501(r) regulations pose challenges to hospitals
On December 29, the IRS issued final regulations regarding compliance with IRC §501(r) for charitable hospitals. The final regulations are effective on or after December 29, 2015, meaning that all IRC §501(c)(3) tax -exempt hospitals must comply with the regulations beginning on the first day of their first tax year beginning after December 29, 2015. For tax years prior to the effective date, an organization can rely on the proposed regulations issued in 2012 and 2013. The final regulations adopt provisions from both the 2012 and 2013 proposed regulations along with some amendments which also include additional clarification based on feedback received. We believe the IRC §501(r) statutory and regulatory regime provide compliance challenges.
IRC §501(r) and related regulations require hospitals (as defined) to meet the following criteria:
- The hospital facility is required to conduct a community health needs assessment (CHNA) and adopt an implementation plan to meet the needs identified. The CHNA must be conducted at least once every three years. The implementation strategy under the final regulations is now required to be adopted on or before the 15th day of the fifth month after the end of the taxable year that the CHNA was conducted. Failure to meet these requirements could result in a $50,000 excise tax.
- The hospital facility must establish both a written financial assistance policy (FAP) that is widely publicized in the community and an emergency medical care policy that provides for care without regard to eligibility under the FAP.
- The hospital facility must limit amounts charged under the FAP to not more than the amounts generally billed to individuals who have insurance. The use of gross charges, for those known to qualify for charity care, is prohibited.
- The hospital facility is prohibited from taking extraordinary collection actions prior to making reasonable efforts to determine if patients are eligible under the FAP before making any extraordinary collection actions against the individual.
The final regulations
Application to hospitals
Hospital organizations, subject to IRC §501(r), are defined under the final regulations as facilities that are required by a state to be licensed, registered, or similarly recognized as a hospital and operated as a charitable organization under IRC §501(c)(3). This includes hospital facilities operated through a disregarded entity and those operated through a partnership. Furthermore, a hospital organization may treat multiple buildings operated under a single state license as a single hospital facility. The final regulations preamble clarifies that operation in a single building under more than one state license constitutes multiple hospital facilities.
In many instances, multiple hospitals operating in a single building may conduct a joint CHNA; adopt a joint implementation strategy; and use identical FAPs.
Failure to meet the requirements of IRC §501(r)
The final regulations include relief provisions for omissions or errors that are minor and either inadvertent or due to reasonable cause. In the event there are multiple omissions or errors, they will only be considered minor if they are minor in aggregate.
The IRS will also consider whether the hospital facility, before the failure, established practices or procedures to reasonably comply with IRC §501(r). This consideration will factor into the application of the reasonable cause relief provision.
What has changed?
Community health needs assessment
The final regulations expanded the proposed regulations requirement to solicit input from persons representing the broad interests of the community to not only identify the significant health needs but to also solicit input when prioritizing the significant health needs identified. A hospital facility must then identify potential resources to address health needs. The final regulations have clarified that the resources of the hospital can be included.
A hospital facility must document the CHNA in a report that is formally adopted by an authorized body of the hospital facility. The final regulations continue to allow for joint reporting of the CHNA when hospital facilities have identical communities. The regulations clarify that the facilities issuing the joint CHNA do not have to make their reports publicly available on the same day. The joint CHNA must contain all of the same basic information. The final regulations also clarified that hospital facilities with overlapping, but not identical, communities may collaborate and have identical CHNA sections, although separate reports.
The proposed regulations describe the requirements that need to be presented in the implementation strategy. The final regulations now require the implementation strategy to evaluate the impact of any actions taken since the hospital conducted its immediately preceding CHNA to address the significant health needs identified. Previously, the proposed regulations focused on a plan to evaluate the needs of the community, while the final regulations are now looking at the impact the prior year implementation strategy has had on the community.
A new hospital organization must meet the CHNA requirements by the last day of the second taxable year beginning after the later of the exemption date or the first date on which the hospital was licensed. A short year is considered a tax year. The final regulations provide that if an organization ceases operations, or transfers ownership before the end of the tax year, then it is not required to meet the CHNA requirements with respect to that year.
