The Tax and Health Sections of the American Bar Association presented IRS with some workable solutions to the concerns raised by the hospital community regarding the administration of Section 501(r) for tax-exempt hospitals.
Responding to the IRS request for comments in IRS Notice 2010-39 on the application of IRC 501(r) requirements for tax-exempt hospitals, the nonprofit health lawyers have addressed a number of concerns regarding the need for definition and clarity of certain provisions contained in the administration of Section 501(r). They are as follows:
Community Health Needs Assessment (CHNA)
Allow hospital organizations to build on specific existing CHNA programs at the state and local level as safe harbors for complying with the CHNA requirement. Among the states identified with existing CHNA provisions; California, New York, Illinois, Texas, Massachusetts, Maryland and New Hampshire could serve as safe harbor models for hospitals in a state without a CHNA.
- Certain states like Illinois, California and Texas exempt small and rural hospitals from CHNA. A similar position could be adopted by the IRS.
- Allow hospitals, operating in states with a specific CHNA requirement, that have not yet met their requirement to explain what they are doing to implement CHNA on Schedule H of Form 990 rather than checking yes/no on the Form 990.
Billing Collection and Extraordinary Collection Practices
A process could be provided to deem a hospital organization to have made reasonable efforts to determine whether an individual is eligible for financial assistance if the hospital obtained:
- A written acknowledgement that the individual did not want to be considered for financial assistance or failure to reply to three notices informing the individual that the hospital has a financial assistance policy and how to apply.
Tax Exemption Under Section 501(4)
Organizations that operate a hospital may jeopardize their 501(c)(3) status if the hospital fails to meet the 501(r) requirements, .i.e., a university operating a hospital as one of its activities. The ABA recommends that the university hospital could retain its 501(c)(3) status under 501(c)(4) until the Section 501(r) requirements are met. Provide a facts and circumstances test, similar to the test applied in Section 4958 used to determine whether an excess benefit transaction or revocation of 501(c)(3) should occur regarding the hospital. The IRS has used this in the past for organizations attempting to meet Section 501(c)(3) status. Donors could rely on the 501(c)(3) status of the hospital until it is reclassified as a 501(c)(4) organization by the IRS and the public is notified.
Operation of Multiple Hospital Organizations
- When an organization operates multiple hospitals subject to Section 501(r), the IRS should consider a facts and circumstances approach whether the organization is in substantial compliance with 501(r) even though one hospital fails to meet 501(r). Failure to comply with 501(r) causing revocation or 501(c)(3) should only be applied at the facility level rather than at the entry level.
- A safe harbor protection could be provided under Section 141 by giving the IRS authority to issue rulings under Rev. Proc. 2010- and 1993-17 to address the change of use.
- Failure of a hospital to meet the 501(r) requirements could affect the taxability of income from the facility financed by tax-exempt bonds. Guidance from the IRS will be required whether such income will be subject to unrelated business tax because the facility is used subsequently for a non 501(c)(3) activity under Section 150(b)(3) of the Code or considered a change of use under Section 141.
Limitation on Charges to Amount Generally Billed
Amounts charged vs. amounts billed have different meanings in the health industry. Confusion has arisen whether 501(r)(5) limits the ”amount charged” to a person eligible for financial assistance to mean the charges found on a “hospital price list” or the managed care negotiated discount that are the patient “billed” amount.
- Because of the complexity of reimbursement systems under different hospital plans, including the Medicare DRGs, case rates and other discounted plans, flexibility should be accorded hospitals. Medicare Rates – If the Medicare rate is used, it should be the actual Medicare rate adjusted by region and if the medical service is not covered by Medicare, a hospital should be allowed to use the nearest equivalent service or discount. This could be determined by a comparison of the aggregated amounts paid by Medicare for services covered by Medicare to the aggregate charge master rates for these same services.Lowest Rates – Determined by the lowest per deim payment from different payers. Average of the three best rates.A blended rate based on the best three rates using a weighted average. Amounts billed to the majority of patients. The amount could be based on rates billed to the insurers who cover a majority of the hospitals’ patients.Sliding Scale Discount – Hospitals with varying sliding scale eligibility factors based on amounts generally billed under 501(r)(5) could apply to any person who qualifies for financial assistance with further discounts from those rates based on the hospital’s financial assistance policy.Other – Outpatient services should be excluded in determining amounts generally billed. Hospitals should also have the option of separately calculating rates for services generally covered under separate agreements such as mental care services.
- Medicare Rates – If the Medicare rate is used, it should be the actual Medicare rate adjusted by region and if the medical service is not covered by Medicare, a hospital should be allowed to use the nearest equivalent service or discount. This could be determined by a comparison of the aggregated amounts paid by Medicare for services covered by Medicare to the aggregate charge master rates for these same services.
- Lowest Rates – Determined by the lowest per deim payment from different payers. Average of the three best rates.A blended rate based on the best three rates using a weighted average.
- Average of the three best rates.
- A blended rate based on the best three rates using a weighted average.
- Amounts billed to the majority of patients. The amount could be based on rates billed to the insurers who cover a majority of the hospitals’ patients.
- Sliding Scale Discount – Hospitals with varying sliding scale eligibility factors based on amounts generally billed under 501(r)(5) could apply to any person who qualifies for financial assistance with further discounts from those rates based on the hospital’s financial assistance policy.
- Other – Outpatient services should be excluded in determining amounts generally billed. Hospitals should also have the option of separately calculating rates for services generally covered under separate agreements such as mental care services.
Making the CHNA Widely Available to the Public
- A recommended safe harbor for making CHNA widely available at principal and regional district places of business or,
- Available in accord with Schedule H of 990, or
- Based on facts and circumstances.
Emergency Medical Care – Written Policy
Hospital’s written policy to provide without discrimination care for emergency medical conditions could be satisfied if the written policy states that the hospital will follow Section 1867 of the Social Security Act that provides for healthcare without discrimination.
Reporting and Disclosure Requirements
- Define a “hospital” for 501(r) purposes as currently defined in the Form 990, Schedule H. Under Schedule H, a hospital is defined as a facility that is or is either registered or required to be registered, or recognized by a state as a hospital.
- Make any new reporting and disclosure requirements relating to Section 501(r) in a separate part of Schedule H and not become effective until years beginning after March 23, 2012.
We will keep you posted on IRS and Treasury implementation on any of these suggestions or the other comments made by the major health associations regarding the administration of PPACA.
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