IRS in the near future to clarify the new requirements found in Section 9007 of PPACA. 

Should you have questions regarding these issues, please contact Calvin Chambers at (317) 977-1459 or cchambers@hallrender.com; Thomas Donohoe at (317) 338-2289 or tdonohoe@hallrender.com; Greg Melgares at (414) 721-0459 or gmelgares@hallrender.com; or your regular Hall Render attorney.

Visit our Health Law Broadcast at hallrender.com/reform for a comprehensive listing of health care reform resources.  Also sign up for health care reform alerts and periodic updates as we continue to monitor this important issue.