Health Care and Life Sciences > Health Reform Resource Center > IRS Requests Comments on New Requirements for Tax-Exempt Hospitals Under Section 501(r) of the Internal Revenue Code
16 Jun '10

On Thursday, May 27, 2010, the Internal Revenue Service (IRS) and the Treasury Department issued Notice 2010-39 soliciting written comments on the application of new Section 501(r) of the Internal Revenue Code to tax-exempt hospitals.  Under Section 501(r), “hospital organizations” must satisfy four new requirements in order to continue to qualify as tax-exempt organizations described in Section 501(c)(3).  Notice 2010-39 generally requests comments regarding whether and what guidance is needed with respect to the new requirements and specifically requests comments on three specific issues.  Although these new requirements may initially appear not to have a significant impact on the day-to-day operations of many hospitals, they may actually prove quite problematic unless the IRS provides clear guidance on a variety of issues.  Comments should be submitted to the IRS by July 22, 2010.

Section 501(r) was added to the Internal Revenue Code by the Patient Protection and Affordable Care Act and applies to any organization that is exempt from federal income tax under Section 501(c)(3) and is defined as a “hospital organization” in Section 501(r)(2).  A hospital organization includes (i) an organization that operates a facility recognized or subject to regulation as a hospital under state law and (ii) any other organization that the Secretary of the Treasury determines has the provision of hospital care as its principal tax-exempt function or purpose.  Significantly, if a “hospital organization” has more than one hospital facility, the new requirements must be satisfied for each facility, and the consequences of not satisfying them apply on a facility-by-facility basis.

New Requirements Under Section 501(r)

Section 501(r) sets out the following four new requirements for tax-exempt hospital organizations—

  • Community Health Needs Assessment .  At least every three years, a hospital organization must conduct a community health needs assessment that must take into account input from people who represent the broad interests of the community served by the hospital, including people having specialized knowledge or expertise in public health.  The hospital organization must make the community health needs assessment widely available to the public and must adopt an implementation strategy to meet the community health needs identified in the assessment.  The hospital organization must also disclose on its Form 990 how it is addressing the needs identified in each assessment, a description of any needs not being addressed and the reasons why such needs are not being addressed.  In addition to revocation of its federal tax exemption, a hospital organization that fails to comply with the community needs assessment provisions may be subject to an excise tax of $50,000 per tax year. 
     
  • Financial Assistance and Emergency Care Policies .  Each hospital organization must adopt a written financial assistance policy that includes eligibility criteria for financial assistance and information concerning whether the assistance includes free or discounted care, the basis for calculating amounts charged to patients, the method for applying for financial assistance and, in the case of an organization that does not have a separate billing and collection policy, the actions the organization may take in the event of nonpayment (including collection actions and reporting to credit agencies).  The financial assistance policy must also describe the measures that the hospital organization will take to widely publicize the policy within its patient community.  In addition to the financial assistance policy, each hospital organization must also adopt an emergency medical care policy that requires that care for emergency medical conditions be provided, without discrimination, to individuals regardless of their eligibility under the hospital organization’s financial assistance policy. 
     
  • Limitations on Patient Charges .  A hospital organization must limit the amounts charged for emergency and other medically necessary care provided to individuals eligible for assistance under its financial assistance policy to the amounts generally charged to individuals having insurance coverage for such services.  The technical explanation of this provision provided by the Joint Committee on Taxation states that “it is intended that amounts billed to those who qualify for financial assistance may be based on either the best or on the average of the three best, negotiated commercial rates, or Medicare rates.”
     
  • Limits on Billing and Collection Practices .  A hospital organization may not engage in extraordinary collection actions before making “reasonable efforts” to determine whether a patient is eligible for assistance under the hospital organization’s financial assistance policy.  The Joint Committee’s technical explanation of this provision states that “extraordinary collection actions” include lawsuits, liens on residences, arrests, body attachments or other similar collection processes. 

Effective Dates

The requirements to establish financial assistance and emergency care policies, limit patient charges and limit collection practices are effective for tax years beginning after March 23, 2010.  The requirement to complete a community health needs assessment is effective for tax years beginning after March 23, 2012.  A hospital organization may satisfy its requirement to conduct a community health needs assessment if it conducts such an assessment during its first tax year beginning after March 23, 2012, or during either of the two prior tax years.   

Request for Comments

As noted above, the IRS and the Treasury Department would like comments regarding the guidance the industry believes is needed with respect to the new requirements under Section 501(r).  They have specifically requested comments on three separate issues—

  • What are appropriate requirements for a community health needs assessment?  For example, how does the requirement to complete a community health needs assessment apply when an organization or health care system has multiple facilities with overlapping service areas? 
     
  • What are “reasonable efforts” that a hospital organization must employ to determine if an individual is eligible for assistance under the facility’s financial assistance policy before the hospital can employ “extraordinary collection actions”?  The Joint Committee on Taxation explanation of this provision states that the term “reasonable efforts” is intended to 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 rating agencies is initiated.  How extensive such notification must be before a hospital organization will be treated as having made such “reasonable efforts” is not yet clear.
     
  • How should the requirements of Section 501(r) apply to a hospital organization with more than one facility, including the tax consequences of a failure with respect to some, but not all, facilities and the proper tax treatment of such a hospital organization in future tax periods?  As described above, a hospital organization with more than one facility must satisfy the requirements of Section 501(r) with respect to each facility.  If a hospital organization does not satisfy the requirements of Section 501(r) with respect to a particular facility, the organization will not be treated as exempt under Section 501(c)(3) with respect to that facility.

Additional Areas for Comment

In addition to the questions listed above, hospital organizations may want to offer comments to the IRS and the Treasury Department on a variety of other issues arising under the new Section 501(r) requirements.  Some areas of interest may include the following—

  • How would two or more hospital organizations in the same service area, whether or not related, jointly complete a community health needs assessment, and how would each of the hospital organizations involved in such a joint assessment be expected to implement a strategy to meet the community health needs identified in the assessment?  
     
  • Will there be any substantive or procedural safe harbors regarding adoption and/or implementation of policies to help hospital organizations avoid losing their tax-exempt status under Section 501(c)(3) as a result of one or more small violations of a single element of any one of the new requirements? 
     
  • Because a failure to satisfy any of the new requirements may result in the loss of tax-exempt status under Section 501(c)(3), will the IRS provide for any remedial actions that can be taken upon discovery by a hospital organization of a failure to satisfy one or more of the new requirements, especially where the hospital organization has tax-exempt bonds outstanding? 

Additional Information

Section 501(r) imposes important new requirements on hospital organizations and has the potential to significantly affect the ability of hospital organizations to maintain their tax-exempt status under Section 501(c)(3).  Accordingly, hospital organizations and other interested parties are strongly encouraged to submit comments to the IRS by the deadline of July 22, 2010.  Comments submitted to the IRS will be available for public inspection and copying.  For assistance or more information on drafting or submitting comments, please contact the lawyers listed below.

The text of Notice 2010-39 is available here: http://www.irs.gov/pub/irs-drop/n-10-39.pdf.