Internal Revenue Service Releases Revised Schedule H to Monitor and Enforce Compliance with Code Section 501(r)

On February 24, 2011, the Internal Revenue Service released a revised Schedule H (with corresponding instructions) to the Form 990, Return of Organization Exempt From Income Tax, which expands the reporting requirements for tax-exempt hospitals. More specifically, the new Schedule H includes questions designed to monitor and enforce compliance with Internal Revenue Code Section 501(r), as added to the Code by the Patient Protection and Affordable Care Act. Tax-exempt hospitals must familiarize themselves with these enhanced reporting requirements, particularly where the questions suggest how the IRS will interpret and enforce Code Section 501(r) or where a wrong answer otherwise might signal noncompliance.

Under Code Section 501(r), tax-exempt organizations that operate hospital facilities must satisfy four additional requirements (noted below) to maintain their tax-exempt status under Code Section 501(c)(3). Part V.B of the revised Schedule H asks numerous questions about each of these requirements, and organizations that operate multiple hospital facilities must respond to each question for each facility. While this brief update will not attempt to summarize all of the new questions, several points will be helpful to tax-exempt hospitals in establishing and evaluating their compliance efforts.

Community Health Needs Assessment – While this portion of the revised Schedule H, like the performance of the assessment itself, will be optional for the 2010 tax year, its questions provide detail regarding issues that should be covered in the assessment, as well as channels for making the assessment widely available to the public. Hall Render will issue a separate client update regarding this section of the form later this week.
Financial Assistance Policy and Emergency Care Policy – The revised Schedule H asks specific questions to ensure that each hospital facility has implemented and properly publicized these policies, including all required elements. Failure to answer these questions properly could signal the IRS that the hospital is out of compliance with Code Section 501(r) and thus jeopardize the hospital’s tax-exempt status.
Limitation on Charges – Under Code Section 501(r), tax-exempt hospitals may not bill patients who are eligible for financial assistance more than the amount “generally billed” to insured patients. The revised Schedule H suggests that the IRS will interpret this position as only allowing hospitals to bill such patients either at the lowest negotiated commercial insurance rate, the average of the three lowest negotiated commercial insurance rates, or the Medicare rate. Additionally, the revised Schedule H requires that each facility state whether it has charged any of its patients an amount equal to gross charges. It remains to be seen whether this question signals an IRS interpretation that Code Section 501(r) prohibits hospitals from billing any patient an amount equal to gross charges (as opposed to the reading advocated by the Joint Committee on Taxation and some commentators, who have suggested that billing an amount equal to gross charges should be prohibited only for patients eligible for financial assistance and should be permissible for other uninsured patients).
Billing and Collection – The revised Schedule H implies that the IRS may take the position that reporting an individual to a consumer credit agency is an “extraordinary collection action” and therefore may not be initiated before making reasonable efforts to determine whether the individual is eligible for financial assistance. The revised Schedule H lists various actions hospitals may take to make this determination, although it is not clear whether a hospital must take all, some, or even just one of these actions for its efforts to be considered reasonable.

In addition to the above-listed changes to Part V of Schedule H, the IRS has revised Line 20 of Part IV of the Core Form to require any organization that operates one or more hospitals to attach its audited financial statements to the return.

In terms of implementation, all Code Section 501(c)(3) organizations that operate one or more hospital facilities must file the revised Schedule H with their returns for the 2010 tax year. As noted above, the questions relating to the community health needs assessment are optional for the 2010 tax year because the Code Section 501(r) requirements for such assessments do not take effect until the 2012 tax year. Additionally, because remaining provisions of Code Section 501(r) did not take effect until March 23, 2010, completing the remainder of Part V.B and filing audited financial statements are likewise optional for organizations whose 2010 tax year began on or before that date (such as calendar year organizations). The actual timing for filing the revised Schedule H will be further delayed due to the automatic three-month extension the IRS has granted for all tax-exempt hospitals to file their Forms 990, as detailed in a separate Hall Render bulletin circulated to clients last week.

In issuing the revised Schedule H, the IRS remarked that it “will continue to work closely with the tax-exempt healthcare sector as we develop appropriate definitions, reporting requirements and guidance necessary to refine the Form 990 and Schedule H for future years and fully implement” the Patient Protection and Affordable Care Act. Part of this effort will be the issuance of regulations, as required by the Act itself. In the meantime, tax-exempt hospitals should ensure that their appropriate people have reviewed the revised Schedule H and are aware of questions that must be answered in a specific manner to satisfy Code Section 501(r). Hospitals also should use the revised Schedule H to develop policies and procedures that ensure compliance.

Should you have questions regarding the revised Schedule H, its instructions, or Section 501(r), please contact