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The IRS has issued final regulations (TD 9708) under Section 501(r) for tax-exempt hospital organizations and hospital facilities. The final regulations generally clarify and make more administrable the proposed Section 501(r) regulations. The final regulations address the requirements for community health needs assessments (CHNAs), financial assistance policies (FAPs), billing and collections policies and practices, emergency medical care policies, and limitations on charges that must be met by tax-exempt hospital organizations and facilities to preserve their tax exemption and avoid excise tax. The final regulations generally are effective for tax years beginning on or after December 29, 2015, and affect all Section 501(c)(3) tax-exempt organizations operating hospital facilities.

Background

The Affordable Care Act, enacted March 23, 2010, added Section 501(r) to the Internal Revenue Code, establishing additional requirements for hospital organizations to qualify for tax exemption under Section 501(c)(3). Under Section 501(r)(2), hospital organizations that operate more than one hospital facility must meet the Section 501(r) requirements separately for each hospital. The requirements include:

— Section 501(r)(3). Each hospital organization must complete a CHNA every three years.

— Section 501(r)(4). Each hospital organization must establish a written FAP and emergency medical care policy that meet certain statutory requirements.

— Section 501(r)(5). Each hospital organization must limit amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the organization's FAP to no more than the amounts generally billed (AGB) to insured individuals.

— Section 501(r)(6). Each hospital organization must make reasonable efforts to determine whether an individual is FAP-eligible before engaging in extraordinary collection actions.

In June 2012, the IRS issued proposed regulations (REG-130266-11) containing guidance on how hospitals may meet the requirements under Sections 501(r)(4) through 501(r)(6) (the 2012 Proposed Regulations). The 2012 Proposed Regulations also clarified which entities must meet the Section 501(r) requirements by providing definitions of "hospital organization," "hospital facility" and other terms. See Tax Alert 2012-1134.

In April 2013, the IRS issued proposed regulations (REG-106499-12) on the Section 501(r)(3) CHNA requirements for charitable hospitals (the 2013 Proposed Regulations). The proposed regulations also addressed the consequences of failing to satisfy the Section 501(r) requirements. See Tax Alert 2013-690.

In August 2013, the IRS issued temporary (TD 9629) and proposed (REG-115300-13) regulations specifying filing requirements for hospital organizations liable for the Section 4959 excise tax as a result of failing to meet the CHNA requirements for any tax year (the Filing Regulations). See Tax Alert 2013-1602.

In January 2014, the IRS released two notices that provided guidance on the Section 501(r) requirements: (1) Notice 2014-2 confirmed that charitable hospitals can rely on the guidance in the 2012 Proposed Regulations and 2013 Proposed Regulations until the IRS issues further guidance; and (2) Notice 2014-3 provided a proposed revenue procedure describing correction and disclosure procedures for certain failures to meet the Section 501(r) requirements. See Tax Alert 2014-50.

Final regulations

The final regulations adopt both the 2012 Proposed Regulations and 2013 Proposed Regulations with amendments. They also adopt the Filing Regulations with amendments. Notable changes in the final regulations include the following:

Hospital facilities and organizations

Consistent with the 2013 Proposed Regulations, the final regulations define "hospital organization" as an organization recognized (or seeking to be recognized) as described in Section 501(c)(3) that operates one or more hospital facilities, and define "hospital facility" as a facility that is required by a state to be licensed, registered or similarly recognized as a hospital.

The final regulations clarify that multiple hospital facilities located in the same building may, if certain conditions are met, have identical FAPs, conduct a joint CHNA, and/or adopt a joint implementation strategy.

Government hospitals

The final regulations, consistent with the 2013 Proposed Regulations, require all hospital organizations — including government organizations — that are recognized or seek to be recognized by the IRS as tax-exempt under Section 501(c)(3) to comply with all Section 501(r) requirements. The preamble to the final regulations also provides that, if a government hospital voluntarily terminates its Section 501(c)(3) IRS recognition, it is not required to meet the CHNA requirements in the tax year in which it terminates.

