On December 31, 2014, the Internal Revenue Service (IRS) published the long-awaited final regulations implementing the Affordable Care Act (ACA) requirements for tax-exempt hospitals.
The ACA added new Internal Revenue Code (Code) section 501(r), which describes criteria hospital organizations must meet to be recognized as exempt from federal income tax under Code section 501(c)(3). The regulations apply to organizations that operate one or more facilities that are required to be licensed or registered as hospitals under applicable state law. Organizations that operate multiple hospitals must meet the requirements with respect to each licensed hospital, even if multiple hospitals operate in the same building. The final regulations also clarify that separate buildings operated under the same license are treated as a single hospital.
The IRS can revoke the tax-exempt status of organizations that fail to meet the requirements of section 501(r) and the final regulations with respect to their hospital facilities. In determining whether to revoke exemption, the IRS considers all relevant facts and circumstances, including:
- Prior failures to satisfy section 501(r)
- Nature, size and significance of the failures
- Significance of the facilities that failed to meet the requirements
- Reason for the failures
- Establishment and implementation of policies to facilitate compliance
- Efforts to correct and prevent failures. The IRS may revoke exempt status as of the first day of the taxable year in which the failure occurs
The IRS will not revoke exemption because of minor errors or omissions in policies that are inadvertent or due to reasonable cause as long as they are corrected promptly after the organization discovers them. In addition, more significant failures to comply will not result in revocation if the failure is not willful or egregious and the hospital facility corrects the failure and discloses it publicly. In these circumstances, the hospital will be subject to an excise tax.
Income generated by a non-compliant hospital facility is treated as taxable with the tax calculated using the rules that apply to taxable corporations under section 11 of the Code. The operation of the non-compliant hospital facility is not, standing alone, considered an unrelated trade or business for the hospital organization. For example, the operation of the non-compliant facility will not, by itself, affect the tax-exempt status of bonds issued to finance the hospital facility assuming the hospital organization otherwise remains exempt.
Community Health Needs Assessments (CHNA)
A hospital organization must conduct a CHNA at least once every three years, with respect to each hospital facility. When conducting the CHNA, the hospital facility must (a) define the community it serves, (b) assess the health needs of that community, (c) solicit and take into account input from the community, (d) document the CHNA in a report approved by an authorized body, and (e) make the CHNA widely available to the public. Hospitals may collaborate in the CHNA process and produce a joint CHNA report, however, the joint report must include all the same basic information that separate CHNA reports would contain.
The CHNA must describe the community served and the process used to determine the relevant community. It must also describe the processes to conduct the CHNA and solicit and take into account community input. Hospital facilities must include a prioritized description of the significant health needs of the community and process used to identify and prioritize them. Finally, the CHNA must describe the resources potentially available to address the significant health needs.
Changes From Proposed Rule
The final regulations confirm that a hospital facility may update an existing CHNA, rather than starting over every three years. The hospital still must solicit and consider input from persons representing the community at the time of the update.
A provision in the proposed rule that said a hospital could define the relevant community to include populations and geographic areas outside those where its patients reside was deleted from the final regulations because of the possibility for confusion. Hospitals retain broad flexibility to define the communities they serve.
The list of health needs a hospital may consider in its CHNA was expanded in the final regulations to include preventing illness; ensuring adequate nutrition; and addressing social, behavioral and environmental factors that influence health.
The proposed regulations required hospital facilities to identify potential measures and resources to address community health needs. The final regulations delete the reference to measures.
Recognizing that hospital facilities may request input from community representatives, but not receive any, the final regulations clarify that the hospital must solicit input and take into account whatever information it receives. The hospital must document that it made reasonable efforts to obtain input and the CHNA must describe those efforts.
While the final regulations permit a hospital facility to post a draft CHNA for public comment, requests from commenters to require a public comment process were not adopted.
When a hospital facility relies on data collected or created by others for its CHNA, the hospital may simply cite the data sources, rather than describing the methods to collect the data, as required under the proposed rule.
The final regulations extend the time a hospital facility has to adopt an implementation strategy for its CHNA until the 15th day of the fifth month following the end of the tax year in which the hospital finishes conducting the CHNA. The proposed rule required the implementation strategy to be adopted by the end of the tax year.
