IRS Issues Regulations on Section 501(r) Applicable to Charitable Hospitals

Posted by David Rosenberg, Lee Meyercord and Tyree Collier                 On December 29, 2014, the IRS issued final regulations (available here) under Section 501(r) of the Internal Revenue Code.  Section 501(r) requires charitable hospitals to meet the following requirements in order to be tax-exempt:Conduct a community health needs assessment at least once every three years and develop an implementation strategy to meet the needs that are identified;Have a written financial assistance policy and provide emergency medical care regardless of an individual’s eligibility for financial assistance;Bill individuals eligible for financial assistance for emergency or other medically necessary care no more than the amounts generally billed to patients that have insurance covering such care; andMake reasonable efforts to determine whether patients are eligible for financial assistance before engaging in extraordinary collection efforts. The following highlights noteworthy items in the final regulations.Community Health Needs Assessment In conducting a community health needs assessment (CHNA), the hospital must define the community it serves and assess the health needs of that community. Like the proposed regulations, the final regulations allow hospitals flexibility in defining its “community” taking into account all relevant facts and circumstances, as long as the community is not defined in a way to exclude the medically underserved, low-income or minority populations.The final regulations clarify that the community’s “health needs” include access to proper nutrition and housing as well as social, behavioral, and environmental factors that influence health in the community.  The preamble makes clear that the CHNA does not need to address every health need listed in the final regulations if it is not a significant health need in the community.The final regulations allow hospitals serving identical communities to prepare a joint CHNA report as long as the report complies with the requirements on a facility-specific basis.  The final regulations do not adopt the recommendation of several commentators that a hospital be required to collaborate with other facilities in preparing its CHNA report. The final regulations also clarify that a hospital may adopt the CHNA (or parts of the CHNA) of a local public health department if the hospital shares the same community as the local public health department and the CHNA adopted by the public health department meets the CHNA requirements in the regulations.The final regulations extend the time by which a hospital must adopt an implementation strategy to meet the health needs identified in the CHNA report.  The proposed regulations were criticized for requiring the implementation strategy to be adopted by the end of the same taxable year in which the hospital completed the CHNA.  The final regulations extend the deadline and allow the implementation strategy to be adopted by the due date for the hospital’s Form 990 (not including extensions).Financial Assistance policyAs mentioned above, Section 501(r) requires a charitable hospital to have a written financial assistance policy (FAP) that explains the availability of financial assistance and provide non-discriminatory emergency care regardless of an individual’s eligibility for financial assistance.The final rules clarify that the FAP applies to emergency and medically necessary care furnished by partnerships or disregarded entities owned by the hospital. If a hospital’s emergency room operations have been outsourced to a third party, the preamble clarifies that the third party must comply with the hospital’s FAP or the hospital’s operation of the emergency room will not satisfy the community benefit standard test in Revenue Ruling 69-545.Because patients may receive care from private physician groups or other third-party providers while in a hospital, commentators asked for clarification on how the hospital’s FAP applies to these other providers.  The final regulations require a hospital to list the providers that a patient may encounter in the FAP and specify which providers are covered by the FAP. Hospitals must widely publicize their FAP within the community served by the hospital.  Like the proposed regulations, the final regulations require a hospital to make the FAP documents available upon request and widely available on a website.  In addition, hospitals must inform hospital visitors and members of the community about their FAP. The FAP must be translated into any language spoken by the lesser of 1,000 or 5% of the community served by the hospital.  This is a lower threshold than that in the proposed regulations, which only required a translation to a language spoken by 10% of the community served. Hospitals have discretion in determining what information is required from applicants seeking financial assistance and whether to grant assistance if the application is incomplete.Limitation on Charges to FAP-Eligible PatientsSection 501(r)(5) prohibits hospitals from billing FAP-eligible patients more than the amounts generally billed (AGB) to insured patients for emergency or other medically necessary care. The proposed regulations provided hospitals two methods to calculate AGB: (1) the hospital could use the amount that the hospital would expect to receive from Medicare if the individual was on Medicare Parts A or B (referred to as the prospective method); or (ii) the hospital could use the amount paid by all private health insurers and Medicare (or Medicare alone) for the past 12 months (referred to as the look-back method).  Under the proposed regulations, the hospital could not change its AGB method.The final regulations expand the methods for hospitals to calculate AGB and allow hospitals to base AGB on Medicaid rates (either alone or in combination with data from Medicare and private health insurers).  In addition, the final regulations allow a hospital to change its AGB calculation method at any time and select different methods for each facility. The final regulations also clarify that in determining how much a FAP-eligible individual is billed, only the amount that the individual is personally responsible for paying is taken into account, less all deductions, discounts and amounts reimbursed by insurers. Extraordinary Collection Actions Section 501(r)(6) allows a charitable hospital to engage in extraordinary collection actions (ECAs) only after it makes “reasonable efforts” to determine an individual’s FAP-eligibility. ECAs include placing a lien or foreclosing on an individual’s property, commencing a civil action, garnishing an individual’s wages or reporting an individual to a consumer credit reporting agency or credit bureau. The final regulations clarify that writing off an account to bad debt, sending a bill, placing a lien against third parties that caused a patient’s injuries, or charging interest on medical debt are not ECAs. The final regulations also set forth the circumstances where the sale of debt to a third party will not be treated as an ECA (generally if the purchaser agrees to comply with the same obligations imposed on the hospital). The regulations affect more than 80% of U.S. hospitals, and it is important to review the detailed final regulations carefully to ensure existing policies are in compliance.  The failure to comply (other than minor omissions and errors) can result in a $50,000 fine and possibly the loss of tax-exempt status.  If you have any questions about Section 501(r) or the final regulations, please contact one of us or any of the other Tax lawyers at Thompson & Knight.