"Operating" a hospital facility

The final regulations clarify that a hospital organization is not required to meet the requirements of Section 501(r) for any hospital facility it is not "operating." The regulations maintain the general rule in the 2013 Proposed Regulations that operating a hospital facility includes operating the facility through the organization's own employees or contracting out to another organization to operate the facility. An organization also operates a hospital facility if it owns a capital or profits interest in an entity treated as a partnership for federal tax purposes that operates the facility, or is the sole member or owner of a disregarded entity that operates the facility. The final regulations add two clarifications. First, they specify that an organization is considered to own a capital or profits interest in an entity treated as a partnership for federal tax purposes if it owns that interest directly or indirectly through one or more lower-tier entities that are treated as partnerships for federal tax purposes. Second, the final regulations clarify that a hospital organization is not required to meet the requirements of Section 501(r) when the organization doesn't have control over the operation of the hospital facility operated by the partnership sufficient to ensure those operations further a Section 501(c)(3) exempt purpose, and thus it treats the operation of the hospital facility as an unrelated trade or business described in Section 513.

Providing care through hospital-owned corporations

The preamble to the final regulations clarifies that a hospital facility is not required to meet Section 501(r) requirements for a taxable corporation (e.g., physicians' practice) that provides care in the facility, even if the corporation is wholly or partially owned by the hospital organization, because Section 501(r) does not apply to the taxable entity.

Authorized body

The final regulations expand the definition of an "authorized body" of a hospital facility to include the governing body of a partnership in which a hospital organization owns a capital or profits interest. Therefore, the governing body may adopt Section 501(r)-related documents for the hospital facility, including a CHNA report, implementation strategy and FAP.

Failures to satisfy the requirements of Section 501(r)

Minor omissions and errors

Under the 2013 Proposed Regulations, no sanctions would apply to (and no disclosure is necessary for) errors that are minor, inadvertent and due to reasonable cause if they are promptly corrected upon discovery. The final regulations expand this exception to apply to errors that are minor and either inadvertent or due to reasonable cause. The final regulations also clarify: (1) in the case of multiple omissions or errors, the omissions or errors are only considered "minor" if they are minor in the aggregate, (2) the fact that the same error or omission has occurred previously is a factor tending to show the error or omission is not inadvertent, (3) a hospital facility's correction of minor omissions or errors must include establishment (or review and, if necessary, revision) of practices or procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with the Section 501(r) requirements, and (4) establishment of such practices or procedures prior to the occurrence of an omission or error is a factor tending to show that the omission or error was due to reasonable cause.

Taxation of noncompliant hospital facilities

Section 4959 imposes a $50,000 excise tax on a hospital organization that fails to meet the CHNA requirements for any tax year. Section 6033(b)(10)(D) requires hospital organizations to report the amount of this excise tax on their annual information returns.

The final regulations follow the 2013 Proposed Regulations in confirming that a hospital facility's noncompliance with Section 501(r) subjects it to a facility-level tax. The final regulations clarify, however, that noncompliance will not by itself result in the operation of the facility being considered an unrelated trade or business described in Section 513, and therefore should not affect the exempt status of tax-exempt bonds issued to finance the noncompliant hospital facility.

The final Section 4959 regulations also clarify that, if a hospital facility does not meet a CHNA requirement under Section 501(r)(3), it will not be considered to have "failed" to meet the CHNA requirement, and will not be liable for the $50,000 excise tax, if its error or omission was minor and either inadvertent or due to reasonable cause, and if it promptly corrected the error or omission.

