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Implementing Health Reform: Standards For Tax-Exempt Hospitals



May 29th, 2010
by Timothy Jost

Editor’s Note: Earlier posts by Timothy Jost provide analyses of regulations implementing provisions of the new health reform legislation governing the small employer tax creditthe Web portal, reinsurance for early retirees, and young adult coverage

Section 9007 of the Patient Protection and Affordable Care Act , creating a new 504(r) of the Internal Revenue Code,  “Additional Requirements for Charitable Hospitals,” crowns a long-standing campaign by Senator Charles Grassley to increase the accountability and “charitability” of tax exempt hospitals.  Indeed, Republican Grassley proudly claims credit for the provision on his website, in spite of the fact that Republican senators have in general had little good to say about the legislation. Senator Grassley and others have long questioned whether the benefits that exempt hospitals provide to their communities and to lower-income Americans justify the billions of dollars that they are afforded each year in tax subsidies

Section 9007 requires tax exempt “hospital organizations” to

  • conduct a community health needs assessment at least once every three years and implement a strategy to meet the needs identified through the assessment;
  • have in place and widely publicize a financial assistance policy for making available free or reduced cost care to eligible persons, which must include eligibility criteria and procedures for applying for and calculating eligibility for assistance.  An exempt hospital must also provide emergency care without discrimination regardless of financial eligibility;
  • limit the amount that those who are eligible for financial assistance are charged for emergency or medically necessary care to the rates “generally billed to individuals who have insurance”; and
  • not engage in “extraordinary collection actions” before determining financial assistance eligibility.

These requirements apply to multi-facility hospital organizations on a facility-by-facility basis. The IRS is required to review the community needs activities of exempt hospitals every three years.  A $50,000 excise tax can be imposed on any hospital that fails to meet the requirements of the statute.  The provisions are effective for taxable years beginning after the implementation of the statute, except for the community needs assessment provisions, which apply for tax years beginning after enactment.

What The IRS Is Thinking

On May 27, the IRS published notice 2010-39 requesting comments regarding the implementation of this provision.  While the notice is very brief, and its purpose is simply to request comments, it does indicate the thinking of the IRS on a number of important issues.  Specifically the IRS seems to adopt a number of comments on the provision from the Joint Committee on Taxation Technical Explanation of March 21, 2010.

Among the Technical Explanation comments incorporated into the notice are the following:

  • The community health needs assessment “may be based on current information collected by a public health agency or non-profit organizations and may be conducted together with one or more organizations, including related organizations.”
  • The limits imposed on “amounts billed to those who qualify for financial assistance may be based on either the best, or an average of the three best, negotiated commercial rates, or Medicare rates.”
  •  “Extraordinary collections include lawsuits, liens on residences, arrests, body attachments, or other similar collection processes.”
  • “Reasonable efforts” to determine eligibility “include notification by the hospital of its financial assistance policy upon admission and in written and oral communications with the patient regarding the patient’s bill, including invoices and telephone calls, before collection action or reporting to credit agencies is initiated.”

Comments are requested by July 22, 2010.

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1 Response to “Implementing Health Reform: Standards For Tax-Exempt Hospitals”

  1. Jeff Goldsmith Says:

    Just like the failure to substantively tighten the prohibitions against physician conflict of interest, Grassley’s “tightening” of guidelines on non-profit hospitals was a cop out. I realize the “big tent” approach to the big interest groups was probably necessary tactically to get health reform done. But Grassley’s approach in PPACA does nothing to wring greater charitable effort out of many “non-profits” who generate far more profit than they create in community benefit. There are lots of suburban and Gold Coast non-profit hospitals and systems that skated away clean from these provisions. . .

    There should be an explicit numerical relationship between the value of the tax exemption and quantifiable community benefit. And though the uninsured will continue to be with (some of us) in large numbers, and Medicaid’s scandalously inadequate payment rates will continue to create torque on some hospitals’ financial positions, health reform will absolutely reduce the amount of uncompensated care hospitals provide, and should, therefore, have proportionately reduced the tax subsidy non-profit hospitals are entitled to. This is certainly grist for a future budget reconciliation initiative, when we seriously address the fact that we cannot afford the open ended entitlements we’re presently funding.

    I still think Uwe Reinhardt’s idea of a few years ago had merit: eliminate the non-profit status of hospitals altogether, but permit hospitals of all stripes and ownerships to credit back against their tax liability the value of the community benefits they provide. An idea whose time is coming, perhaps.

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