Header graphic for print
Not For Profit/Exempt Organizations Blog

Proposed Regulations on Federal Income Tax Exemption for Hospitals

Posted in Healthcare Organizations, IRS Filings

As previously reported, the Treasury Department released proposed regulations on June 22, 2012 interpreting and implementing specific requirements for hospitals to maintain their Section 501(c)(3) tax-exempt status under Section 501(r) of the Code.  Section 501(r) was enacted as part of the 2010 Health Care Reform Act (the “Act”). 

The proposed regulations provide guidance for the following requirements of Section 501(r): required financial assistance policies, required emergency care policy, amounts that may be charged to patients eligible for financial assistance, and the requirement that hospitals make reasonable efforts to determine whether individuals are eligible for financial assistance before initiating extraordinary collection actions.  The other Section 501(r) requirements, that hospitals conduct community health needs assessments, has been addressed by the IRS in separate guidance.  The Supreme Court’s decision in National Federation of Independent Businesses v. Sebelius  upholding the Act in its entirety on June 28, 2012 eliminates any lingering uncertainty on whether the requirements of Section 501(r) will continue to remain in effect, and tax-exempt hospitals should review the proposed regulations and their existing policies and procedures carefully to ensure that they will be in compliance with these new, detailed requirements when effective.

Hospitals should keep in mind that the provisions addressed by the proposed regulations have been the law since 2010.  A hospital that does not comply with one of the requirements is theoretically subject to revocation of tax exemption.  The regulations are only proposed, not final, but can be relied upon, and hospitals would be well advised to comply with these specific requirements of the proposed regulations.

Required Financial Assistance Policies

Section 501(r)(4) requires a hospital organization to establish a written financial assistance policy.  The statute specifies that the financial assistance policy must include: (1) eligibility criteria for financial assistance, and whether such assistance includes free or discounted care; (2) the basis for calculating amounts charged to patients; (3) the method for applying for financial assistance; (4) in the case of an organization that does not have a separate billings and collections policy, the actions the hospital organization may take in the event of nonpayment; and (5) measures to widely publicize the policy within the community served by the hospital organization.

The statute and proposed regulations give tax-exempt hospitals complete flexibility regarding the actual eligibility criteria for financial assistance, requiring only that a hospital’s financial assistance policy specify the financial assistance that is available and the criteria that must be satisfied for an individual to qualify for such financial assistance.

The financial assistance policy must also be widely publicized.  Under the proposed regulations, the policy must be accessible on the hospital’s or another party’s website.  In addition, copies of the policy must be available by mail or at the hospital, upon request and free of charge.  The policy must also be displayed inside the hospital, and the hospital must reach out to the community it serves, targeting those individuals that likely require financial assistance.  If more than 10 percent of the residents of the community served by the hospital have a primary language other than English, the policy must be available in that language as well.  The hospital must also have a “plain language” summary of the policy with very specific information.

Required Non-Discriminatory Emergency Care Policies

Section 501(r)(4) also requires a hospital organization to establish a written policy relating to emergency medical care.  This policy requires the hospital organization to provide, without discrimination, care for emergency medical conditions to individuals regardless of their eligibility under the organization’s financial assistance policy.  The regulations prohibit tax-exempt hospitals from stationing employees in emergency departments and other hospital areas where collection activities could interfere with treatment.  The proposed regulations do clarify that a hospital that does not have any emergency department can still qualify for exemption.  It can meet this requirement by adopting a policy that it will not discriminate against patients who are seeking urgent care, or who have unpaid bills because of their need for financial assistance.  Hospitals without emergency departments should confirm that such a policy is in place.

 Limits on Charges

Under Section 501(c) (5), hospitals must limit the amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the organization’s financial assistance policy to not more than amounts generally billed (“AGB”) to individuals who have insurance covering such care.  To determine AGB, the proposed regulations permit a “look-back” method based on actual past claims paid to the hospital by either Medicare fee-for-service only or Medicare fee-for-service together with all private health insurers paying claims to the hospital.  A second proposed method is “prospective” in that it requires the hospital facility to estimate the amount it would be paid by Medicare and a Medicare beneficiary for the service if the financial assistance eligible individual were a fee-for-service beneficiary.

The regulations also require a hospital facility to limit the amount charged for any medical care it provides to an individual eligible for financial assistance to less than the gross charges for that care.  A gross charge is defined as a hospital facility’s full, established price for medical care that the hospital consistently charges all patients before applying any discounts.

To help comply with these regulations, charitable hospitals are given a safe harbor.  If the hospital does not know if an individual is eligible for assistance, the hospital can bill the person its usual charges, as long as the hospital reaches out to determine whether the person is eligible for financial assistance.  If the person is eligible for assistance, the hospital must refund any excess payments.

Limits on Extraordinary Collection Actions

Section 501(c)(6) provides that a hospital cannot engage in extraordinary collection actions against an individual before it makes reasonable efforts to determine whether the individual is eligible for financial assistance.  Under these proposed rules, a hospital must provide patients with a plain language summary of the financial assistance policy before discharge and include the summary with the patient’s first three bills.  Patients should be given 120 days following the first bill to apply for financial assistance and should get an additional 120 days to submit a complete application.  Finally, if the patient is deemed eligible for financial assistance, the hospital must refund any excess payments and reverse any collection actions already underway.

A hospital has engaged in an extraordinary collection action if it takes any action against an individual relating to paying a medical bill covered under the financial assistance policy that requires a legal or judicial process.  Examples would be foreclosing on the individual’s real property, garnishing an individual’s wages, reporting to credit agencies, or causing an individual’s arrest.  However, deferring or denying medical care because of a pattern of nonpayment is not considered an extraordinary collection action.  Characterizing a credit agency report as an extraordinary collection action has been the subject of many comments to the IRS since Section 501(r) was enacted, but it is included as such in the proposed regulations.

The deadline for submitting comments on the proposed regulations is September 24, 2012.