The CHNA must be conducted at least once every three years. The implementation strategy under the final regulations is now required to be adopted on or before the 15th day of the fifth month after the end of the taxable year that the CHNA was conducted.
Financial assistance policy and emergency medical care policy
A hospital facility’s financial assistance policy (FAP) must apply to all emergency and other medically necessary care provided by the hospital facility. The final regulations have expanded this requirement to include care provided by a “substantially-related entity,”, partnership owned in part by the hospital, a disregarded entity, and the organization operating the facility to the extent the income is not unrelated business income.
The final regulations only require the FAP to describe discounts “available under the FAP” rather than all discounts offered by the hospital facility. The hospital facility may offer other types of discounts outside of the FAP, such as self-pay, out-of-state patients, and discounts mandated under state law. However, it should be noted, that discounts that are provided outside of the FAP, and not subject to the limitation of amounts generally billed, cannot be considered community benefit and must be excluded from the Form 990, Schedule H.
The final regulations eliminate the requirement that the FAP contain a list of measures taken to make the FAP widely available and focus on actually making the FAP, the application, and a plain language summary widely available.
Each bill is required to contain a note about the availability of financial assistance and how to obtain information about the FAP and application process. The facility is also required to display information about the FAP in public locations including the emergency room and administration areas. In addition, the FAP summary must be available in English and any other language that is the primary language for the lesser of 1,000 individuals or 5 percent of the community served.
To establish medically necessary care, the FAP can use the Medicaid definition, the definition provided by the state, or a definition that is generally accepted. The FAP must indicate if other providers who deliver emergency or medically necessary care are covered under the FAP. It should also include which providers are not covered under the policy. The final regulations also clarify that an emergency medical care policy can be included in the same policy as the FAP.
Billing and collection requirements
The regulations prohibit taking any extraordinary collection actions against an individual before making reasonable efforts to determine if an individual would qualify under the hospital facility’s FAP. The final regulations clarify that the placement of a lien to collect proceeds of judgments, settlements, or compromises arising from a suit does not constitute an extraordinary collection practice.
Under the proposed regulations, the notification period begins on the date of the first billing statement and ends 120 days later and the application period runs concurrently ending 240 days later. Under the final regulations the notification period begins on the date the facility provides the first post-discharge billing statement and ends 120 days later while the application period runs concurrently ending 240 days later. This change eliminates the possibility of sending a notice to a patient that continues to remain hospitalized.
The facility must wait 30 days from the date of the notice prior to initiating any extraordinary collection actions. If an application for financial assistance is incomplete, the organization must suspend any extraordinary collection actions until the individual has failed to respond to requests for additional information within a reasonable amount of time.
The final regulations allow for a hospital to classify an individual as qualifying for financial assistance based on a prior FAP-eligibility. The facility must notify the individual of the determination and explain if the individual may qualify for more. A reasonable amount of time must be provided to allow the individual to apply for more assistance prior to initiating any extraordinary collection practices.
Notices may be sent electronically if an individual indicates the electronic notification is preferred. If an individual qualifies for free care the hospital is not required to send a bill.
Limitations on charges
For emergency and medically necessary care, the amount charged to any FAP-eligible individual cannot exceed amounts generally billed for individuals who have insurance that covers such care. For all other medical services, the hospital must limit charges to less than the gross charge for the care provided.
The amount charged is defined in the final regulations as the amount the individual is personally responsible for paying after all deductions and discounts, and less any amount paid by insurance. The limitation on charges to amounts generally billed applies to FAP-eligible individuals regardless of the fact that they may have insurance.
There are two acceptable methods to determine amounts generally billed. The first is the look-back method and the second method is based on prospective Medicare or Medicaid charges. The hospital may change its method at any time provided the FAP is also updated. The final regulations allow the department of Treasury the ability to provide additional methods of determining amounts generally billed at a later date. The amounts generally billed percentage must be used by the 120th day after the end of the 12-month period.
Hospital organizations are advised to review their policies and practices to assess compliance with the final regulations. Please contact a member of the Plante Moran tax team for additional guidance.