IRS Proposes Hospital Tax-Exempt Status Revocation for Failure to Comply with IRC §501(r)(3)
IRC §501(r) Background
The Patient Protection and Affordable Care Act, more commonly known as the Affordable Care Act (“ACA”) signed into law by President Obama on March 23, 2010, introduced IRC §501(r) which includes four new requirements which tax-exempt hospital facilities are required to comply:
- Community Health Needs Assessment (IRC §501(r)(3));
- Financial Assistance Policy (IRC §501(r)(4));
- Limitation on amounts charged, to individuals eligible under the organization’s financial assistance policy, for emergency or other medically necessary care (IRC §501(r)(5)); and
- Billing and collection practices (IRC §501(r)(6)).
IRC §501(r)(3)
A tax-exempt hospital organization meets the requirements of IRC §501(r)(3) if it has conducted a CHNA which meets the requirements of IRC §501(r)(3) once every three years for tax years beginning on or after March 23, 2012. In addition, the hospital organization must have an authorized body adopt a written implementation strategy to meet the needs identified in the CHNA. Under the final regulations, the implementation strategy is a written plan that, with respect to each significant health need identified through the CHNA, that either:
- Describes how the hospital facility plans to address the health need; or
- Identifies the health need as one the hospital facility does not intend to address and explains why the hospital facility does not intend to address the health need.
The CHNA must take into account input from persons who represent the broad interests of the community served by the hospital facility, including those with special knowledge or expertise in public health, and be made widely available to the public.
IRC §501(r)(4)
IRC §501(r)(4) requires a tax-exempt hospital organization to have a written financial assistance policy (“FAP”) for its hospital facility(ies), which must:
- Apply to all emergency and other medically necessary care provided by the hospital facility or any other substantially-related entity;
- Be widely publicized;
- Include the following six components:
- The eligibility criteria for financial assistance and whether such assistance includes free or discounted care;
- The basis for calculating amounts charged to patients;
- The method for applying for financial assistance; and
- In the case of an organization that does not have a separate billing and collections policy, the actions the organization may take in the event of nonpayment;
- Any information obtained from other sources other than an individual seeking financial assistance that the hospital facility uses, and whether and under what circumstances; and
- A list of providers, other than hospital staff, delivering emergency or other medically necessary care in the hospital facility that specifies which providers are covered by the hospital’s FAP and which are not. This requirement is outlined in IRS Notice 2015-46.
A hospital facility must also have a plain language summary which is a written statement which notifies an individual that the hospital facility offers financial assistance under its FAP and provides additional information in a clear, concise and easy to understand manner.
IRC §501(r)(5)
A hospital organization meets the requirements of IRC §501(r)(5) only if the hospital facility, or any other substantially related entity, as defined in the regulations, limits the amounts charged for care that it provides to an individual eligible for financial assistance under its FAP:
A hospital facility must limit the amount charged for any emergency or other medically necessary care it provides to a FAP-eligible individual to not more than the amounts generally billed (AGB) to individuals with insurance covering that care. In addition, a hospital facility must limit the amount charged for any medical care it provides to a FAP-eligible individual to less than the gross charges for that care.
IRC §501(r)(6)
A hospital facility may not engage in extraordinary collection actions (“ECAs”) against an individual before making reasonable efforts to determine whether the individual is FAP-eligible.
A hospital facility will be considered to have engaged in ECAs against an individual if the hospital facility engages in ECAs against any other individual who has accepted or is required to accept responsibility for the first individual’s hospital bills.
Furthermore, a hospital facility will be considered to have engaged in an ECA against an individual if any purchaser of the individual’s debt or any debt collection agency or other party to which the hospital facility has referred the individual’s debt has engaged in an ECA against the individual.
Facts and Determination
The Hospital is a “dual status” entity since it is recognized by the IRS as tax-exempt under IRC §501(c)(3) and also qualifies as a governmental unit or as an affiliate of a governmental unit pursuant to Revenue Procedure 95-48. The Hospital is also known as a “Disproportionate Share Hospital” which is designated by Medicare as a “critical care access facility” for Medicare billing purposes.
The Hospital had its CHNA conducted by the National Rural Health Resource Center to meet the requirements imposed by Medicare; not for the intent of complying with the ACA. After the CHNA was completed, the Hospital did not post it to its website thus making it widely available to the public claiming that they had the CHNA in paper and made it available upon request. In addition, the Hospital never drafted or adopted an implementation strategy.
Pursuant to interviews held by the IRS during its audit, the administrators of the Hospital indicated that the Hospital did not need to be tax-exempt under IRC §501(c)(3) and “as a small rural facility, had neither the financial wherewithal nor the staffing to devote to the specific requirements of Treasury Regulation §1.501(r)-3 for conducting a proper Community Health Needs Assessment every three years.”
In its Letter, the IRS stated the adverse determination was made for the following reason:
“You are a hospital organization which failed to comply with the requirements of IRC §501(r), to conduct a community health needs assessment, adopt an implementation strategy and make it widely available to the public”.
In its Form 886A, Explanation of Items, the IRS noted that the hospital did not complete and adopt a written implementation strategy; nor did it make its CHNA widely available to the public.
Moreover, since the administrators of the Hospital indicated that the Hospital did not need to be tax-exempt and that it did not have the financial wherewithal or the staff to comply with IRC §501(r)(3), the IRS, in making its adverse determination, stated that “Consequently, (Hospital’s) failure to meet the requirements of §1.501(r)-3 is considered willful. Especially in light of the fact that the organization expressed on several occasions that they did not need to be exempt under IRC §501(c)(3) and that this status at times actually got in the way of their ability to be involved in various Medicare reimbursement programs.”
Conclusion
This revocation of tax-exempt status by the IRS is a significant event in the IRS’ continuing efforts to ensure tax-exempt hospital facilities are complying with IRC §501(r). It is extremely important for tax-exempt hospital facilities to be compliant with all aspects of the final regulations. Otherwise, tax-exempt hospital facilities can face adverse consequences such as the imposition of excise taxes or, potentially, as in this case, loss of tax-exempt status.
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