It is no surprise that non-profit hospitals received special attention as part of “health reform” under the sweeping Patient Protection and Affordable Care Act (“PPACA”) enacted March 23, 2010, since these entities have come under increasing scrutiny by Congress, the Internal Revenue Service and individual states in recent years.1 Under Sec. 9007 of PPACA, a charitable hospital organization “shall not be treated” as an Internal Revenue Code Sec. 501(c)(3) organization unless it meets specific new requirements. These include conducting and implementing ongoing community health needs assessments, maintaining a financial assistance policy which incorporates new measures, implementing limits on certain charges, and meeting new billing and collection requirements. Every hospital facility within a hospital organization must comply with these changes.
The new financial requirements require prompt attention as they are effective as of a hospital’s first tax year after the date of enactment of PPACA. The tax year for many non-profit hospitals begins October 1, which means that, for those facilities, the new policies and procedures must be in place no later than that date. The requirement regarding community health needs assessments is not effective until the first tax year beginning after March 23, 2012, so there is more time to prepare. The specific obligations of the revisions to the Internal Revenue Code Sec. 501(c)(3) include the following:
FINANCIAL ASSISTANCE POLICY
Charitable hospitals must have financial assistance policies in place which include: (1) eligibility criteria and whether the assistance includes free or discounted care, (2) the basis for calculating amounts charged to patients, (3) the method by which a patient can apply for assistance, and (4) in the case of an entity that does not have a separate billing and collections policy, the actions it may take in the event of nonpayment, including collection actions and reporting to credit agencies. In addition, the ways in which the hospital will widely publicize the financial assistance policy within the community must be described. Most charitable hospitals already have financial assistance policies in place and post these on their websites as well as circulating the information in other ways, so some of these requirements may be fairly straightforward. However, hospitals should review and update their policies to ensure they include the explanation of the manner in which patients are charged and in which the hospital may undertake collections actions as well as the other requirements.
EMERGENCY MEDICAL CARE
A non-profit hospital now must also have a written policy which commits it to provide nondiscriminatory care for emergency medical conditions, regardless of whether an individual is eligible for financial assistance under the financial assistance policy. Although an “emergency medical condition” is defined in the same way as under EMTALA (the Emergency Medical Treatment and Active Labor Act), which already applies to hospitals, it is unclear whether and how far “care” for such conditions extends beyond the requirements for stabilization under EMTALA. It seems unnecessary to include in PPACA a provision duplicative of EMTALA, which suggests that the intent was to require non-profit hospitals to provide more care than currently required under EMTALA. This is an area in which clarification is critical as this could have a substantial financial impact on charitable hospitals. Increasing numbers of individuals should be covered under insurance as a result of other provisions of PPACA, which should reduce the financial impact of this provision on tax-exempt hospitals, but during the transition years, substantially more resources could be expended on this care.
LIMITATIONS ON CHARGES
Tax-exempt hospitals also must limit the amounts they charge for “emergency or other medically necessary care” provided to individuals eligible under the financial assistance policy to “not more than the amounts generally billed” to individuals who have insurance coverage for such care. Further, the hospitals may not use “gross charges.”
This provision has a number of troubling aspects. First, no detail is given as to what is considered “other medically necessary care.” This section seems to suggest that non-profit hospitals will be expected to provide “medically necessary care” for uninsured patients eligible for financial assistance beyond that required under EMTALA, but it is not clear how much care and for how long. Again, the financial impact could be dramatic.
With respect to charges, most hospitals presently charge all patients at the same level of gross charges and address differing insurance reimbursement arrangements through write-offs for contractual allowances or insurer allowed amounts. Thus, the amounts generally billed are the same; it is the amount accepted for reimbursement that differs depending on the payor. Congress appears to have struggled with this concept in PPACA since it first limited charitable hospital charges to the “lowest amounts charged” to individuals with insurance and changed the language later in the bill to “amounts generally billed” to such individuals, but this still leaves the water muddy. It is possible that the intent was to limit charitable hospitals to charging no more than the amounts generally accepted for individuals who have insurance coverage for similar care, but this provision needs further clarification.
