How Healthy Is Your Hospital’s Tax-Exempt Status?

Scrutiny of tax-exempt hospitals continues to increase, and with that, new regulations have been proposed to marry the Internal Revenue Code (IRC) with requirements mandated by the Patient Protection and Affordable Care Act (PPACA).

IRC Section 501(r) sets forth certain requirements for tax-exempt hospitals that are now required to “justify” their tax-exempt status. Recently, the IRS has proposed two sets of regulations on financial assistance, billing and collection actions, charges policies, community health needs assessments (CHNA) and the consequences of noncompliance. The new rules and regulations apply to all US 501(c)(3) hospitals including government hospitals that have 501(c)(3) status. In addition, a hospital that is operated through a disregarded entity such as a limited liability company is also subject to the rules.

The proposed regulations will significantly increase the level of specificity and the amount of requirements that a hospital must follow in order to remain compliant. Among the proposed changes, hospital executives can expect more clarity around compliance-related topics such as community health needs assessments (CHNAs), implementation strategy deadlines, financial assistance policies (FAP) and what constitutes an extraordinary collection action.

Here are a few key takeaways from the recently proposed regulations:
  • Omissions and errors, if minor, inadvertent and due to reasonable cause, can be excused if disclosed and corrected promptly and in accordance with future IRS guidance.
  • Facts and circumstances — size, scope, nature and significance of any failure to meet 501(r) requirements — will be considered by the IRS prior to revocation of 501(c)(3) status.
  • Taxation of noncompliant hospital facilities will occur through taxing their gross income derived from that hospital during the taxable year, less deductions allowed by chapter 1 of the Code.
  • A facility-level tax imposed as a direct result of failure to comply with Section 501(r) will not, in and of itself, have an adverse impact on the hospital’s tax exempt bonds.  But a hospital should continue to be diligent here because the bond covenants may be of concern.
The Financial Assistance Policy (FAP)

IRC 501(c)(3) hospitals must have a financial assistance policy (FAP) that includes guidelines on who is eligible for assistance, how to apply, how those eligible will be charged and what the billing and collection policies are for those eligible.

The proposed regulations make it very clear that the FAP must be widely publicized in a way that allows it to reach those who might need it the most. Publicity includes distributing written communication in “plain” language, informing public agencies and nonprofit referral organizations and posting it clearly throughout the hospital and online.
  • Persons who are eligible for the FAP cannot be charged more than the amounts generally billed (AGB) to individuals who have insurance. The proposed regulations provide that to determine the AGB, hospitals must use one of two methods – the look-back or prospective Medicare method.
  • Reasonable efforts should be made to notify patients of their FAP-eligibility in a pre-determined length of time before the hospital can engage in extraordinary collections including civil action suits, liens on property, reporting to credit agencies, wage garnishment, bank account seizures, etc.
These are just some of the very explicit rules.  Under new law, tax-exempt hospitals are being reviewed every three years as a means to regulate and evaluate their level of compliance based on many areas including those outlined in this post.  As a result, hospital executives should take the necessary steps to review key policies, evaluate whether they are actively addressing proposed regulations and effectively communicate the policies to hospital leaders, personnel and patients.

To read more about 501(r) provisions and the proposed regulations, read Laura’s extended article in the BDO Knows Healthcare Newsletter – Spring 2013 issue or visit the IRS website. If you have specific questions regarding these new regulations, include them in the comment section below or email me at