IRS Proposed Regulations Relating to Financial Assistance Policies and Billing and Collection Activities of Tax-Exempt Hospitals
By David Hatch and Amy Joseph, Hooper, Lundy & Bookman, P.C., Los Angeles, CA
With the U.S. Supreme Court’s recent decision to largely uphold the Patient Protection and Affordable Care Act (“PPACA”), tax-exempt hospitals should focus on PPACA’s obligations relating to hospitals with 501(c)(3) tax-exempt status, including community health needs assessments and implementation, financial assistance and emergency care policies, certain limits on charges, and certain billing and collection restrictions, all of which were codified in Section 501(r) of the Internal Revenue Code (“Section 501(r)”).1
|On June 22, 2012, the Internal Revenue Service (“IRS”) released proposed regulations offering guidance to tax-exempt hospitals relating to certain provisions of Section 501(r) (the “Proposed Regulations”). The Proposed Regulations were formally published in the Federal Register on June 26, 2012 and comments and requests for a public hearing must be received by the IRS by September 24, 2012.2|
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The Proposed Regulations discuss many of the requirements under 501(r), including (1) definitions of key terms, (2) financial assistance policies, (3) methods for limiting patient charges, (4) extraordinary collection actions (“ECAs”), and (5) patient notification procedures. However, the Proposed Regulations do not provide additional guidance for the Community Health Needs Assessments required under Section 501(r)(3)3 or penalties for non-compliance, both of which the IRS indicated would be addressed in future regulations.
The statutory requirements under section 501(r) are already in effect. While the Proposed Regulations do not have the force of law, hospitals may rely on these Proposed Regulations to assist in implementing the statutory requirements until final or temporary regulations are issued.4
Applicability of 501(r)
The Proposed Regulations clarify which organizations must abide by 501(r). A “Hospital Organization” includes an organization recognized under Section 501(c)(3) that operates one or more hospital facilities, including a hospital facility operated through a disregarded entity.5 All Hospital Organizations must satisfy the requirements with respect to each “Hospital Facility.” A “Hospital Facility” is any facility operated by a “Hospital Organization” that is required by a state to be licensed, registered or similarly recognized as a hospital. It also includes any other organization that the Secretary determines has the provision of hospital care as its principal function or purpose constituting the basis for its exemption under Section 501(c)(3).
Although the statutory language does not create an exemption for government hospitals with 501(c)(3) recognition, the Treasury Department and IRS are requesting comments regarding alternate methods these facilities may use to satisfy 501(r).
501(r)(4) – Financial Assistance Policies (“FAPs”) and Emergency Medical Care Policies
The Proposed Regulations also provide specific guidance regarding financial assistance and emergency care policies for tax-exempt hospitals. Hospital Organizations must establish a written FAP that applies to, at a minimum, all emergency and other medically necessary care provided by the Hospital Facility. The FAP should establish (1) eligibility for financial assistance and whether the assistance includes free or discounted care, (2) the basis for calculating amounts charged to patients, (3) the method for applying financial assistance, (4) actions which may be taken for nonpayment if the facility does not have a separate billing and collections policy, and (5) measures to widely publicize the FAP within the hospital itself and the community served by the hospital (including posting on the hospital’s website). While some guidelines are offered for each above section, the hospital has discretion to develop its own FAP, and there are no mandates for specific eligibility criteria.6
A Hospital Facility must make reasonable efforts to determine whether an individual is FAP-eligible, which includes (1) distributing a plain language summary of the FAP and offering a FAP application to the individual prior to discharge, (2) informing the individual about the FAP in all oral communications regarding the amount due, and (3) providing an individual with at least one written notice about potential ECAs that could be taken.
In addition to the FAP, Hospital Organizations must also establish a written emergency medical care policy. That policy must address care for all emergency medical conditions to all patients, including those who are not FAP-eligible. Compliance with the Emergency Medical Treatment and Labor Act (“EMTALA”) will constitute compliance with this portion of 501(r). Thus, this requirement should not add additional significant burdens on hospitals.
501(r)(5) - Limitations on Patient Charges
The Proposed Regulations clarify what a Hospital Facility may bill certain patients. Hospital Facilities will have to limit amounts charged to FAP-eligible patients for emergency and medically necessary care. A FAP-eligible patient cannot be charged more than the amount generally billed (“AGB”) to an individual with insurance coverage. The Hospital Facility must also limit the amount charged for any other type of medical care provided to FAP-eligible patients to less than the gross charges for that care. The purpose of this provision is to protect FAP-eligible patients from being billed more than what the Hospital Facility would have received if that patient had insurance.
The Proposed Regulations offer two methods for calculating AGB. The first method is a “look-back” method based on actual past claims paid to the Hospital Facility by either Medicare fee-for-service only or Medicare fee-for-service together with all private health insurers. The second method is “prospective” and requires the Hospital Facility to estimate the amount it would be paid if the FAP-eligible individual was a Medicare fee-for-service beneficiary. Specifically, the Hospital Facility would set the AGB as the amount that Medicare and the Medicare beneficiary together would be expected to pay for the emergency or other medically necessary care at issue. The two methods are mutually exclusive and after choosing one, the Hospital Facility must continue to use that method.