Section 501(r)(3): CHNAs

Assessing community health needs

The 2013 Proposed Regulations stated that, to assess the health needs of its community for purposes of conducting a CHNA, a hospital facility must identify the significant health needs of its community, prioritize those health needs, and identify potential measures and resources available to address the health needs. The final regulations expand the examples of "health needs" that a hospital facility may consider in its CHNA to include the need to prevent illness, to ensure adequate nutrition, and to address social, behavioral, and environmental factors that influence health in the community. The facility may also describe interventions designed to address these factors or prevent illness in its implementation strategy.

The final regulations also clarify that the requirement to take into account input in assessing the health needs of the community includes taking into account input in identifying and prioritizing significant health needs, as well as identifying resources potentially available to address those health needs.

Documentation of a CHNA

The 2013 Proposed Regulations stated that a CHNA report will be considered to describe the process and methods used to conduct the CHNA if the CHNA report describes the data and other information used in the assessment, as well as the methods of collecting and analyzing this data and information, and identifies any parties with whom the hospital facility collaborated, or with whom it contracted for assistance, in conducting the CHNA. The final regulations clarify that a hospital facility may rely on (and the CHNA report may describe) data collected or created by others in conducting its CHNA and, in such cases, may simply cite the data sources rather than describe the "methods of collecting" the data.

Collaboration on CHNA reports

The 2013 Proposed Regulations permit hospital facilities with different but overlapping communities to collaborate in conducting a CHNA and to include substantively identical portions in their separate CHNA reports if appropriate under the facts and circumstances. The final regulations add an example of two hospital facilities with overlapping, but not identical, communities that are collaborating in conducting a CHNA and state that, in such a case, the portions of each hospital facility's CHNA report relevant to the shared areas of their communities may be identical. Thus, the final regulations not only expressly permit hospital facilities with different communities to collaborate but also allow those hospital facilities to adopt substantively identical portions of the CHNA reports to the extent appropriate.

Describing how a hospital facility plans to address a significant health need

In describing how a hospital facility plans to address a significant health need identified through the CHNA, the 2013 Proposed Regulations provided that the implementation strategy must, among other things, describe the actions the hospital facility intends to take to address the health need, the anticipated effect of these actions, and the plan to evaluate that effect. Rather than requiring that the implementation strategy describe a plan to evaluate its effect, the final regulations require the CHNA report to include an evaluation of the effect of any actions that the facility has taken to address significant health needs since it finished conducting its immediately preceding CHNA.

When the implementation strategy must be adopted

Under the 2013 Proposed Regulations, an authorized body of the hospital facility must adopt an implementation strategy to meet the health needs identified through the facility's CHNA by the end of the same tax year in which the hospital facility finishes conducting the CHNA. The final regulations extend the deadline four and a half months, requiring an authorized body of the hospital facility to adopt an implementation strategy on or before the 15th day of the fifth month after the end of the tax year in which the hospital facility finishes conducting the CHNA.

Transferred or terminated hospital facilities

The final regulations clarify that a hospital organization is not required to meet the requirements of Section 501(r)(3) for a hospital facility in a tax year if the hospital organization transfers all ownership of the hospital facility to another organization or otherwise ceases its operation of the hospital facility before the end of that tax year.

New hospital organizations

The final regulations provide that a new hospital organization must meet the CHNA requirements by the last day of the second tax year beginning after the later of its effective date of IRS recognition of tax exemption or the first date on which its hospital facility was licensed or registered by its state as a hospital.

Section 501(r)(4): FAPs and Emergency Care Policies

In response to comments and to provide transparency to patients, the final regulations require a hospital facility's financial assistance policy (FAP) to list the providers, other than the hospital facility itself, delivering emergency or other medically necessary care in the hospital facility, and to specify which providers are covered by the hospital facility's FAP and which are not.

Additionally, the final regulations clarify that the facility's FAP must apply to all emergency and other medically necessary care provided in a hospital facility by a partnership owned in part by, or a disregarded entity wholly owned by, the hospital organization operating the hospital facility, to the extent that care is not an unrelated trade or business.

