Don’t Let Your Hospital Lose Its Tax-Exempt Status

By Alan Gracie on December 4, 2012
Back to main Blog
Alan Gracie

Tax-Exempt Hospitals Must Adopt New IRS Requirements

Authors: Alan Gracie, Tim Dalton and Mary Madonia

The IRS recently released proposed regulations that clarify a not-for-profit hospital’s responsibilities under the Affordable Care Act (ACA). Such hospitals must satisfy certain requirements in order to maintain their tax-exempt status. They can rely on the proposed regs until the final regs are issued.

Written financial assistance plan

Under the regs, a tax-exempt hospital should establish a written financial assistance plan (FAP) that describes the eligibility criteria for financial assistance and whether such assistance includes free or discounted care. In addition, the FAP must include the basis for calculating amounts charged to patients and the method for applying for assistance.

In cases where a hospital doesn’t have a separate billing and collections policy, the FAP describes the actions it may take in cases of nonpayment. Finally, it includes measures intended to publicize the FAP within the community that the hospital serves.

Amazingly, the regulations don’t outline any specific substantive requirements for a FAP in regard to eligibility or the amount of assistance. This leads us to conclude that individual hospitals can determine the most effective ways to serve their particular community.

To establish the FAP, it must be adopted by an authorized body (that could be your board of directors or trustees) and then consistently carried out. Organizations that operate multiple hospitals should implement a separate FAP for every organization, even though such policies may contain the same terms.

Regs offer financial assistance to some

The regs prohibit hospitals from charging more for people who are eligible for financial assistance, and for medically necessary care that’s greater than the “amounts generally billed” (AGB) to insured individuals. Moreover, the regs require hospitals to limit the amounts charged for medical care provided to a FAP-eligible patient to less than the gross charges for that care.

The regulations offer two methods for determining AGB:

  1. The look-back method is based on past claims paid to the hospital by either:
    • Medicare fee-for-service only, or
    • Medicare fee-for-service together with all private health insurers paying claims to the hospital.
  1. The “prospective” method requires hospitals to estimate the amount they would be paid by Medicare and a Medicare beneficiary for medical care if the FAP-eligible individual were a Medicare fee-for-service beneficiary.

The regs also provide a safe harbor in instances when a hospital doesn’t know whether a patient is eligible for assistance. If the patient hasn’t applied for such assistance, the hospital can bill the patient at its normal charges, as long as it’s reaching out to determine eligibility. If the patient is eligible, the facility must refund any excess payments that have already been made.

Regs prohibit extraordinary collections

Tax-exempt hospitals are prohibited from engaging in certain extraordinary collections practices (for instance, reporting a debt to a credit agency or garnishing wages) until it makes considerable and reasonable efforts to determine whether the individual is eligible for financial assistance. In order to make this determination, the regulations require charitable hospitals to provide patients with a simple summary of the FAP before the patient is discharged and with the first three bills. In addition, hospitals must give patients up to 120 days following the first bill to submit an application for financial assistance before the facility commences extraordinary collection actions.

Moreover, the regs allow the patient still another 120 days to submit a complete application. Finally, the regulations state that hospitals must refund any excess payments that were made before the patient applied for financial aid and try to reverse any collection actions that have begun if the patient is determined eligible for financial assistance during those 240 days.

If a patient submits an incomplete application for financial assistance, the hospital will need to provide the information necessary in order to complete it.

Providing emergency care

Tax-exempt facilities need to have written policies requiring them to offer emergency medical care without discriminating against any patient who might need financial assistance. (The regulations state that a policy that satisfies the EMTALA requirements is usually sufficient.) In addition, the policy must prohibit debt collection activities in the emergency department or other hospital venues where collection activities might interfere with the patient’s treatment.

But there’s more …

The Affordable Care Act also requires that tax-exempt hospitals conduct community health needs assessments on a regular basis. The new regs note that the IRS is likely to issue proposed regs on those requirements at some point in the future.

For any questions on healthcare, contact us here or give us a call at 716.847.2651.

tax-exempt hospitals

Stay up to date