New Internal Revenue Service (IRS) regulations (Final Regulations) force charitable hospitals1 to publicize information about their financial assistance policies and limit their collection activities. Section 9007 of the Patient Protection and Affordable Care Act (PPACA)2 added four new requirements for a charitable hospital to maintain its federal income tax exemption under Section 501(c)(3) of the Internal Revenue Code:
1. Community health needs assessment;
2. Financial assistance policy;
3. Limitations on charges; and
4. No extraordinary collection actions before assessing eligibility for assistance.
The Final Regulations implementing these four new requirements of PPACA were published on December 31, 2014, and apply to taxable years beginning after December 29, 2015.3 Section 9007 of PPACA and the Final Regulations respond to complaints that charitable hospitals provided no greater charitable care than for-profit hospitals and used over-aggressive collection tactics against uninsured patients.4
Community Health Needs Assessment
Section 9007 of PPACA and the Final Regulations require a charitable hospital to conduct a community health needs assessment (CHNA) at least once every three years.5 The statutory requirement for CHNAs applies to taxable years beginning after March 23, 2012. In addition, a charitable hospital must report on Schedule H of IRS Form 990 information on the activities and policies of, and community benefit provided by, its hospital facilities and other non-hospital healthcare facilities that it operated during the tax year.6 Hospitals go to great lengths to prepare the CHNA and provide the community benefit data required in Schedule H of Form 990 to justify their tax exemptions.
The remaining three requirements in the IRS regulations focus on affordable care at an individual level.
Financial Assistance Policy
A charitable hospital must establish and widely publicize its financial assistance policy, which must apply to all emergency care and other medically necessary care provided by the hospital facility.7 The “widely publicize” requirement includes dissemination on a Web site, available paper copies, notices to the community most likely to require financial assistance and notices to patients who receive care at the hospital. The hospital must translate the financial assistance policy into each non-English language spoken by each language group of the lesser of 1,000 individuals or five percent of the community served by the hospital.
The financial assistance policy must include (a) the eligibility criteria and whether such assistance includes free or discounted care, (b) the basis for calculating charges, (c) the method of applying for financial assistance, and (d) the actions that may be taken in the event of non-payment. The Final Regulations expressly state that a hospital facility may grant financial assistance notwithstanding an applicant’s failure to provide information required in the financial assistance policy.8
The hospital must also establish (but is not required to widely publicize) its emergency medical care policy to comply with the regulations implementing the Emergency Medical Treatment and Labor Act (EMTALA).9 The Final Regulations on emergency medical care policy apply only to debt collection activities in the emergency department that could discourage individuals from seeking emergency care, or interfere with the provision of emergency care, such as demanding emergency department patients pay before receiving treatment for emergency medical conditions.10 The Final Regulations on financial assistance policies extend beyond emergency care under EMTALA to include “other medically necessary care provided by the hospital facility.”11 The Final Regulations require both the financial assistance policy and the emergency medical care policy to be adopted by an authorized body of the hospital facility (that is the board of directors, board of trustees or equivalent body).12
Limitations on Charges
A charitable hospital must limit the amount of charges for care provided to any individual who is eligible for assistance under its financial assistance policy to not more than the amounts generally billed to individuals who have insurance covering such care.13 In other words, charitable hospitals can no longer charge uninsured patients more than insured patients. The term “amounts generally billed” (AGB) means the amounts determined under one of two methods: (1) a look-back method using 12-month data on charges allowed by health insurers, or (2) a prospective method using the billing and coding process as if the individual were a Medicare or Medicaid fee-for-service beneficiary.
No Extraordinary Collection Actions
A charitable hospital may not engage in extraordinary collection actions against an individual to obtain payment for care before the hospital has made reasonable efforts to determine whether the individual is eligible for assistance under the hospital’s financial assistance policy.14 The term “extraordinary collection actions” includes: (i) selling the individual’s debt to another party; (ii) reporting adverse information to consumer credit reporting agencies or credit bureaus; (iii) deferring or denying, or requiring a payment before providing, medically necessary care because of any individual’s nonpayment of one or more bills for previously provided care covered under the hospital’s financial assistance policy; (iv) actions that require a legal or judicial process including liens, foreclosure of real property, attaching bank accounts or other personal property, commencing civil actions against an individual, causing an individual’s arrest or writ of body attachment and garnishing an individual’s wages.15
The Final Regulations provide detailed guidance for defining “reasonable efforts” to determine if the individual is eligible for financial assistance. In general, a charitable hospital may take no extraordinary collection actions against an individual whose eligibility for financial assistance has not been determined before 120 days after the first post-discharge bill.16 An individual may submit a financial assistance policy application that the charitable hospital must accept and process up to 240 days after the first post-discharge bill, or longer if the charitable hospital allows a longer period.17
The statutory requirements of Section 9007 of PPACA (except for the CHNA) apply to taxable years beginning after March 23, 2010; as noted above, the statutory requirement for CHNAs applies to taxable years beginning after March 23, 2012. The Final Regulations apply to taxable years beginning after December 29, 2015 to give all hospital facilities roughly a year to come into compliance with the Final Regulations.18 For taxable years beginning on or before December 29, 2015, hospital facilities may rely on a reasonable, good faith interpretation of the statute, the proposed regulations19 or the Final Regulations.
