Sept/Oct 2012 Focus on Finance: IRS Releases Proposed Regulations on Certain Aspects of New Internal Revenue Code Section 501(r) Applicable to Hospital Organizations

Sept/Oct 2012 Focus on Finance: IRS Releases Proposed Regulations on Certain Aspects of New Internal Revenue Code Section 501(r) Applicable to Hospital Organizations

On June 22, 2012, the Internal Revenue Service (“IRS”) released proposed regulations (26 CFR 38148) addressing three (3) of the four (4) new Internal Revenue Code (“IRC”) Section 501(r) requirements applicable to tax-exempt hospital organizations. The Patient Protection and Affordable Care Act (“Affordable Care Act”), Pub. L. No. 111-148, 124 Stat. 119, enacted on March 23, 2010 created new IRC Section 501(r) which applies to tax-exempt hospital organizations and their hospital facilities. IRC Section 501(r) creates the following four (4) new requirements:

• Community health needs assessment; IRC Section 501(r)(3);
• Financial assistance policy and emergency medical care policy; IRC Section 501(r)(4);
• Limitation on charges; IRC Section 501(r)(5); and
• Billing and collections; IRC Section 501(r)(6).

The proposed regulations relate to hospital requirements two, three and four outlined above. Also included in the proposed regulations is a definitions section that defines certain significant terms including gross charges, hospital organization, hospital facility and financial assistance policy. The Affordable Care Act states that a hospital organization will not meet the requirements pertaining to tax-exemption as set forth in IRC Section 501(c)(3) unless it meets the applicable requirements as outlined in IRC Section 501(r).

The community health needs assessment requirement (“CHNA”) is not addressed in the proposed regulations. The IRS intends to provide future guidance with respect to the CHNA and various other aspects of the new IRC Section 501(r) requirements, including penalties for failure to comply. Accordingly, with respect to their CHNA, and any written implementation strategy adopted, hospital organizations may continue to rely on Notice 2011-52 issued in July of 2011, on or before six (6) months after the date further guidance is issued by the IRS.

Proposed Regulations

The proposed regulations define a hospital organization and offer explanations and guidance as to organizations operating more than one hospital facility, foreign hospital facilities and a hospital organization that operates a hospital facility through a disregarded entity (single member limited liability company). The proposed regulations define a hospital organization as: “(i) an organization that operates a facility required by a state to be licensed, registered, or similarly recognized as a hospital; and (ii) 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 IRC Section 501(c)(3).” Hospital organizations operating more than one hospital facility need to meet the requirements of IRC section 501(r) separately with respect to each hospital facility.

The proposed regulations have defined the term “state” for these purposes to include only the fifty states and the District of Columbia. With respect to organizations which operate hospital facilities outside of the United States, a facility located outside of the United States will not be considered a hospital facility for these purposes. However, it is intended by the IRS that a hospital organization that operates a hospital facility through a disregarded entity within the fifty states or District of Columbia comply with IRC Section 501(r).

IRC Section 501(r)(4) Proposed Regulations: Financial Assistance Policy and Emergency Medical Care Policy

The IRC Section 501(r)(4) proposed regulations provide that a tax-exempt hospital organization must have a written financial assistance policy (“FAP”) for its hospital facility(ies) which should include the following:

• Financial assistance eligibility criteria and whether that assistance includes free or discounted care;
• The basis for calculating the amounts charged to patients;
• The method for applying for financial assistance;
• If the hospital facility does not have a separate billing and collections policy, actions for an organization to
  take in the event of nonpayment, including collections actions and reporting to credit agencies; and
• Publicizing the FAP within the community served.

Each hospital facility must post its FAP on its website and make paper copies available upon request without charge, notify visitors via a public display and notify the community through means likely to reach individuals requiring assistance. The paper copies of the FAP must be available in both English and in the primary language of any population which constitutes more than ten percent of the residents of the community served by the hospital facility. Additionally, the hospital facility must ascertain the method or methods best used to inform and notify residents of the community served by the hospital facility who are most likely to utilize the hospital facility’s financial assistance. The FAP must also be adopted by the hospital’s governing body, a committee with authority to approve and adopt on behalf of the governing body or other parties authorized by the governing body to act on its behalf.

