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New Requirements for Tax-Exempt Hospitals

10.13.2010

As part of the Patient Protection and Affordable Care Act, Congress enacted earlier this year a new tax provision, Section 501(r) of the Internal Revenue Code. This provision imposes four new, additional requirements upon hospitals that are recognized as tax-exempt under Section 501(c)(3).

These new requirements specifically apply to any organization that operates a facility required by a state to be licensed, registered, or similarly recognized as a hospital, as well as any other organization that the Secretary of the Treasury determines has the provision of hospital care as its principal function or purpose constituting the basis for its tax exemption under Section 501(c)(3). If a hospital organization operates more than one facility, it must meet the requirements of this provision separately with respect to each facility.

Community Needs Health Assessment

The first requirement is that a hospital must conduct a community health needs assessment every three years and adopt an implementation strategy to meet the community health needs identified from that assessment. A hospital must include in its annual information return, Form 990, a description of how it is addressing these needs, as well as a description of any needs that are not being addressed and the reasons why not. An excise tax may be imposed on hospitals that fail to meet these requirements. This new requirement is effective for taxable years beginning after March 23, 2012.

Financial Assistance and Emergency Care

The second requirement is that a hospital establish both a financial assistance policy and a policy relating to emergency medical care. A financial assistance policy must include eligibility criteria for financial assistance and whether that assistance includes free or discounted care; the basis for calculating amounts charged to patients; the method for applying for financial assistance; for organizations that do not have separate billing and collections policies, the actions the organization may take in the event of nonpayment; and measures to widely publicize the financial assistance policy in the community. A hospital must also have a written policy requiring it to provide care for emergency medical conditions without discrimination. This policy is required to prevent discrimination in providing emergency treatment against those eligible for either financial assistance under the hospital's policy or government assistance.

Limitation on Charges

Third, a hospital must limit the amount it charges for emergency or other medically necessary care that is provided to individuals eligible for financial assistance to not more than the amounts generally billed to individuals who have insurance. The legislative history indicates that the amount billed to those who qualify for financial assistance should be based on either the best, or an average of the three best, negotiated commercial rates or Medicare rates.

Collection Actions Restricted

Fourth, a hospital must forego extraordinary collection actions against individuals before it has made reasonable efforts to determine whether the individual is eligible for assistance under its financial assistance policy. Extraordinary collections may include lawsuits, liens on residences, and arrests. Reasonable efforts may include providing notification of the hospital's financial assistance policy upon admission and in communications regarding the patient's bill.

Except for the community health needs assessment requirements, the new provisions are effective for taxable years beginning after March 23, 2010.

The Internal Revenue Service requested, and is now considering, comments submitted concerning these new provisions by the American Hospital Association and others. Comments were requested on particular areas of concern, including what should be the appropriate requirements for a community health needs assessment, what should constitute reasonable efforts to determine eligibility for assistance, and what should be the consequences to a hospital organization where some, but not all, of the facilities meet the standards of Section 501(r).

We recommend that hospitals begin reviewing their policies for compliance with the requirements of Section 501(r). Financial assistance policies should be reviewed for compliance with the new law, or where there are none, such policies should be put in place. Similarly, emergency treatment policies, as well as billing and collection policies, need to be reviewed and revised if needed. In addition, community needs assessments should be reviewed, though there is more time to undertake this review since this part of the law is not effective until 2012. Hospitals should be sure to report, as appropriate, compliance with these measures on Schedule H of their annual information return filed with the IRS.

Craig Dalton, an attorney no longer with Poyner Spruill, was the original author of this article.

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