Medicaid Expansion and the Coverage Gap
PPACA expanded Medicaid eligibility in all states to nearly all low-income individuals with incomes at or below 138 percent of federal poverty guidelines. PPACA provides federal funding for 100 percent of the Medicaid expansion for the first three years and declining to a 90 percent federal share by the year 2020. The United States Supreme Court ruled on June 28, 2012 that the statutory provision giving the Secretary of the Department of Health and Human Services (HHS) the authority to penalize states that chose not to participate in PPACA’s expansion of the Medicaid program exceeded Congress’s power under the Spending Clause.20 This ruling made Medicaid expansion optional for the states.
As of March 6, 2015, 22 states have not expanded their Medicaid programs as contemplated by PPACA.21 Medicaid eligibility in states not expanding is limited for parents to 50 percent of federal poverty guidelines, and childless adults are ineligible. The result is a coverage gap in states not expanding Medicaid, which affects individuals who are not eligible for Medicaid (parents earning more than 50 percent of federal poverty guidelines plus childless adults) and who do not earn more than 100 percent of federal poverty guidelines to qualify for government financial aid to buy subsidized private health insurance on the PPACA exchange. Nearly four million individuals fall into the coverage gap, with more than half of those individuals concentrated in four States: Florida, Georgia, North Carolina and Texas.22 Even with the additional insurance coverage provided by PPACA, uninsured and under-insured individuals still need the financial assistance provided by charitable hospitals, particularly those individuals in the Medicaid coverage gap.
Free and Discounted Hospital Care
While the Final Regulations require a plain language summary of the hospital’s financial assistance policy which is clean, concise, and easy to understand, many of the financial assistance policies published to date need further interpretation and explanation. For example, Emory Healthcare in Atlanta, Georgia, offers a generous Financial Assistance Policy for all uninsured and under-insured patients.23 Patients with family income at or below 200 percent of the federal poverty level will qualify for a 100 percent charity adjustment (i.e., free care). Patients with family income at 201 percent to 400 percent of the federal poverty level will qualify for a 50 percent charity adjustment (discount).
But what is the federal poverty level? HHS updates the federal poverty guidelines annually to account for last calendar year’s increase in prices as measured by the Consumer Price Index. HHS publishes main poverty guidelines for the 48 contiguous states and the District of Columbia, and separate poverty guidelines for Alaska and Hawaii. The guidelines vary depending on the number of persons in the family/household. For the year 2015, the main guideline for a family/household of four persons is annual income of $24,250.24 Under Emory Healthcare’s Financial Assistance Policy, a family of four persons will receive free emergency and other medically necessary care in the hospital if annual income does not exceed 200 percent of the federal poverty guideline, which means 200 percent x $24,250 or $48,500. In other words, Emory Healthcare offers free hospital care for families of four making up to $48,500 per year.
Many other tax-exempt hospitals offer free hospital care to individuals with family/household incomes up to 200 percent of the federal poverty guidelines, including Baycare Health System based in Tampa, Florida,25 Texas Health Resources based in Dallas, Texas,26 and Carolinas Healthcare System based in Charlotte, North Carolina.27 The public accounting firm Ernst & Young analyzed information about free care on Schedule H of IRS Form 990 for more than 900 hospitals around the nation and found 100 percent of tax-exempt hospitals provided free care for those below 100 percent of the federal poverty guidelines, while 91 percent of tax-exempt hospitals provided free or discounted care for those below 200 percent of the federal poverty guidelines.28
Hospitals in states which did expand Medicaid are benefiting from larger reductions in uncompensated care than hospitals in states which did not expand Medicaid.29 The reductions in uncompensated care may allow charitable hospitals to expand their community benefits to individuals earning higher, even middle class, incomes.30 For example, Kaiser Permanente is offering free hospital care in California (which has expanded Medicaid) for individuals with incomes up to 350 percent of the federal poverty guidelines, which converts to annual income of $84,875 for a family of four in 2015.31
By 2016, each charitable hospital must widely publicize its financial assistance policy, including the eligibility criteria for free or discounted care. The financial assistance policy must apply to all emergency care and other medically necessary care provided by the hospital facility. A charitable hospital must limit the amount of charges to amounts generally billed to other insured individuals. A charitable hospital may not engage in extraordinary collection actions before it determines whether the individual is eligible for financial assistance. Uninsured individuals in the Medicaid coverage gap need the financial assistance provided by charitable hospitals. Hospitals in states which did expand Medicaid may offer more generous financial assistance as uncompensated care declines. Hospitals should begin reviewing and updating their policies and procedures so that they are in compliance with these changes by their effective date.
