The Patient Protection and Affordable Care Act (P.L. 111-148) as amended by the Health Care and Education Reconciliation Act of 2010 (together, the “Health Reform Law”) establishes additional requirements for hospitals to qualify for tax-exempt status.  In particular, the Health Reform Law enacts new Internal Revenue Code Section 501(r) (hereinafter "Section 501(r)") which supplements the community benefit standard generally applicable to tax-exempt hospitals.  Since at least 1969 the community benefit standard has been the touchstone by which the IRS differentiates between hospitals and other health care organizations that qualify for tax-exempt status versus those that do not so qualify.  New Section 501(r), which generally is effective for years beginning after March 23, 2010, applies to any 501(c)(3) organization: (1) that operates any facility that is, or is required to be, licensed, registered, or similarly recognized as a hospital by a State; and (2) which the Secretary of Treasury determines has the provision of hospital care as its principal function or purpose.  Organizations that operate multiple hospital facilities must demonstrate that each separate hospital facility meets each of the new requirements. Any facility that fails to meet the requirements will not be treated as exempt.  It is unknown precisely what this means for the entire hospital organization when one facility fails the new requirements.

Under the new law, a tax-exempt hospital must take the following additional actions to safeguard its exempt status:

1.  Community Health Needs Assessment.  At least once every three years, the hospital must conduct a community health needs analysis soliciting input from the communities it serves.  Once the hospital has identified community needs, it must adopt an implementation strategy to meet those needs.  This particular requirement is not effective until tax years beginning after March 23, 2012.
 
2.  Financial Assistance Policy Requirement.  Additionally, the hospital must adopt, implement, and make widely available a financial assistance policy.  The policy must specify eligibility criteria, including if the assistance includes free or discounted care, and how the hospital calculates the amounts that are billed to patients.  For a hospital that does not have separate billing and collections policies, the hospital must have a policy that accounts for the actions that the hospital takes in the event of non-payment.   Additionally, the hospital must adopt a policy to provide emergency medical care to all individuals, regardless of their eligibility under the financial assistance policy.  

3.   Restrictions on Patient Charges.  The hospital must limit charges for “emergency or other medically necessary care” to those who qualify under the financial assistance policy to not more than the lowest amounts charged to insured patients.  The hospital may not use “gross charges” when billing individuals who qualify for financial assistance.  The term “gross charges” is not defined by the new law.  Generally speaking, however, gross charges are considered the full amount a hospital charges for services, without taking into account any discounts negotiated with insurance providers.

4.   Limitation on Collections Practices.  Finally, the hospital cannot take “extraordinary” collection actions before making a reasonable effort to determine whether a patient is eligible for assistance under the financial assistance policy. 
 
In summary, the Health Reform Law imposes additional burdens on tax-exempt hospital facilities beyond meeting the traditional community benefit standard.  Many tax-exempt hospitals already may be fulfilling most of these requirements in connection with their annual IRS Form 990 filing obligations, but the new law contains a significant penalty for noncompliance. Specifically, tax-exempt hospitals that fail to comply with the community health needs assessment over a three-year period will be subject to a special tax of $50,000 per year, which tax appears to apply to each separate non-compliant hospital facility (not merely the hospital organization that owns the facility).  Before the full impact of the new law can be understood completely, significant regulatory guidance will be necessary.  Morris, Manning, & Martin will monitor these regulatory developments. For now, tax-exempt hospitals should familiarize themselves with the new law and begin preparing to implement the new requirements of Section 501(r) when their next tax  year begins after March 23, 2010.

If you have any questions about how these new requirements will affect your organization, please contact one of the authors listed on the left.