Key provisions of the healthcare reform legislation adopted in the Patient Protection and Affordable Care Act (H.R. 3950) and the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) introduce new requirements for all section 501(c)(3) organizations operating a state-licensed hospital or providing healthcare as their principal purpose. These organizations will be required under a new section 501(r) of the Internal Revenue Code to:
- Conduct a community health assessment at least every three years, implement a strategy to meet the needs identified in the assessment, and make the assessment available to the public.
- Publicize written financial assistance policies including eligibility criteria, basis for calculating patient charges, method for applying for assistance, and policies regarding the provision of emergency care on a non-discriminatory basis without regard to eligibility under the financial assistance policy.
- Limit charges to patients qualifying for financial assistance to amounts generally billed to insured patients.
- Follow certain debt collection practices.
What role will the IRS play under these new rules?
In addition to the operational changes, the IRS will review the tax-exempt status of each hospital every three years. Tax-exempt section 501(c)(3) hospitals will also be subject to the following additional reporting requirements on their annual Form 990 filed with the IRS:
- A description of the level of charity care.
- A designation of how the hospitals meet the needs identified in the health assessment or an explanation if those needs are not being met.
- A description of unreimbursed costs of means tested and non-means tested programs.
- Audited financial statements, prepared either on a separate or consolidated basis, which will be subject to the public disclosure rules applicable to Form 990 and therefore will be made available to the public.
In the anticipation of health reform, the IRS incorporated the following information requests into Schedule H of the 2009 Form 990 regarding charity care and community benefit:
- Cost, revenue offset, and net cost of charity care.
- Lack of reimbursement from Medicaid.
- Amount of community/health improvement services, research, cash, and in-kind contributions.
- Information on how the hospital’s charity care policy is communicated to patients.
These new tax rules are a result of Sen. Charles Grassley’s concern that tax-exempt hospitals were not “sufficiently operating in a charitable manner.” The healthcare reform legislation will require the Department of Treasury (Treasury) and the Department of Health and Human Services (HHS) to submit an annual report to Congress on the level of charity care, bad debt expenses, and the unreimbursed costs of means tested and non-means tested government programs. A tax-exempt hospital will have both the Treasury and HHS looking over its operations for at least five years when a final report to Congress is to be issued by these departments on the trends of the assessments reported on an annual basis.
In addition to the other compliance issues facing nonprofit hospitals today, the new legislation has added another layer of concern for hospital administrators. It is important that section 501(c)(3) hospitals conduct compliance audits on their operations not only on these new rules, but also on existing rules regarding good governance practices, excess benefit transactions, compensation, and potential Medicare and Medicaid fraud and abuse.
If you have questions or need assistance regarding the rules applicable to hospitals under the new healthcare legislation or existing rules, please contact the attorneys in McGuireWoods’ Nonprofit and Charitable Advisory Services team and Healthcare Department.
McGuireWoods’ lawyers are available to address any of your questions and to keep you informed as developments occur in this important area.
McGuireWoods’ Nonprofit and Charitable Advisory Services
Our Nonprofit and Charitable Advisory Services provides advice and guidance that enable charities and other nonprofits to operate successfully in the increasingly complicated, regulated, and competitive environment facing nonprofits today.
This Legal Update was included in the EO Tax Journal Email Update on April 7, 2010.