The preamble to the final regulations states that, if a hospital facility outsources the operation of its emergency room to a third party that is not subject to the facility's FAP, the hospital facility may not be considered to operate an emergency room for purposes of determining whether the hospital meets the community benefit standard in Revenue Ruling 69-545.

Eligibility criteria

The final regulations clarify that the FAP must describe only discounts available under the FAP, rather than all discounts offered by the hospital facility, some of which (e.g. self-pay, out-of state patient) may be outside the FAP and therefore not subject to amount generally billed (AGB) limitations. The preamble to the final regulations notes, however, that those discounts will not be considered community benefit activities, and will not be reportable on Form 990 Schedule H, if they are not specified in the FAP.

The final regulations suggest that a facility may determine that an individual is FAP-eligible based on information other than that provided by the individual, or based on a prior FAP-eligibility determination for that individual, but require that the facility describe in its FAP any information from other resources and under what circumstances it bases its determination on prior FAP-eligibility determinations.

Method for applying for financial assistance

Like the 2012 Proposed Regulations, the final regulations provided that a hospital facility's FAP must describe how an individual applies for financial assistance under the FAP and that either the hospital facility's FAP or FAP application form (including accompanying instructions) must describe the information or documentation the hospital facility may require an individual to submit as part of his or her FAP application. The final regulations clarify that a hospital facility may grant financial assistance under its FAP notwithstanding an applicant's failure to provide that information and may rely on other evidence of eligibility (e.g., attestation by applicant) to determine FAP eligibility.

The final regulations also clarify that an FAP application refers not only to a written submission; a hospital facility may obtain information from an individual in writing, orally or both.

Widely publicizing FAP through notification process

The final regulations modify notification requirements that the 2012 Proposed Regulations required facilities to follow to make "reasonable efforts" to determine FAP eligibility before engaging in extraordinary collections actions (ECAs). For instance, the final regulations no longer require the facility to send each individual three separate bills that include a plain language summary of the FAP. Instead, the final regulations require hospital facilities to offer (though not necessarily provide) a plain language of the FAP to patients as part of the intake or discharge process. They also require facilities to include a conspicuous notice on all bills that (i) notifies recipients of the availability of financial assistance under the FAP, (ii) includes the telephone number of an office that can provide information about the FAP and FAP application process, and (iii) includes the web site address where copies of the FAP, FAP application and plain language summary of the FAP may be obtained.

The 2012 Proposed Regulations required the plain language summary to provide FAP contact information for both the facility and nonprofit organizations or governments. The final regulations provide that the plain language summary of the FAP may include contact information of either a hospital facility office/department or a nonprofit organization or government agency that can provide assistance with the FAP application process.

The final regulations also clarify that hospital facilities must notify and inform visitors about the FAP in "public locations" in the hospital facility including, at a minimum, in the emergency room and admissions areas.

Additional FAP clarifications

Some additional clarifications on FAPs in the final regulations include:

1. To the extent a hospital facility must provide its FAP and FAP-related documents to individuals, it must provide paper copies of the documents unless an individual indicates he or she would prefer to receive or access the documents electronically.

2. The threshold for requiring facilities to provide translations of their FAP, FAP application, and plain language summary to limited English proficiency populations (LEP) is reduced from 10% of the members of the community to the lesser of 5% of the members of the community or 1,000 members of the LEP group in the community.

3. The requirement in the proposed regulations that the FAP must list the "measures taken" to widely publicize the FAP is eliminated. Instead, the final regulations require only that a hospital facility actually implement measures to widely publicize the FAP in the community it serves.

4. Multiple hospital facilities may have identical FAPs, billing and collections policies, and/or emergency medical care policies established for them (or even share one joint policy document), provided that the information in the policy or policies is accurate for all those facilities and that any joint policy states it applies to each facility.

