Louis E. Michelson, A Professional Corporation

The American Bar Association Section of Taxation and Health Law Section submitted comments regarding the application of new requirements imposed on tax-exempt hospitals by section 501(r), /2/ which was added to the Code by section 9007(a) of the Patient Protection and Affordable Care Act.  The following is the Executive Summary (without footnotes) from the January 20, 2011 comment letter.

EXECUTIVE SUMMARY

The Internal Revenue Service (the “Service”) issued Notice 2010-39.  The Notice solicits comments regarding the application of new requirements imposed on tax-exempt hospitals by section 501(r),  which was added to the Code by section 9007(a) of the Patient Protection and Affordable Care Act (the “PPACA”).  Section 501(r) includes four new requirements that hospital organizations must meet to qualify as tax-exempt organizations described in section 501(c)(3). The PPACA also added new disclosure requirements relating to section 501(r).

These Comments include the following recommendations regarding guidance issued under section 501(r):

1. With respect to the requirement that hospital organizations conduct a community health needs assessment (“CHNA”), we recommend that hospital organizations be allowed to build upon the many existing CHNA programs at the state and local level and that the Service consider identifying specific state CHNA provisions as safe harbors for complying with the CHNA requirement.

2. With respect to the requirement that hospital organizations make reasonable efforts to determine whether an individual is eligible for financial assistance before engaging in extraordinary collection actions, we recommend that:

(a) a hospital organization be deemed to have made reasonable efforts if it has either (i) obtained a written acknowledgment that the individual does not want to be considered for financial assistance or (ii) sent to the individual at least three notices stating that it has a financial assistance policy and providing information on how to apply for assistance; and

(b) the term “extraordinary collection actions” be defined (i) to exclude making a report to a credit rating agency or engaging a collection agent and (ii) to require that the action involve a judicial or administrative procedure under state law that would affect the individual or the property of the individual.

3. With respect to the effect of section 501(r) on the section 501(c)(3) status of a hospital organization, we recommend that:

(a) a good faith interpretation and compliance period be provided to organizations subject to the section 501(r) requirements, until final guidance is issued by the Service under section 501(r);

(b) a facts and circumstances test, similar to the one used under section 4958 to determine whether an excess benefit transaction should be treated as private inurement warranting revocation of section 501(c)(3) status, be used to determine whether a failure to comply with section 501(r) warrants revocation of section 501(c)(3) status, taking into account substantial compliance with section 501(r) and the organization’s other exempt activities;

(c) if a hospital organization fails the facts and circumstances test and is not in substantial compliance with section 501(r), the hospital organization be reclassified as an organization exempt under section 501(c)(4); and

(d) existing law allowing a donor to rely on the Service’s published listing of tax-exempt organizations to determine the deductibility of contributions apply as well to any hospital organization that loses its section 501(c)(3) status under section 501(r).

4. With respect to the application of section 501(r) to hospital organizations that operate multiple hospital facilities, we recommend that:

(a) the tests recommended above also be applied in determining the tax-exempt status of separate hospital facilities;

(b) if and to the extent failure to comply with section 501(r) results in section 501(c)(4) status for one or more facilities but not the hospital organization as a whole, an approach similar to that in section 150(b)(3) be applied to address the treatment of tax-exempt bonds; and

(c) existing Regulations on changes of use be applied and the “safe harbor” protection of section 141 be expanded to include the failure to satisfy 501(r) and specific authorization be provided for rulings under Revenue Procedures 2010-1 and 1993-17 to address changes of use.

5. With respect to the requirement that hospital organizations limit amounts charged to individuals eligible for financial assistance “to not more than the amounts generally billed” to individuals with insurance coverage, we recommend that:

(a) hospitals be given flexibility in determining the “amounts generally billed,” although using the Medicare rate is the simplest alternative when a Medicare rate is available;

(b) the Medicare rate be the actual Medicare rate used by the hospital, as adjusted for regional differences;

(c) for services that are not covered by Medicare, hospitals have the option of using either the Medicare rate for the nearest equivalent service or a discount that is determined by comparing the aggregate amount paid by Medicare for services covered by Medicare to the hospital’s chargemaster rates for these same services;

(d) a hospital basing the amounts billed to financial assistance recipients on its “best” rates, have several options for determining this amount, including (i) the actual lowest rate, regardless of insurer, if the hospital is able to make this determination or (ii) a blended rate of the actual rates offered by the insurer who on average pays the lowest rates;

(e) a hospital basing the amounts billed to financial assistance recipients on an average of its three “best” rates, be permitted to select the three best rates using one of the options for selecting the lowest rate and have the option to use a simple or a weighted average or to base the amounts on the rates billed to the insurers who cover a majority of the hospital’s patient base;

(f) the amounts generally billed provision apply to any person who is eligible for financial assistance as well as any further discounts provided under the hospital’s financial assistance policy; and

(g) a hospital organization has the option of excluding outpatient services when determining amounts generally billed.

6. With respect to the requirement that a hospital organization make its CHNA widely available to the public and the requirement that a hospital organization widely publicize its financial assistance policy, we recommend that the Service provide:

(a) a safe harbor stating that a hospital organization makes its CHNA widely available to the public if it makes the CHNA available for public inspection without charge at its principal, regional, and district offices during regular business hours and either (i) provides a physical copy upon request or (ii) makes the CHNA widely available through an Internet posting;

(b) a safe harbor stating that a hospital organizations has widely publicized its written financial assistance policy within the community it serves if it uses the procedures mentioned in the foregoing paragraph and makes the policy available in a manner consistent with examples included in the instructions to Form 990, Return of Organization Exempt from Income Tax, Schedule H, Hospitals; and

(c) if a hospital organization does not satisfy these safe harbors, its compliance with the widely available to the public requirement would be evaluated based on all of the facts and circumstances.

7. With respect to the requirement that a hospital organization have a written policy requiring it to provide emergency medical care without discrimination and without regard to eligibility for financial assistance, we recommend that the organization be considered to satisfy this requirement if its written policy states that it will follow the procedures set forth in section 1867 of the Social Security Act, without discrimination and regardless of an individual’s ability to pay for such care.

8. With respect to the new statutory reporting and disclosure requirements imposed on hospital organizations, we recommend that:

(a) the term “hospital” be defined for section 501(r) reporting purposes in the same manner that “hospital” is currently defined in the instructions for Form 990, Schedule H; and

(b) any new reporting and disclosure requirements relating to section 501(r) be contained in a separate part of Schedule H and not be effective until tax years beginning after March 23, 2012.