It is also intriguing that Congress appears to want to prohibit charitable hospitals from billing anyone at gross charges. If this is the case, this could result in the hospitals having two sets of charges – gross charges, which they cannot charge anyone, and something less than gross charges, which will be the amounts they actually charge.
This section will also affect hospitals’ financial assistance policies. Most such policies now calculate discounts based on gross charges. Hospitals will have to adjust these policies to meet the above requirement and will likely adjust downward the amount of discount to reflect the change in the starting point. Charitable hospitals will want to think through carefully the economics of the changes.
BILLING AND COLLECTION REQUIREMENTS
These provisions may be a response to what were perceived as egregious tactics by certain hospitals to collect from uninsured patients. The amendment to Sec. 501(c)(3) now prohibits charitable hospitals from engaging in “extraordinary collection actions” before they have made “reasonable efforts” to determine whether the person is eligible under the new financial assistance policy. It is unclear what will be considered “extraordinary” in terms of collection actions as well as what efforts on the part of a hospital are considered “reasonable” in trying to determine whether a person is eligible for financial assistance.
Further guidance as to all of the above changes, and specifically as to reasonable efforts under the billing and collection requirements, is to be provided in upcoming regulations. Hospital associations and charitable hospital organizations have an opportunity to help shape these regulations by providing comments and presenting issues and concerns that need to be addressed.
COMMUNITY HEALTH NEEDS ASSESSMENT
Effective with its first tax year beginning after March 23, 2012, each tax-exempt hospital must have conducted a community health needs assessment either during that year or during one of the two immediately preceding tax years, and have adopted an implementation strategy to meet the needs identified through that assessment. This means a new community health needs assessment will be required at least every three (3) years. The assessment itself must take into account input from people representing the broad interests of the community the hospital serves, including those people with special knowledge or expertise in public health, and must be made widely available to the public.
Some states already require that charities regularly prepare and submit community benefit plans, and that health care charities include a community needs assessment as part of those plans. For hospitals in these states, this process will not be new, although the cycles in these states may now be shortened substantially and the distribution of the plans may be broader. For hospitals in states without a current requirement for a public community needs assessment, this will be a significant change. These hospitals will need to set up a process to gather the required public input and develop the assessment tool, as well as be prepared for the publication and scrutiny of the plan and its implementation on an ongoing basis.
PENALTIES AND REPORTING
Congress is clearly planning to continue to look hard at charitable hospitals. To add teeth to the community health needs assessment requirement, PPACA changes the Internal Revenue Code to impose a tax penalty of $50,000.00 for any charitable hospital that fails to satisfy the needs assessment requirements for any taxable year. Moreover, the U.S. Department of the Treasury Secretary (or a delegate) must review the community benefit activities of every tax-exempt hospital at least once every three (3) years. Non-profit hospitals also now must include in their annual Form 990 filing (1) a description of how they are addressing the needs identified in each community health needs assessment, (2) a discussion of any needs that are not being addressed and the reasons why, and (3) their audited financial statements.
The Treasury Secretary, in consultation with the Secretary of the U.S. Department of Health and Human Services (HHS), must submit annual reports to various committees of Congress on (1) levels of charity care, bad debt and certain unreimbursed costs of private tax-exempt, taxable and government-owned hospitals, and (2) costs incurred for community benefit activities of tax-exempt hospitals. The Treasury and HHS must also conduct a study on the trends related to these items and submit a report to Congress by March 2015. If Congress is not satisfied by the changes in charity care and community benefit activities of taxexempt hospitals, it will likely push for more regulatory action in the future.
CONCLUSION
This relatively small section of the PPACA packs a punch. Charitable hospitals will need to bring their operations into conformity with these requirements in order to maintain their 501(c)(3) status. They should promptly review their financial assistance, billing and collections policies and operations, as well as their community needs assessment processes, and begin to make or plan for required changes. They will also want to watch for and digest upcoming regulations which will provide more detail. Finally, taxexempt hospitals should also seize the opportunity to try to shape those regulations to the extent possible.
[1] This client update will not discuss any of the specifics regarding this scrutiny, but for a discussion of the most recent state Supreme Court decision about property tax exemption and hospitals, please see the April 2010 Health Care & Non-Profit Update entitled The Provena Case: State and Federal Tax Exemption Implications for Charitable Health Care Providers.