5. Hospital facilities have flexibility in defining to what "medically necessary care" FAP (and AGB limitation) must apply. A facility may, but is not required, to use the Medicaid definition of "medically necessary care," a definition provided by state law, or a definition that refers to generally accepted standards of medicine in the community. The proposed regulations did not define "medically necessary care."

Section 501(r)(5): Limitation on charges

For purposes of determining the limitation on amounts charged to FAP-eligible individuals for emergency care or other medically necessary care, the final regulations retain the two methods allowed by the 2012 Proposed Regulations for determining "amounts generally billed" or "AGB": the look-back method and the prospective method. However, the final regulations also allow facilities to base AGB on Medicaid rates, either alone or in combination with Medicare (or, under the look-back method, together with Medicare and all private health insurers).

The final regulations do not amend either AGB method to specifically account for value-based, shared savings or accountable care methods of payment. The preamble to the regulations provides, however, that a facility can incorporate those payments into its AGB percentage calculation if it can reasonably allocate a capitated or lump-sum payment made by an insurer to care received by particular patients, and has tracked the gross charges for that care.

Regarding the Section 501(r)(5) limitation on charges, the final regulations also clarify:

1. A FAP-eligible individual is considered to be "charged" only the amount he or she is personally responsible for paying, after all deductions, discounts (including discounts available under the FAP), and insurance reimbursements have been applied.

2. A hospital facility may change the method it uses to determine AGB at any time, as long as it updates its FAP to describe the new method before implementing it.

3. When calculating its AGB percentage(s) under the look-back method, a hospital facility should include in the numerator the full amount of all of the hospital facility's claims for emergency and other medically necessary care that have been "allowed" (rather than "paid") by health insurers during the prior 12-month period.

4. A hospital facility may include in the calculation of its AGB percentage(s) claims for all medical care allowed during the prior 12-month period, rather than just claims allowed for emergency and other medically necessary care.

5. Hospital facilities that are covered under the same Medicare provider agreement can calculate one AGB percentage (or multiple percentages for separate items or services) based on the claims and gross charges for all such facilities, and implement that AGB percentage across all such hospital facilities.

6. The prohibition on gross charges to FAP-eligible individuals applies only to charges for care covered under the facility's FAP, which may but need not cover care that is neither emergency nor medically necessary care.

In addition, the 2012 Proposed Regulations provided that a hospital facility must begin applying its AGB percentage(s) by the 45th day after the end of the 12-month period the hospital facility used in calculating the AGB percentage(s). The final regulations extend this period, allowing a hospital facility to take up to 120 days after the end of the 12-month period used in calculating the AGB percentage(s) to begin applying its new AGB percentage(s).

Section 501(r)(6): Billing and collection

Extraordinary collection actions (ECA)

The final regulations provide that a facility's sale of individual debt is not an ECA if: (i) the purchaser agrees not to engage in any ECAs to obtain payment of the debt; (ii) the purchaser agrees not to charge interest on the debt in excess of certain statutory interest rates; (iii) the debt is returnable or recallable by the facility upon a determination that the individual is FAP-eligible; and (iv) if the individual is determined to be FAP-eligible and the debt is not returned to the facility, the purchaser ensures the individual does not pay more than required as an FAP-eligible individual.

In addition, the final regulations clarify that: (i) a hospital's placement of a lien to collect proceeds of judgments, settlements or compromises arising from a patient's suit against a third party does not constitute an ECA, and (ii) filing a claim in a bankruptcy proceeding does not constitute an ECA.

Reasonable efforts

For purposes of determining whether a facility has made reasonable efforts to determine an individual's FAP eligibility before engaging in ECAs, the proposed regulations imposed a 120-day "notification period" and 240-day "application period" that began on the date the facility provided the first billing statement to the individual. The final regulations retain these periods, but provide that they begin on the date the first "post-discharge" billing statement is provided, so that the periods do not begin running until an individual has left the facility and has been provided a first post-discharge billing statement.

