The Patient Protection and Affordable Care Act, signed into law on March 23, 2010, P.L. 111-148 (the "Act"), contains specific requirements for hospitals that wish to receive or maintain their tax-exempt status under section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). In particular, Section 9007 of the Act adds new section 501(r) to the Code, which supplements the community benefit standard generally applicable to tax-exempt hospitals. For the past 40 years, the availability of tax exemption has been judged by the community benefit standard. In effect, Section 9007 codifies and elaborates on certain key aspects of the community benefit standard.
New section 501(r) applies to any organization that operates a facility required by any state to be licensed, registered, or otherwise recognized as a hospital. If an organization has more than one hospital facility, each facility must meet the requirements of new section 501(r) individually or the facility will not be treated as a tax-exempt organization under section 501(c)(3) of the Code. Unfortunately, it is unknown precisely what this means for the entire hospital organization when one facility fails to meet the new requirements.
Requirements of New Section 501(r) of the Internal Revenue Code
The Act adds four requirements, in addition to the general requirements of section 501(c)(3) of the Code, that hospitals must satisfy in order to safeguard tax-exempt status under section 501(c)(3):
Community Health Needs Assessment. Each tax-exempt hospital must conduct a "community health needs assessment" at least once every three years and adopt an "implementation strategy" to meet the needs identified by the assessment. The assessment itself must take into account input from a broad cross-section of the community served by the hospital, including those with special knowledge of or expertise in public health, and be made widely available to the public.
Financial Assistance Policy. Additionally, each tax-exempt hospital must establish, implement, and make widely available written policies regarding financial assistance and emergency medical care. The financial assistance policy must specify eligibility criteria (including whether the assistance includes free or discounted care) and state how the hospital calculates the amounts that are billed to patients. For a hospital that does not have separate billing and collections policies, the hospital must have a policy that accounts for the actions that the hospital takes in the event of non-payment. Further, the hospital must have a written policy requiring it to provide non-discriminatory emergency medical care to all individuals, regardless of an individual's eligibility for financial assistance.
Limitations on Charges. The Act provides that each tax-exempt hospital must limit the amount it charges for emergency or other medically necessary care provided to patients eligible for financial assistance to not more than the lowest amounts charged to insured patients. The policy also must prohibit the use of "gross charges" when billing individuals who qualify for financial assistance.1
Limitations on Billing and Collections Practices. Finally, a tax-exempt hospital must meet certain billing and collections requirements. The Act provides that a tax-exempt hospital cannot take "extraordinary collection actions" (e.g., lawsuits, arrests, liens, or other similar actions) until it has made "reasonable efforts" to determine whether a patient is eligible for financial assistance. The term "reasonable efforts" is not defined by the Act.
Penalties and Reporting Requirements
The Act also adds new sections 4959 and 6033(b)(15) to the Code. New section 4959 imposes a $50,000 excise tax for any taxable year in which a tax-exempt hospital fails to meet the needs assessment requirement of new section 501(r). New section 6033(b)(15) imposes new reporting requirements on a tax-exempt hospital. Now a hospital will have to provide a description of how the organization is addressing the needs identified in the community health needs assessment and a description of any such needs that are not being addressed, together with the reasons why such needs are not being addressed. Hospitals will have to provide this report and their audited financial statements as attachments to the IRS Form 990.
Effective Dates
In general, the provisions described above are effective for taxable years beginning after March 23, 2010. However, the community health needs assessment requirement becomes effective for taxable years beginning after March 23, 2012, and the excise tax provision is effective immediately.
Conclusion
The Act imposes additional burdens on tax-exempt hospitals beyond meeting the traditional community benefit standard. Although many hospitals may already be operating in substantial conformance with the new standards in connection with their annual IRS Form 990 filing obligations, all tax-exempt hospitals should review their existing policies and procedures to be certain that they are in compliance, and that the compliance efforts are integrated into their reporting requirements under Schedule H of the IRS Form 990.
Footnote
1. The term "gross charges" is not defined by the Act. However, "gross charges" generally are considered the full amount a hospital charges for services, without taking into account any discounts negotiated with insurance providers.
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