Final regulations for tax-exempt hospitals.

• Author: Kalick, Laura

Final regulations (T.D. 9708) under Sec. 501 (r) (regarding additional requirements charitable hospitals must meet to be treated as tax exempt under Sec. 501(c)(3)) were recently issued and apply to a hospital's tax year that begins after Dec. 29, 2015. For tax years beginning on or before that date, the final regulations provide that a hospital may rely on a reasonable, good-faith interpretation of Sec. 501(r) and that a hospital will be deemed to have operated in accordance with a reasonable, good-faith interpretation of that section if it has complied with the provisions of the proposed regulations issued in 2012 (REG-13026611) and 2013 (REG-106499-12) or the final regulations. To avoid the potential revocation of their tax exemptions and the resulting taxation of their income, charitable hospitals should make sure that any errors or omissions in their procedures are only minor, inadvertent, and due to reasonable cause and should take steps to adopt and carry out the proper procedures.

Background

In 1969, the IRS published Rev. Rul. 69-545 to set forth the community benefit standard with which a tax-exempt hospital must comply to be a Sec. 501(c) (3) organization. Rev. Rul. 69-545 required a community-based board of directors, an open medical staff, an open emergency room, and acceptance of patients who had insurance, including Medicare. However, the lines between tax-exempt hospitals and for-profit entities continued to be blurred, especially in fight of "whole-hospital" joint ventures, management company arrangements, and multientity complex health care organizational structures.

Rev. Rul. 98-15 clarified how the community benefit standard would be enforced with some of these combinations, but the debate still continued as to whether the characteristics of the tax-exempt hospital differed sufficiently to justify the revenue subsidy that tax exemption provides and whether there should be a charity care requirement. Also, concerns were raised about tax-exempt hospitals that took extraordinary collection actions against individuals who could not pay their bills, pushing them into even more dire financial straits. In many instances, the amounts billed to the patients who had no insurance were the full gross charges, much higher than the lower, negotiated rates that patients with insurance or Medicare enjoyed.

Sec. 501(r)

As a result of these events, the 2010 Patient Protection and Affordable Care Act, PL. 111-148, provided that a Sec. 501(c)(3) hospital would have to meet the requirements of Sec. 501(r) to keep its exemption. Sec. 501(r) provides that a tax-exempt hospital must:

* Conduct a community health needs assessment (CHNA) at least once every three years and adopt an implementation strategy to meet the needs identified through the CHNA;

* Establish a written financial assistance policy (FAP) and a written policy relating to emergency medical care;

* Not use gross charges and limit the amounts charged for emergency or other medically necessary care provided to individuals eligible under the FAP to not more than the amounts generally billed (AGB) to individuals who have insurance covering such care; and

* Make reasonable efforts to determine whether an individual is FAP-eligible before engaging in extraordinary collection actions.

These requirements are in addition to meeting the general requirements of Sec. 501(c)(3) and the community benefit standard of Rev. Rul. 69-545. Noncompliance with the requirements can result in revocation of the hospital's tax-exempt status and...