A safe-harbor provision applies to Hospital Facilities that bill an individual more than the AGB if that party has not submitted a FAP application and the Hospital makes “reasonable efforts” to determine whether the patient is FAP-eligible. However, once the Hospital Facility determines the individual is FAP-eligible, it must reverse the charges and refund excess payments, if applicable.
501(r)(6) - Policies for Billing and Collections
The Proposed Regulations also clarify the restriction of certain billing and collection activities pertaining to FAP-eligible patients. Hospital Facilities are prohibited from engaging in ECAs against an individual before making reasonable efforts to determine whether the individual is FAP-eligible. Some examples of ECAs include, but are not limited to (1) reporting to credit agencies, (2) placing a lien on an individual’s property, (3) attaching or seizing an individual’s bank account or any other personal property, (4) commencing a civil action against an individual, (5) causing an individual’s arrest, (6) garnishing an individual’s wages, and (7) certain sales of the patient’s debt to another party.
To determine when a Hospital Facility can commence ECAs, the Proposed Regulations define both a “notification period” and “application period.” Under the notification period, a Hospital Facility has up to 120 days after providing the first billing statement to inform the individual about its FAP. If no FAP application is submitted within that window, the Hospital Facility may proceed with ECAs. However, a Hospital Facility must accept and process FAP applications submitted by an individual during a longer “application period” that ends 240 days after the first billing statement for the care. If an individual’s debt is referred or sold to a third party during the application period, the Hospital Facility must obtain a legally binding, written agreement from the third party to abide by certain procedures.7 This also applies to subsequent transfers of the debt during the application period. These changes may have implications in various customary business arrangements, including, for example, accounts receivable financing or factoring arrangements, certain collections arrangements, and mergers or asset sales involving tax-exempt hospitals.
Reactions to the Proposed Regulations
Reactions to the Proposed Regulations have been mixed. For example, the general counsel for the American Hospital Association (“AHA”), Melinda Hatton, has been quoted as saying that while these Proposed Regulations are “good and sensible steps,” AHA is also concerned “by the way they’ve been implemented,” and has described the Proposed Regulations as “very prescriptive.”8 In a letter dated August 23, 2012, AHA further stated:
While we appreciate the agencies’ efforts, the proposed regulations fall short of meeting the preamble’s goal of preserving flexibility for hospitals while assuring access to information for patients who need financial assistance. Instead, the proposed regulations are frequently excessively complex and prescriptive. Too often, the proposed regulations dictate uniformity rather than offer flexibility for meeting the ACA’s requirements and, in doing so, appear to foreclose better and perhaps more effective methods of achieving transparency and accountability for financial assistance and billing and collection practices.9
Conversely, Senator Grassley (R-Iowa), who co-authored Section 501(r), has stated that the
Proposed Regulations take “only baby steps” to hold tax-exempt hospitals accountable, and “tougher rules are needed.”10 Senator Grassley has expressed concern that charitable hospitals do not act charitably, spending only “a pittance” on community benefit activities, and has also specifically expressed “surprise and disappointment with comments reported in the press as being made by” AHA’s general counsel.11, 12
Senator Grassley’s characterization of the Proposed Regulations as only “baby steps” may arise because they leave discretion to the hospital to determine eligibility criteria under its FAP and the type of documentation required to establish FAP-eligibility. However, this characterization may be an overstatement, as the Proposed Regulations impose a number of additional restrictions that could significantly increase a hospital’s administrative time and expense. The Proposed Regulations could be revised to lessen the burdens on tax-exempt hospitals without weakening the purpose behind Section 501(r). First, more flexibility could be provided to newly formed tax-exempt hospitals to calculate limits on charges. Based on the Proposed Regulations, newly formed tax-exempt hospitals may only use the prospective method (based on Medicare rates), since they would not have the pricing data required to use the look-back method (based on Medicare and private insurer rates). Second, the notification requirement has some built-in redundancy. Must an individual be informed of the FAP in all oral communications regarding the amount due, or would the provision of the information in at least one oral communication suffice? If an individual receives treatment for different medical issues multiple times within a short time period, must a hospital include information about the FAP in all corresponding first billing statements? The additional burden imposed by such requirements potentially outweighs their value.
In addition, the Proposed Regulations leave some questions unanswered. For example, clarification is needed regarding the penalty faced by a hospital for violating these regulations. Section 501(r) states that a hospital “shall not be treated as described in subsection (c)(3) unless” it meets the requirements of Section 501(r). Thus, under the current statute and Proposed Regulations, a hospital could lose its tax exemption for a minor violation. The IRS has stated that it will address penalties for non-compliance in future guidance, but interested persons should consider taking this opportunity to comment on when, and to what extent, penalties should be imposed.
