In 1969, recognizing that the promotion of health can be a charitable endeavor, the Internal Revenue Service established the “community benefit” standard allowing qualifying nonprofit hospitals to obtain federal tax-exempt status pursuant to Section 501(c)(3) of the Internal Revenue Code. To gain and maintain tax-exempt status, nonprofit hospitals had to meet certain community benefit requirements, such as conducting medical research or providing emergency care to patients who were unable to pay.
Tax-exempt status became financially essential for many.
The requirements remained virtually unchanged for 40 years, until the passage of the Patient Protection and Affordable Care Act added new requirements. Much like other measures implemented by the ACA, the goal of these additional mandates is to increase transparency within the healthcare system. However, they also make maintaining tax-exempt status significantly more difficult for nonprofit hospitals, which play a vital role in Kentucky communities – particularly in rural areas.
Pursuant to 501(r) of the Internal Revenue Code (added by Section 9007 of the ACA), hospitals are now required to comply with several additional policy and reporting obligations, as outlined below, to maintain their tax-exempt status.
The new requirements
1) Conducting a community health needs assessment triennially: A hospital must produce a written community health needs assessment (or CHNA) at least once every three years to demonstrate that it continues to serve local needs. Documentation must specify the methods and sources used for the assessment, and the hospital must create a written implementation strategy to address any unmet needs. Hospitals must make the CHNA and accompanying implementation strategy, if applicable, widely available throughout the community.
The ACA imposes a $50,000 excise tax on hospitals that fail to satisfy the CHNA requirement for each year of noncompliance. The excise tax is applied on a facility-by-facility basis – meaning health systems that own more than one hospital must pay the penalty for each noncompliant facility.
(2) Establishing and disclosing financial assistance policies: Hospitals are now specifically required to maintain written financial assistance policies (FAP) that must be widely publicized and include: eligibility criteria; a disclosure of whether available assistance includes free or discounted care; information on how charged amounts are calculated; the process by which to apply for assistance; and the documentation used to determine eligibility. Although the ACA does not mandate particular eligibility requirements and each hospital retains the ability to establish the parameters of its eligibility criteria, these new regulations and documentation requirements can be onerous for smaller hospitals.
(3) Limiting charges to needy individuals: Historically, hospitals have charged uninsured and private-pay patients at their pre-determined rates, while reduced prices were negotiated for insured patients through their insurance providers. This is now disallowed for the financially needy who, under the ACA, must be charged the same basic rates for emergency or medically necessary care as those charged to patients who are insured. To determine the amounts to be charged, hospitals may use one of two methods:
The first, a “look back” method, is based on the actual dollar amount of past claims paid to a hospital facility by either Medicare or a Medicaid fee-for-service program, in addition to private health insurers’ payments. The second method is prospective, requiring a hospital to estimate the amount that it would be paid by Medicare or a Medicaid fee-for-service program for emergency/medically necessary care if the patient was a beneficiary.
Hospitals may still bill gross charges for all types of care in the event that the patient does not qualify for financial assistance or has not submitted an application for assistance.
(4) Following reasonable billing and collection practices: A hospital must make reasonable efforts to determine whether an individual qualifies under its FAP before engaging in extraordinary collection efforts (i.e., legal or judicial action). A hospital must notify patients about its FAP, assist an individual who submits an incomplete application, and determine and document whether an individual is qualified for the plan.
Only after these requirements have been met may a hospital use extraordinary collections actions to obtain payment of a bill. Notably, a patient’s written waiver of the right to financial assistance does not alleviate the hospital’s duty to make reasonable efforts to determine whether the individual is eligible for assistance.
The CHNA requirement became effective upon a hospital’s first tax reporting year after March 23, 2012. Section 501(r)’s additional requirements are effective upon a hospital’s first tax reporting year after March 23, 2010. In December 2013, the IRS released two notices for affected organizations, Notice 2014-2 and Notice 2014-3. Hospitals should carefully review these notices, as they attempt to clarify a wide variety of hospitals’ questions regarding Section 501(r)’s requirements.
A hospital’s nonprofit status enables it to provide necessary healthcare services to the community, in addition to extensive programming, such as free health screenings and support group services. The ACA’s new requirements force nonprofits to be more transparent, responsible and proactive in promoting overall public health – and made maintaining tax-exempt status significantly more difficult.
Nonprofit hospitals have long been proactive in their missions to promote public health; now they must go the extra mile. Specifically, nonprofits should re-examine their mission statements and determine whether they need to adjust the roles that they play for their respective communities in order to comply with the ACA’s regulatory requirements. Compliance officers should consider consulting with tax and legal professionals for best practices and procedures to ensure compliance with applicable laws and avoid steep excise taxes.
At a time when the entire healthcare industry is undergoing a massive transformation, nonprofit hospitals must adapt to change, or risk losing one of their most valuable assets: tax-exempt status. We believe that Kentucky’s nonprofit hospitals will step up to the plate because their tax-exempt status is vital both to their ongoing clinical operations and to the communities in which they serve.”
Anne-Tyler Morgan ([email protected]) concentrates in healthcare law practice with McBrayer, McGinnis, Leslie & Kirkland PLLC. Matthew J. Koch ([email protected]) is an attorney and CPA and focuses on tax and finance law with MMLK.