Financial Assistance and Emergency Care Policies
Hospital facilities must adopt a written financial assistance policy (FAP) that includes:
- Eligibility criteria for financial assistance, and whether the assistance includes free or discounted care
- Bases for calculating amounts charged to patients
- If the organization does not have a separate billing and collections policy, the actions the organization may take in the event of non-payment, including collections action and reporting to credit agencies
- Measures to publicize the policy widely in the community
At a minimum, the FAP must be available on a website and also in paper form in public locations of the hospital and by mail. In addition, the hospital must affirmatively reach out to community members to inform them about the FAP in a manner reasonably calculated to reach those most likely to require assistance.
The hospital must also have a written policy requiring it to provide, without discrimination, care for emergency medical conditions as defined in the Emergency Medical Treatment and Labor Act (EMTALA). The hospital must provide emergency care regardless of the individual's eligibility for assistance under the FAP.
Changes From Proposed Rule
The final regulations recognize that hospitals may offer discounts, such as prompt pay discounts, that are not appropriately classified as financial assistance, and that such discounts need not be described in the FAP. Instead, the FAP must describe only the discounts offered as part of the hospital's financial assistance program. Only discounts offered under the FAP may be listed as financial assistance on Form 990 and treated as community benefit.
In response to concerns that patients may not fully cooperate in providing information or documentation of financial need, the final rule permits a hospital to grant financial assistance based on information other than that described in the FAP or based on the patient's attestation, even if the FAP does not describe that form of evidence or attestation. Further, a hospital may obtain information orally or in writing. Hospitals can also use information from sources other than the individual and from past FAP eligibility determinations.
The FAP no longer needs to describe the measures taken to widely publicize the FAP. The hospital must provide FAP information to patients before discharge and with billing statements. Billing statements need not include a full plain language summary, but rather must include a conspicuous written notice of the availability of financial assistance along with a telephone number and website address where FAP documents may be obtained.
The final regulations also clarify that the plain language information may be provided at any time (not just at the time of discharge) and that a hospital does not fail to publicize its FAP if patients decline to accept information about the FAP. The plain language summary must include the process to apply for financial assistance.
The final regulations require the FAP to list the providers delivering emergency and other medically-necessary care, and to specify which of those providers are covered by the FAP. These provisions respond to comments that noted that private physician practices may operate independently of the hospital and bill separately for their services.
Hospitals must translate the FAP into the primary language of any low-English proficiency populations that constitute more than 5 percent of the members of the community served by the hospital or 1,000 individuals, whichever is less. The proposed regulations required translations for populations that constitute more than 10 percent of the community.
With respect to emergency care, the final regulations prohibit debt collection activities that interfere with the provision, without discrimination, of emergency medical care, regardless of where the debt collection activities occur. The preamble makes clear that asking for insurance information or collecting co-payments is permissible to the extent EMTALA allows those activities.
Limitation on Charges
Hospital facilities must limit the amounts charged for emergency or other medically necessary care they provide to an individual who is eligible for financial assistance pursuant to the hospital's financial assistance policy (FAP-eligible individual) to not more than the amounts generally billed (AGB).
The scope of "emergency or other medically necessary care" can be fairly broad. A hospital can limit its definition of medically necessary care to care that is considered medically necessary by the state's Medicaid program. Or, the hospital could simply define medically necessary care as care that is consistent with generally accepted standards of medicine in the community, or to an examining physician's determination.
One method of calculating the AGB is the "look-back method." The numerator in the "look-back method" is all amounts allowed for emergency and medically necessary care by a) Medicare fee-for-service; b) Medicare fee-for-service and all private health insurers; or c) Medicaid, either alone or in combination with the payers identified in a) or b). The denominator in the "look-back method" is all charges for emergency and other medically necessary care. The resulting percentage, applied to the total charges for medically necessary items and services received, is the AGB. The AGB essentially provides a cap on the amount that an individual can be personally responsible for. If the FAP-eligible individual is insured, the individual's deductible and applicable coinsurance cannot exceed the AGB.
Another method of calculating the AGB is the "prospective Medicare or Medicaid method." Under this method, the AGB is equal to the amount that Medicare or Medicaid would pay for the item or service in question, including any deductible or coinsurance owed by the individual. A hospital can apply Medicare rates to some services and Medicaid rates to other services, as long as the FAP specifies when the applicable rate will be used.
A hospital may have multiple AGB percentages. For example, it could have one AGB percentage applicable to inpatient services and another applicable to outpatient services. The hospital's FAP must specify how the AGB percentages will be calculated.
