August 23, 2018
The Internal Revenue Service (“IRS”) is in the process of auditing 501(c)(3) tax-exempt hospitals for compliance with new requirements under Section 501(r) of the Internal Revenue Code (the “Code”) which were added under the Patient Protection and Affordable Care Act. This appears to be an early round of audits now that the 501(r) regulations have been finalized and are effective for tax years beginning on or after December 29, 2015. It is important to note that these audits include governmental hospitals (e.g., health care authorities and hospital boards) that have dual status as a 501(c)(3) tax exempt entity as well. Below are some things hospital organizations exempt under Section 501(c)(3) need to know about the 501(r) requirements and the current audits.
The 501(r) Requirements
Section 501(r) applies to facilities licensed by the state as a hospital and any other organization where the provision of hospital care is its principal function or purpose constituting the basis for exemption under Section 501(c)(3). For a hospital to maintain its tax-exempt status under 501(c)(3), it must meet the requirements for a Community Health Needs Assessment (“CHNA”), Financial Assistance Policy (“FAP”), and other requirements for billing and collections and charges.
Hospitals must conduct a CHNA once every three (3) taxable years in order to identify the health needs of the community the hospital serves and the resources available to address those health needs. Specifically, a hospital must identify the community it serves, assess the health needs of the community, and in doing so, solicit input from persons who represent “the broad interests of the community” (at a minimum, including a state local, tribal, or regional governmental public health department, members of the medically underserved, low-income, or minority populations in the community, and any written comments from the most recent CHNA).
The CHNA must be documented in a written report (the “CHNA Report”) adopted by the hospital’s board or other authorized governing body. The CHNA Report must include the definition of the community served by the hospital, a description of the process and methods used to conduct the CHNA, a prioritized description of the health needs of the community and the resources potentially available to address those needs, and for subsequent CHNA reports, an evaluation of any actions taken pursuant to the previous CHNA. Whether separate from or a part of the CHNA, there must also be an implementation plan to address the health needs identified in the CHNA, approved by the hospital’s governing body.
Once the hospital has conducted the CHNA and adopted the CHNA Report, the CHNA Report must be made “widely available to the public” by posting the CHNA Report on its website and making a paper copy of the CHNA Report available for public inspection upon request, and without charge, at the hospital facility.
Hospitals are also required to have a Financial Assistance Policy (“FAP”) and an emergency medical care policy. The FAP must set forth the eligibility criteria for financial assistance, the basis for calculating amounts charged to patients, and the method for applying for financial assistance, as well as the actions that the hospital can take in the event of nonpayment. Often, eligibility for financial assistance is determined on a sliding scale based on the household’s income as a percentage of the Federal Poverty Level or based on total household income.
Similar to the CHNA Report, the FAP must be made “widely available to the public” by putting it on the hospital’s website and making paper copies available upon request and without charge. The paper copies must be made available both by mail and in public locations in the hospital facility, including at a minimum, the emergency room and admissions areas.
Additionally, individuals who receive care from the hospital must be informed of the FAP by offering a paper copy of a plain language summary of the FAP during the intake and/or discharge process, including conspicuous written statements regarding the availability of financial assistance on the billing statements of the hospital, and setting up conspicuous public displays in public locations around the hospital facility informing patients about the FAP, including at a minimum, the emergency room and admissions areas.
Notably, the written documentation related to the FAP must also be made available in any foreign language spoken by at least 1,000 individuals or 5% of the community served by the hospital.
Charges; Billing and Collections
Section 501(r) and the corresponding Treasury Regulations also impose certain requirements and limitations on hospital charges and so-called “extraordinary collection actions” that hospitals can take in the event of non-payment. These requirements are beyond the scope of this article, but hospitals should be aware of these additional requirements under Section 501(r).
The 501(r) audits appear to be focused on the CHNA and FAP requirements for now. With respect to the CHNA, auditors are looking to see that a CHNA was conducted at the appropriate intervals and according to the processes and methods set forth in the regulations, that the hospital is following up on the needs identified in the CHNA, and that the CHNA Report is widely publicized. In fact, we understand in at least some instances that 501(r) audits were initiated because of an apparent failure by a hospital to widely publicize its CHNA Report by making it available on the hospital’s website. As such, it is very important that hospitals not only conduct the CHNA, but also make the CHNA Report widely available to the public according to the requirements in the regulations.
Similarly, auditors are looking to ensure that hospitals have an FAP and that it is widely publicized to the community. Generally, auditors want to ensure that actual and potential patients of the hospital are aware of the availability of financial assistance, but specifically, it is expected that hospitals publish the FAP on their website and post signs about the availability of financial assistance in conspicuous public areas in the hospital.
This is a healthy reminder for hospitals about the CHNA and FAP requirements under Section 501(r). If you haven’t checked in a while, now is a great time to conduct an internal audit for 501(r) compliance at your facility if you are an exempt entity under Section 501(c)(3). At the very least, you should ensure that your facility has up-to-date CHNA Reports and FAPs posted on its website and otherwise available according to the regulations.
 26 U.S.C. § 501(r)(2)(A).
 26 C.F.R. § 1.501(r)-3(b)(1), (5).
 26 C.F.R. § 1.501(r)-3(b)(1)(iv).
 26 C.F.R. § 1.501(r)-3(b)(6).
 26 C.F.R. § 1.501(r)-3(b)(7).
 26 U.S.C. § 501(r)(4); 26 C.F.R. § 1.501(r)-4(a).
 26 C.F.R. § 1.501(r)-4(b)(1).
 26 C.F.R. § 1.501(r)-4(b)(5).
 26 C.F.R. § 1.501(r)-4(b)(5)(i)(D).
 26 C.F.R. § 1.501(r)-4(b)(5)(ii).
- Proposed Regulations Issued Clarifying Aspects of Qualified Opportunity Zone Investments
- Two-Minute Primer on Electronic Prescription of Controlled Substances
- Is Your Community Health Needs Assessment Up To Date? Reminders for 501(c)(3) Hospital Organizations as 501(r) Audits Conducted
- What Can Physicians Charge for Medical Records?
- 20-State Lawsuit Challenges Affordable Care Act Now That Individual Mandate Is Not Backed By a Tax