IRC Section 501(r)(5) Proposed Regulations: Limitation on Charges

The IRC Section 501(r)(5) proposed regulations provide that a hospital organization 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 (“FAP-eligible individuals”) to not more than the amounts generally billed to individuals who have insurance covering such care (“AGB”). IRC Section 501(r)(5)(B) prohibits the use of gross charges, which per the proposed regulations are defined as “a hospital’s full, established price for medical care that the hospital facility consistently and uniformly charges all patients before applying any contractual allowances, discounts or deductions.” Note, however, that the proposed regulations further clarify that including the gross charges on hospital bills as the starting point to which various contractual allowances, discounts or deductions are applied is permissible as long as the gross charges are not the actual amount a FAP-eligible individual is expected to pay.

Determining AGB

There are two methods outlined in the proposed regulations that hospitals may elect to use to determine AGB. According to the proposed regulations these two methods are mutually exclusive. Once a hospital facility chooses a method it must continue to use that method. In addition, the hospital facility must calculate its AGB percentage(s) at least annually and begin applying its AGB percentage(s) by the 45th day after the end of the twelve month period the hospital facility used in calculating the AGB percentage(s). The proposed regulations also provide guidance on what constitutes a safe harbor for certain charges in excess of AGB.

The proposed regulations provide that the FAP must state which of the permitted methods a hospital facility chooses to calculate their AGB and AGB percentage. The IRS and Treasury recognize that reissuing the FAP annually to include the revised AGB percentage would be burdensome to a hospital facility. As such, the proposed regulations currently permit a hospital facility to widely-publicize its FAP noting that certain information, such as the AGB percentage, may be obtained separately from the FAP. Note, however, that the FAP still needs to include how members of the community can readily obtain this information free of charge.

1. Look-Back Method

The first method is called the Look-Back Method which allows a hospital to elect one of two alternatives to calculate AGB. These alternatives allow a hospital to calculate AGB by either (1) Medicare fee-for-service only or (2) Medicare fee-for-service together with all private health insurers paying claims to the hospital facility.

A hospital determines its AGB by multiplying its gross charges for the care provided by one or more percentages, which the proposed regulations define as AGB percentages. The AGB percentages are calculated by dividing the sum of all claims that have been paid in full to the hospital facility by the sum of the associated gross charges for those claims in the prior twelve month period. Under the proposed regulations a hospital facility may include in “all claims that have been paid in full” both the portions of the claims paid by Medicare or the private insurer and the associated portions of the claims paid by Medicare beneficiaries or insured individuals in the form of co-insurance, co-payments, or deductibles.

Under the look back method a hospital facility may calculate AGB by applying one average percentage of gross charges for all emergency and other medically necessary care provided by the facility. Alternatively, a hospital facility may calculate multiple AGB percentages for separate categories of care, (such as inpatient and outpatient care, or care provided by different departments) or for separate items or services, as long as the hospital facility calculates AGB percentages for all emergency and other medically necessary care provided by the hospital facility.

2. Prospective Medicare Method

The second method is called the Prospective Medicare Method which requires a hospital facility to estimate the amount it would be paid using the same billing and coding process as if the FAP-eligible individual were a Medicare fee-for-service beneficiary for the emergency or other medically necessary care provided. The hospital facility determines the AGB for the care provided at the amount that Medicare and the Medicare beneficiary together would be expected to pay for the care. Under the proposed regulations, a hospital facility may include both the amount anticipated to be paid from Medicare and the associated portions of the claims paid by Medicare beneficiaries in the form of co-insurance, co payments, or deductibles.

Under both the Look-Back Method and the Prospective Medicare Method, the proposed regulations provide that “for purposes of determining AGB, amounts paid under Medicare only include amounts paid under “Medicare fee-for-service,” which is defined as including only Medicare Part A and Part B and excluding Medicare Advantage (or Medicare Part C.”)