There is no preemption associated with this law or regulation. The IRS acknowledges that some states have already placed limits on amounts that hospitals can charge certain individuals. It simply notes that hospitals will have to satisfy both state and federal requirements. Presumably, the formula that yields a lower charge to the affected individual will be required.
Changes From Proposed Rule
In response to criticism that the rule provided for only two methods of setting the AGB, the final rule gives the Treasury Department and the IRS the ability to establish additional methodologies in future published guidance, as circumstances warrant.
The final rule added a third option for calculating the AGB using the look-back method. Providers may now calculate the AGB using only Medicaid allowed amounts, or Medicaid and Medicare fee-for-service allowed amounts, or Medicaid and Medicare fee-for-service and all private health insurer allowed amounts.
Similarly, the final rule allows the prospective method to be based on Medicaid allowable amounts, not just Medicare allowable amounts.
Amounts received from Medicare or Medicaid through a managed care organization are treated somewhat differently. Amounts received from Medicare managed care organizations would be included in amounts allowed by private health insurers. Amounts received from Medicaid manage care organizations would be included in amounts allowed by Medicaid.
The final rule clarifies the fact that the AGB represents only the cap on what a FAP-eligible individual can be charged. A hospital may charge such an individual a lesser amount.
The final rule clarified that the numerator when using the look-back method is the total "allowed amount," not the total amount actually paid by health insurers and individuals. The use of the "allowed amount" also clarified that claims allowed during the look-back period can be included, even if they have not yet been fully paid.
The final rule gives hospitals the option of calculating the AGB based on charges for all items and services provided by the hospital, rather than emergency and other medically necessary services, when using the look-back method. This option may be less burdensome, since hospitals would not have to identify services that did not meet the "medically necessary" definition.
The final rule rejected the request by some commentators that a hospital system be able to calculate an AGB for all or a portion of the hospitals in the system. The final rule only allows a single AGB calculation for multiple hospitals if both hospitals are covered under the same Medicare provider agreement.
The final rule expanded the time period for implementing a new AGB. The proposed rule said that the new percentage must be implemented within 45 days of the last day used in the 12-month calculation. The final rule extends this period to 120 days.
The final rule changes the requirement contained in the 2012 proposed rule that a hospital must stick with a particular methodology for calculating its AGB indefinitely. The final rule allows hospitals to change their methodology at any time, provided such a change is clearly articulated in their FAP.
The proposed rule did not contain a definition for "medically necessary care." The final rule allows hospitals to define "medically necessary care" as described in the previous section.
The final rule includes a procedure to follow if an individual is initially charged full charges, but then submits a complete FAP application and is determined to be FAP eligible. In such a case, the hospital is required to refund any amounts collected from the individual in excess of the amount required of FAP-eligible individuals (provided it is more than $5).
Billing and Collection
A hospital meets the billing and collection requirements contained in 501(r)(6) if it does not engage in extraordinary collection actions (ECAs) against an individual before it has made reasonable efforts to determine whether the individual is FAP eligible.
The following actions are considered ECAs:
- Selling an individual's debt to another party, with certain exceptions
- Reporting adverse information about the individual to consumer credit reporting agencies or credit bureaus
- Deferring or denying, or requiring payment before providing, medically necessary care because of an individual's nonpayment of one or more bills for medically necessary care previously provided
- Actions that require a legal or judicial process including, but not limited to:
- Placing a lien on an individual's property (not including liens on certain judgments, settlements or compromises)
- Foreclosing on an individual's real property
- Attaching or seizing an individual's bank account or any other personal property
- Commencing a civil action against an individual (not including filing a claim in bankruptcy court)
- Causing an individual's arrest
- Causing an individual to be subject to a writ of body attachment
- Garnishing an individual's wages
Reasonable efforts involve either notifying the individual of the hospital's FAP and providing the individual an opportunity to submit an application, or making a determination based on third-party information or prior FAP-eligibility determinations.
Extraordinary collection activities are subject to a notification period and an application period. The notification period begins on the date of the first post-discharge bill (i.e., date a letter was mailed, date a letter was hand-delivered or date an email was sent) and continues for 120 days. During the notification period, a hospital may not initiate an ECA on an individual whose FAP eligibility has not been determined. The period after 120 days, and before 240 days of the first post-discharge bill, is referred to as the application period. During this period, if an individual submits an application for FAP eligibility, the hospital must process the application. The rule also provides direction on what to do if the individual becomes FAP eligible at this time, and how to treat an incomplete FAP application. After 240 days have passed, a hospital may, but is not required to, accept and process a FAP application.