As described above, the final regulations modify the notification requirements that the 2012 Proposed Regulations required facilities to meet to make "reasonable efforts" to determine FAP eligibility before engaging in ECAs. In addition to the modifications described in "Widely Publicizing FAP Through Notification Process," above, the final regulations also require the facility to provide the individual with a written notice at least 30 days before initiating an ECA that: (i) indicates the availability of financial assistance, (ii) identifies only those ECAs the facility "intends to initiate" (rather than all ECAs the facility may take in the future), (iii) states a deadline after which such ECAs may be initiated that is at least 30 days after the written notice is provided; and (iv) includes a plain language summary of the FAP in the notice.

The final regulations also modify the oral notification requirement in the 2012 Proposed Regulations, to require that a hospital facility make a reasonable effort to orally notify an individual about the hospital facility's FAP, and about how the individual may obtain assistance with the FAP application process, at least 30 days before initiating ECAs against the individual. The proposed regulations did not require any such oral notification, but did require the facility to inform an individual about the FAP in any oral communications the facility may have with the individual about the amount due.

Additional billing and collection changes

Additional changes and clarifications in the Section 501(r)(6) final regulations include:

1. A hospital facility may satisfy the FAP notification requirements simultaneously by aggregating bills for multiple episodes of care, so long as it refrains from initiating ECAs until 120 days after it provided the first post-discharge billing statement for the most recent episode of care in the aggregation.

2. In the case of any written notice or communication that is mailed, the communication will be considered "provided" on the date of mailing.

3. ECAs taken against an individual who has submitted an incomplete FAP application only have to be suspended for "a reasonable period of time," not for a period of at least 240 days after the hospital facility provides the individual with the first billing statement for the care, as was required in the proposed regulations.

4. In addition to presumptively determining that an individual is eligible for the most generous assistance available under its FAP, a hospital facility may also presumptively determine that an individual is eligible for less than the most generous assistance available based on information other than that provided by the individual or based on a prior FAP-eligibility determination, if the facility follows certain notification requirements.

Implications

Tax-exempt hospitals have been required to make a good faith effort to comply with the statutory requirements of the Affordable Care Act since the law was passed in 2010 and have been able to rely on the proposed regulations and notices issued in 2012 and 2013, pending the finalization of regulations. The final regulations continue to allow reliance on both the 2012 and 2013 Proposed Regulations for tax-exempt hospitals until an organization's first tax year beginning on or after December 29, 2015, allowing all tax-exempt hospitals at least one year to learn and begin to comply with the final regulations.

If a hospital facility fails to meet the Section 501(r) requirements, it risks revocation of its tax-exempt status. If a hospital facility fails to properly conduct a CHNA, the facility is subject to an excise tax in the amount of $50,000. If a hospital fails to meet a requirement, the failure is neither willful nor egregious, and the hospital corrects and publicly discloses the error, however, it would avoid revocation of tax-exempt status, but the excise tax for failure to properly conduct a CHNA would still apply. While Notice 2014-3 contains a proposed revenue procedure to address such noncompliance issues, that revenue procedure is not yet effective. The preamble to the final regulations indicates that the Treasury Department and the IRS intend to release a revenue procedure finalizing the guidance proposed in Notice 2014-3 in the near future.

Hospitals should review their practices, policies and procedures to ensure that they comply with the Section 501(r) requirements. Specifically, hospital organizations should ensure that they have a written FAP and emergency care policy, limit amounts charged for emergency care or other medically necessary care to certain individuals, make efforts to determine an individual's eligibility for financial assistance before engaging in certain debt collection actions, conduct a CHNA at least once every three years, and adopt an implementation strategy for the CHNA.

On 12 January 2015 from 1:00 — 2:30 p.m. ET, a panel of EY professionals will discuss the final Section 501(r) regulations, significant changes from the proposed regulations, and practical implications and insights. We hope you can join us. Please click here to register.

Please contact your EY professional for further information.

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