Summary
Tax-exempt Hospital Organizations will have to take extensive action in the days ahead to ensure compliance with Code Section 501(r). In addition to completing their first community health needs assessments (“CHNAs”) by the end of their current tax years, these Hospital Organizations now face detailed and complicated Proposed Regulations that will govern the other aspects of Code Section 501(r), including financial assistance policies, limitations on charges, and billing and collection practices. While these Proposed Regulations have not yet been finalized, Hospital Organizations should start their compliance efforts now to ensure that they are prepared when the regulations do take effect. Proper compliance is a matter of great importance because Code Section 501(r) implies that the penalty for noncompliance will be revocation of the Hospital Organization’s Code Section 501(c)(3) status.
A Recap of the Proposed Regulations
As a refresher, the Affordable Care Act added Section 501(r) to the Internal Revenue Code. Under this new Code Section, every Hospital Organization (meaning any Code Section 501(c)(3) organization that operates one or more Hospital Facilities) must satisfy four new requirements to retain its tax-exempt status. Most of these statutory requirements took effect by January 1, 2011, but last summer, the IRS quietly “upped the ante” by issuing Proposed Regulations to govern the specific ways Hospital Organizations must demonstrate their compliance. In fact, as described in a series of articles published by Hall Render last summer, the Proposed Regulations addressed three of the four major subject areas of Code Section 501(r). As a very brief overview, the Proposed Regulations imposed the following new requirements:
- The Proposed Regulations include a lengthy list of topics that must be addressed in each Hospital Facility’s financial assistance policy and specify what a Hospital Organization must do to make that policy “widely available.”
- Regarding the new limitations on charges, the Proposed Regulations mandate that a Hospital Organization follow one of two specific (and detailed) methods for calculating the amounts generally billed to individuals who have insurance covering such care (and not bill any financial assistance eligible person more than the calculated amount).
- The Proposed Regulations address billing and collection procedures by defining what constitutes an “extraordinary collection action” and defining a rigid timetable regarding when a Hospital Organization may (or must) take various actions.
As noted above, the Proposed Regulations are extremely detailed and, in many places, quite complicated. Hospital Organizations will face major challenges in reviewing the written policies and actual procedures of each of their Hospital Facilities to ensure that each meets all the regulatory requirements. The risk is great because Code Section 501(r) implies that the penalty for noncompliance is revocation of Code Section 501(c)(3) status with respect to any Hospital Facility that fails to satisfy all of the new requirements, and thus far, the IRS has not yet announced or even proposed any alternative punishments for noncompliance.
Notice and Comment – And a Hearing
Significantly, the Proposed Regulations do not yet have the force of law. Under the notice and comment process of rulemaking, the IRS began by publishing the Proposed Regulations and allowing individuals and organizations to submit written comments in response. By the September 24, 2012 comment deadline, the IRS had received approximately 200 written comments. In informal settings after September, representatives of the IRS observed that the comments, which came from a broad range of perspectives, addressed a wide variety of issues – some criticizing the Proposed Regulations as too inflexible, too detailed or too complicated, and others lamenting that the Proposed Regulations did not go further in mandating particular conduct by Hospital Organizations.
After the formal comment period, the IRS took the additional step of holding a public hearing on the Proposed Regulations on December 5, 2012. Eleven commenters spoke at the hearing, and their remarks tracked what the IRS had reported about the prior written comments. Individuals speaking on behalf of hospitals and health systems stressed the need for flexibility over the “one size fits all” approach of the Proposed Regulations. They also suggested remedies for various specific issues in the Proposed Regulations and urged the IRS to delay full implementation until the IRS had resolved such compliance issues as the transition timetable, the effect of a violation and the opportunity to cure any misstep. In contrast, public health advocates noted areas where the Proposed Regulations could be expanded to serve other needs of their constituents, such as allowing more time to request financial assistance and expanding the requirement for providing information in foreign language.
Practical Takeaways – What to Do Now
In light of this history, Hospital Organizations face the challenging question of when to come into full compliance with the new requirements. At the outset, it bears emphasis that each Hospital Organization should take this opportunity to reaffirm that it currently satisfies all of the express requirements of Code Section 501(r), as presented by the Code itself. These requirements were adopted by the Affordable Care Act and have been in effect for Hospital Organizations since 2010 (or 2011, at latest). It also is worth emphasizing that the Proposed Regulations do not address and have no effect upon the CHNA requirements, and Hospital Organizations still must complete their first CHNA and adopt a corresponding implementation strategy by the end of the current tax year.
As for the Proposed Regulations, they do not yet have the force of law, and the IRS has not yet announced any timeline for issuing final regulations. Hospital Organizations can reasonably anticipate that, before the Proposed Regulations are finalized, the IRS will complete the process of proposing regulations to address the remaining issues of Code Section 501(r), including the CHNA requirements and consequences for failure to comply fully with the regulatory requirements. Hospital Organizations also can expect a brief period of time after the Proposed Regulations are finalized to allow them to come into compliance, although it is unlikely that such transition relief will be as long as Hospital Organizations might desire.
As a matter of best practices, Hospital Organizations would be prudent to begin their compliance efforts now. Hospital Organizations should reasonably assume that the final regulations will generally track the overall framework of the Proposed Regulations. Accordingly, Hospital Organizations should ensure that their Boards and leadership are aware of the new requirements and should immediately begin the process of reviewing their existing financial assistance policies, charge methodologies, and billing and collection policies and procedures. Involving counsel in this process will help ensure that all the regulatory issues are addressed. Once the policies and procedures have been reviewed and revised as necessary, however, a Hospital Organization would be wise to delay actual approval and implementation until the IRS has issued final regulations. This will enable the organization to make any last needed adjustments before final adoption and thus avoid having to engage in the approval and implementation process twice. Under this approach, the Hospital Organization can use the transition relief period to adopt the new policies and procedures, educate its personnel and accomplish the implementation in a manner far less hectic than what would be required if the Hospital Organization waited for the final regulations before beginning the review process.
With appropriate action now and continued attention to announcements and other regulations, both proposed and final, Hospital Organizations can ensure compliance with Code Section 501(r) and avoid inadvertently jeopardizing their Code Section 501(c)(3) status.
For additional information, please contact Jeffrey L. Carmichael at (317) 977-1443 or jcarmichael@hallrender.com or your regular Hall Render attorney.