Changes From Proposed Rule
The IRS rejected a request from several commentators that hospitals not be held responsible for collection agencies or entities that purchase debt. However, the IRS noted that a hospital's failure to meet a particular requirement will be excused if the failure is not willful or egregious, and the hospital both corrects and discloses the failure in accordance with published guidance. This means that hospitals should act reasonably and in good faith to supervise and enforce the section 501(r)(6) obligations contained in its contracts with collection agencies or purchasers of debt.Extraordinary Collection Actions
Characterizing credit reporting as an extraordinary collection action in the proposed rule was very controversial. The IRS decided not to change this in the final rule, finding that reporting to credit agencies is a collection action and a tool to collect delinquent debts. It also noted that bad credit reports can have extraordinarily detrimental consequences for the affected individuals.
With respect to liens, the final rule creates an exception for liens placed on a portion of potential settlement proceeds when the patient has sued a third party due to an auto accident or other type of accident. This is not treated as a collection action against the patient.
Unlike the propose rule, the final rule does not consider a sale of debt to a third party as an ECA, provided the following conditions are met:
- The purchaser must agree not to engage in any ECAs to obtain payment of the debt
- The purchaser must agree not to charge interest in excess of the rate specified in 26 U.S.C. § 6621(a)(2) (the federal short-term rate plus three percentage points)
- If the individual is determined to be FAP eligible, the debt is either returned to the hospital or the purchaser must ensure that the individual does not pay more than he or she is personally responsible to pay as a FAP-eligible individual
The final rule adds a new ECA when a hospital defers or denies, or requires a payment before providing, medically necessary care because of an individual's nonpayment of one or more previous bill. Failure to provide medically necessary care to an individual who has past debts will be presumed to be an ECA, absent evidence to the contrary.Reasonable Efforts
The final rule makes a number of changes to the final definition of reasonable efforts.
The final rule clarifies and simplifies what is required to make a reasonable effort with regard to notice. At least one bill post-discharge must provide a plain language summary of the FAP (not every bill as required in the proposed rule). An oral notification of the FAP and how the individual may obtain assistance with the FAP application process is required at least once, 30 days before initiation of an ECA (as opposed every conversation with all individuals). And a summary of ECAs that the hospital intends to initiate (rather than all possible ECAs) must be provided to the individual before initiation of the ECAs.
The revised rule also provides more flexibility when an incomplete FAP application is received during the application period. Although ECAs must cease while an application is pending, they may resume before the expiration of the application period if the individual fails to respond to requests from the hospital within a reasonable period of time. What is reasonable depends on the amount of information missing and/or the documentation that is being requested.
The revised rule also clarifies that only ECAs taken against an individual for the current care at issue must be suspended while an application is being reviewed. But ECAs on prior care may continue.
If a complete FAP application is received before expiration of the application period, the hospital must suspend all ECAs taken against the individual, make and document an eligibility determination in a timely manner, and notify the individual in writing of the determination. There is no fixed number of days that constitutes a "timely manner," but a hospital could suspend a final determination while an individual's Medicaid application is pending.
The final rule creates a special process before a hospital may defer, deny or require a payment before providing medically necessary care. A hospital must first notify the individual in writing of the availability of financial assistance, include a FAP application, and notify the individual of a deadline for submitting the application form (at least 30 days). In addition, at least 240 days must have passed since the date of the prior post-discharge bill that has not yet been paid.Presumptive Eligibility
The final rule expands on the use of third-party data to determine eligibility for a hospital's FAP. In the proposed rule, a hospital could only determine an individual eligible for the most generous FAP benefits based on third-party data. In the final rule, a hospital can determine that an individual is eligible for something less than the most generous FAP benefits, but must also notify the individual regarding his or her ability to submit a FAP application.
Effective Dates and Implementation
The final regulations apply to tax years beginning after December 20, 2015, so all organizations will have at least one year to ensure compliance. For tax years beginning before then, the organization can rely on a reasonable, good-faith interpretation of section 501(r), meaning the organization may comply with either the 2012 and 2013 proposed regulations or the final rule.