IRC Section 501(r)(6) Proposed Regulations: Billing and Collections

Hospital organizations are required under IRC Section 501(r)(6) to engage in reasonable efforts to determine whether an individual is eligible for assistance under its FAP before engaging in extraordinary collection actions (“ECA”). A hospital facility will be considered to engage in ECA against an individual if the hospital facility engages in ECA against any other individual who has accepted or is required to accept responsibility for the first individual’s hospital bills. In addition, a hospital facility will be considered to engage in ECA against an individual if an organization purchases the individual’s debt or a debt collection agency or other party to which the hospital facility has referred the individual’s debt engage in ECA against the individual.

Extraordinary Collection Actions

Under the proposed regulations, ECA include any actions taken by a hospital facility that require a legal or judicial process in an attempt to collect payment from an individual covered under the organization’s FAP. ECA that require legal or judicial process include, but are not limited to:

1. Placing a lien on an individual’s property;
2. Foreclosing on an individual’s real 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. Causing an individual to be subject to a writ of body
   attachment; and
7. Garnishing an individual’s wages.

The proposed regulations also provide guidance on what constitutes reasonable efforts for a hospital facility in complying with this requirement.

Notification Period and Application Period

The proposed regulations provide that a hospital facility must comply with both the notification period and the application period in order to be in compliance with IRC Section 501(r)(6).

1. Notification Period

The notification period is the period during which the hospital facility must notify an individual regarding the FAP. The proposed regulations define this period as “the period begins on the date care is provided to the individual and ends on the 120th day after the hospital facility provides the individual with the first billing statement for care”. Once the hospital facility has satisfied the notification requirements and if the individual does not submit a FAP by the end of the notification period the hospital facility may engage in ECA against the individual.

2. Application Period

The proposed regulations also require compliance with an application period. A hospital facility must still accept and process FAP applications submitted by an individual during the “application period” which ends on the 240th day after the hospital facility provides the individual with the first billing statement for care. When an individual submits a complete FAP application during the application period, the hospital facility will be deemed to have made reasonable efforts to determine if the individual is FAP-eligible only if the hospital facility does the following in a timely manner (1) suspends any ECA against the individual; (2) makes and documents a determination as to whether the individual is FAP-eligible and (3) notifies the individual in writing if they are FAP-eligible and provides them with the hospital facility’s basis for this determination.

The proposed regulations also provide guidance regarding situations relating to (1) incomplete FAP applications during the application period and (2) agreements between the hospital facility and other parties whereby the hospital facility refers or sells an individual’s debt to another party during the application period.

Comment Period and Effective Dates

Comments and requests for a public hearing must be received by the IRS no later than September 24, 2012. Comments specific to the collection of information must be submitted to the IRS no later than August 27, 2012. The proposed regulations under IRC Section 501(r)(4) through 501(r)(6) released on June 22, 2012 apply to taxable years beginning on or after the date these regulations are published as either final or temporary regulations in the Federal Register.

Additionally, the effective date of the IRC Section 501(r) requirements, with the exception of the community health needs assessment, IRC Section 501(r)(3), applies to taxable years beginning after March 23, 2010, the date of the enactment of the Affordable Care Act. Thus tax-exempt hospitals should have already been in compliance with the initial IRS guidance. The community health needs assessment requirements are effective for taxable years beginning after March 23, 2012.

Summary

This article is intended to highlight the general provisions of the proposed regulations. The proposed regulations are ninety four pages in length; thus a complete analysis of the proposed regulations is too comprehensive for this article. Accordingly, each hospital organization should review these proposed regulations themselves in conjunction with their current written policies and business practices in these areas for each of their hospital facilities. Based upon this review, a tax-exempt hospital organization may need to make certain revisions, additions and/or deletions to its current written policies prospectively in order to comply. Lastly, hospital organizations should review their written policies and current business practices again upon the issuance of either temporary or final IRC Section 501(r) regulations and make revisions, if necessary.

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