Taxing challenges as not-for-profit rules shift

Advocate Christ Medical Center now offers patients copies of its financial assistance policy in three languages. But soon the Oak Lawn, Ill., hospital will offer translations in 15 more languages to better reflect the local community.

The change was driven by new, final Internal Revenue Service regulations outlining what more than 2,900 not-for-profit hospitals across the country need to do to hold on to their tax-exempt status. The mandate for change, contained in the Affordable Care Act, was driven by concerns that some not-for-profit hospitals are operating more like for-profit entities, especially in the area of bad-debt collections.

Some believe the final regulations will lead to more community engagement and collaboration between state and local health agencies and hospitals. Hospitals clearly have a lot at stake if they fail to comply with the new regulations.

“What hospitals should be concerned about is the broader message coming from the government, and particularly congressional leaders, that they're going to put charitable hospitals' feet to the fire to justify their tax exemption,” said Jim Flynn, who heads the healthcare group at Bricker & Eckler in Columbus, Ohio.

The final regulations, which go into effect Jan. 1, grew out of criticism by Iowa Republican Sen. Chuck Grassley and others that some tax-exempt hospitals were aggressively pursuing poor patients for unpaid bills while racking up huge, untaxed surpluses. Before the ACA, hospitals only had to show they were providing a “community benefit” to be tax-exempt, and the definition of “community benefit” was vague, said Sara Rosenbaum, a law professor at George Washington University.

The new regulations are far more specific, and follow proposed regulations hospitals have followed for years. They require not-for-profit hospitals to establish written financial-assistance and emergency-care policies; limit the amount they bill low-income patients for care; make reasonable efforts to find out whether an individual is eligible for financial assistance before engaging in extraordinary collection activities; and conduct a community health-needs assessment, followed by an implementation strategy at least once every three years.

“These requirements build on the kinds of things hospitals were otherwise doing, but as to the details, hospitals are in the process of revisiting their own policies and practices to see if there's a need for any changes or enhancements,” said Maureen Mudron, the American Hospital Association's deputy general counsel.

Each element of the new rules is accompanied by a litany of details. In addition to the language requirement, for example, the final regulations, unlike the proposed ones, also require hospitals to list which of their providers are covered by their financial assistance policies and which are not.

The AHA and the Association of American Medical Colleges wrote a letter to the IRS and others May 1 decrying that new requirement, saying it is “unexpected, confusing and extraordinarily burdensome for hospitals.”

Other changes are viewed more positively by hospitals. For example, the rules expand the types of health needs that may be included in community health needs assessments to include prevention of illness, ensuring adequate nutrition and addressing social, behavioral and environmental health factors.

Intermountain Healthcare, for example, is meeting the new rules by adding more social determinants of health to its list of health indicators for the assessments, such as high school graduation rates, said Cynthia Boshard, Intermountain's director of community benefit reporting.

The penalty for failing to comply with the health-needs assessment requirement is only $50,000. But penalties for failing to comply with the final regulations more broadly could lead to hospitals losing their tax-exempt status, although some tax experts say it is unlikely the short-staffed IRS would take such drastic measures.

“Their goal is for people to comply with the law, so they will typically work with hospitals,” said Michael Meissner, a tax partner at Squire Patton Boggs in Cleveland.

The IRS has said if hospitals find, correct and disclose their own minor, inadvertent compliance mistakes, the IRS won't come after them.

But states with aggressive attorneys general could be another matter. Requirements vary from state to state, but in many places, a hospital losing its federal tax-exempt status could also lose its exemptions from state and local income, property and sales taxes, said Don Stuart, a partner at Waller Lansden Dortch & Davis in Nashville who also leads the American Health Lawyers Association's tax and finance practice group.

At the least, the new regulations may provide a stronger basis for challenging hospitals' tax-exempt status if they aren't doing enough for their local communities. Illinois and Ohio have mounted challenges to not-for-profit hospitals' statuses in the past.

“Because (the new rules) require a lot more disclosure, a lot more publicizing of what you're doing in satisfying community health needs, it will give the states ammunition,” Meissner said.