The IRS itself has requested comments on numerous topics as it develops the final regulations. For example, the IRS seeks comments on (1) the potential link between a hospital’s most recent Community Health Needs Assessment and its FAP, (2) the AGB calculation, such as whether Medicare rates must be included in the look-back method and whether the prospective method should also include rates of private health insurers, (3) whether a hospital should be able to change the method applied under certain circumstances, (4) the length of the notification period and application period, and whether the notification and application periods should start on the date of discharge for inpatients, and (5) feasible ways that a hospital could determine whether an individual is FAP-eligible other than by soliciting and processing the FAP application.13
The Proposed Regulations provide further guidance for 501(c)(3) tax-exempt hospitals as they work to implement the statutory requirements of Section 501(r). In particular, the Proposed Regulations provide detailed information regarding the required elements of a FAP, the calculation methods to determine amounts generally billed, and limitations on billing and collection policies. It will be interesting to see what changes the IRS does, and does not, implement when the final regulations are released, as the AHA commentary indicates that many in the industry are concerned with the level of burden imposed by the Proposed Regulations. However, until the final regulations are released, hospitals should ensure that they update their current policies and procedures to comply with both Section 501(r) and the Proposed Regulations.
26 U.S.C. § 501(r); see also Alex Grashkina-Hristov, Looking at Hospitals through the Internal Revenue Service’s Magnifying Glass: New Section 501(r) Requirements Affect Tax Return Requirements for Exempt Hospitals, ABA Health eSource, Feb. 2011 Vol. 7 No. 6, at this link (last visited August 10, 2012) (discussing Section 501(r) and reactions of tax-exempt hospitals and tax practitioners).
|2||Additional Requirements for Charitable Hospitals; Proposed Rule, 77 Fed. Reg. 38148 (June 26, 2012) (to be codified at 26 C.F.R. §1.501(r)).|
The IRS has previously issued some guidance on Community Health Needs Assessments. See IRS Notice 2011-52, available at www.irs.gov/pub/irs-drop/n-11-52.pdf (last visited August 10, 2012).
A disregarded entity is defined as “an entity that is generally disregarded as separate from its owner for federal tax purposes,” such as a “domestic single member limited liability company that does not elect to be classified as an association taxable as a corporation for federal tax purposes.” 77 Fed. Reg. 38160.
Although the IRS does not set minimum eligibility criteria for a hospital’s FAP, the Proposed Regulations do include examples, and these examples provide insight into what types of eligibility criteria the IRS would consider appropriate. See 77 Fed. Reg. 38162-68. In one provided example, the FAP provides assistance to “all uninsured and underinsured individuals whose family income is less than or equal to x% of the Federal Poverty Level (“FPL”), with the level of discount . . . determined based upon the individual’s family income as a percentage of FPL. Id. at 38162. Other examples base eligibility on household income. Id. The types of documentation mentioned in the provided examples include federal tax returns, payroll check stubs, eligibility for other state assistance programs, and other documentation verifying income. Id. at 38162-68.
For example, the third party must agree to refrain from engaging in ECAs until the hospital has made reasonable efforts to determine whether the individual is eligible under the FAP. Id. at 38158-59. If the individual submits an FAP application during the application period, but after the debt is referred or sold to a third party, the third party must suspend ECAs and, if the hospital determines that the individual is FAP-eligible, must ensure that the individual is not obligated to pay more than the amount required pursuant to the FAP. Id. at 38159.
IRS Regulations to Obtain Tax-Exempt Status Are ‘Too Rigid’ Says AHA, http://www.advisory.com/Daily-Briefing/2012/07/02/IRS-regulations-to-obtain-tax-exempt-status-are-too-rigid (last visited Sept. 7, 2012). For example, Hatton described the Proposed Regulations as prescriptive because they represent “only about a quarter of the requirements in the ACA on which tax exemption rests,” and the penalty for failing to comply “is not a $50 fine – it’s losing your tax exemption.” Id.
See http://www.aha.org/advocacy-issues/letter/2012/120823-aha-cl-omb-irs.pdf (last visited Sept. 7, 2012). The AHA letter also provides a chart describing the procedures required to comply with the Proposed Regulations.
Letter from Charles E. Grassley, U.S. Senator, to Richard Umbdenstock, President and Chief Executive Officer, American Hospital Association (June 27, 2012); Letter from Charles E. Grassley, U.S. Senator, to Timothy F. Geithner, Secretary, U.S. Department of the Treasury (July 9, 2012).
Interestingly, some California lawmakers have also raised questions as to whether California tax-exempt hospitals do enough to justify their tax-exempt status, and a California Senate Committee recently met to discuss the issue. See California State Auditor, August 2012 Report 2011-126, Nonprofit Hospitals: Statute Prevents State Agencies From Considering Community Benefits When Granting Tax-Exempt Status, While the Effects of Purchases and Consolidations on Prices of Care Are Uncertain, http://www.bsa.ca.gov/pdfs/reports/2011-126.pdf, and http://www.latimes.com/business/money/la-fi-mo-nonprofit-hospitals-20120814,0,2668747.story (last visited Sept. 7, 2012). California’s California Charity Care and Discount Payment Law, California Health and Safety Code Sections 127400-127446, imposes similar requirements as those in Section 501(r).
These issues are only a small sample of the specific questions raised by the IRS.
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