Scott C. Withrow is a founding partner of Withrow, McQuade & Olsen, LLP, Atlanta, Georgia. He has practiced corporate and healthcare law for 31 years. He earned his undergraduate degree in accounting from the University of Virginia’s McIntire School of Commerce in 1979 and his law degree from Vanderbilt University in 1984. He may be reached at email@example.com.
|1||Hospitals which are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code are commonly referred to as “charitable hospitals.”|
|2||Pub. Law No. 111-148.|
|3||T.D. 9708; 79 Fed. Reg. 78954 (Dec. 31, 2014).|
|4||United States Gov’t Accountability Off’c, NonProfit, For-Profit, and Government Hospitals: Uncompensated Care and Other Community Benefits, Statement of David M. Walker, May 26, 2005, available at http://www.gao.gov/new.items/d05743t.pdf (last viewed March 24, 2015).|
|5||26 C.F.R. § 1.501(r)-3.|
|6||http://www.irs.gov/pub/irs-pdf/i990sh.pdf (last viewed Feb. 16, 2015).|
|7||26 C.F.R. § 1.501(r)-4.|
|8||26 C.F.R. § 1.501(r)-4(b)(3)(i).|
|9||26 C.F.R. § 1.501(r)-4(c); 42 C.F.R § 489.24.|
|10||26 C.F.R. § 1.501(r)-4(c)(2).|
|11||26 C.F.R. § 1.501(r)-4(b)(1)(i).|
|12||26 C.F.R. § 1.501(r)-4(d)(1).|
|13||26 C.F.R. § 1.501(r)-5.|
|14||26 C.F.R. § 1.501(r)-6.|
|15||26 C.F.R. § 1.501(r)-6(b)(1).|
|16||26 C.F.R. § 1.501(r)-6(c)(3)(i).|
|17||26 C.F.R. § 1.501(r)-6(c)(4)(iii)(A).|
|18||26 C.F.R. § 1.501(r)-7.|
|19||77 Fed. Reg. 38148 (June 26, 2012); 78 Fed. Reg. 20533 (Apr. 5, 2013).|
|20||Nat’l Fed’n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566, 183 L. Ed. 2d 450 (2012).|
|21||Kaiser Family Foundation, “The Coverage Gap: Uninsured Poor Adults in States that Do Not Expand Medicaid – An Update,” November 2014 http://kff.org/health-reform/issue-brief/the-coverage-gap-uninsured-poor-adults-in-states-that-do-not-expand-medicaid-an-update, revised March 6, 2015 at http://kff.org/interactive/uninsured-gap/ (last viewed Mar. 24, 2015).|
|22||Id., at p. 2.|
|23||http://www.emoryhealthcare.org/patient-guide/billing/charity-care-policy.html (last viewed Feb. 18, 2015).|
|24||80 Fed. Reg. 3236, 3237 (Jan. 22, 2015); see also http://aspe.hhs.gov/poverty/15poverty.cfm (last viewed Feb. 18, 2015).|
|25||http://www.baycare.org/workfiles/baycarewebfiles/1401916-final.pdf (last viewed Feb. 18, 2015).|
|26||https://www.texashealth.org/Documents/System/Business_Office/Charity_Care_Program_05-24-2013_English.pdf (last viewed Feb. 18, 2015).|
|27||http://www.carolinashealthcare.org/chs-financial-assistance (last viewed Feb. 18, 2015).|
|28||Ernst & Young Schedule H Benchmark Report for the American Hospital Association Tax Years 2009 & 2010, http://www.aha.org/content/12/09-sche-h-benchmark.pdf (last viewed Feb. 18, 2015).|
|29||http://aspe.hhs.gov/health/reports/2014/UncompensatedCare/ib_UncompensatedCare.pdf (last viewed Feb. 18, 2015).|
|30||See Center for Health Care Strategies, Inc., “The Future of U.S. Charity Care Programs: Implications of Health Reform,” August 2010, http://www.academyhealth.org/files/publications/FutureofCharityCarePrograms.pdf (last viewed Feb. 18, 2015).|
|31||http://share.kaiserpermanente.org/article/subsidized-care-and-coverage-medical-financial-assistance-program (last viewed Feb. 18, 2015); http://share.kaiserpermanente.org/wp-content/uploads/2013/10/NCAL-Medical-Financial-Assistance-Policy-Final-9_1_14.pdf (last viewed Feb. 18,. 2015); http://share.kaiserpermanente.org/wp-content/uploads/2013/12/scal_MFA-Policy-10-31-14.pdf (last viewed Feb. 18, 2015).|