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On June 9, 2016, Senate Judiciary Chairman Chuck Grassley (R-IA) sent IRS Commissioner John Koskinen a letter asking for detailed information on the IRS's oversight of tax-exempt hospitals' compliance with Section 501(r), citing two instances of non-profit hospitals that had recently changed their collection practices and financial assistance policies following media scrutiny.

Background

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

— Complete a community health needs assessment (CHNA) and implementation strategy every three years

— Establish a written financial assistance policy (FAP) and emergency medical care policy meeting certain requirements

— 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 to insured individuals

— Make reasonable efforts to determine whether an individual is FAP-eligible before engaging in extraordinary collection actions against that individual

In January 2015, the IRS issued final regulations (TD 9708) that provide tax-exempt hospitals with guidance on meeting the Section 501(r) requirements. The final regulations address the requirements for CHNAs, FAPs, billing and collections policies and practices, emergency medical care policies, and limitations on charges that must be met by tax-exempt hospitals and hospital facilities to preserve their tax-exempt status 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. See Tax Alert 2015-29 {}.

Senator Grassley's letter

In January 2015, Sen. Grassley started an investigation into Mosaic Life-Care (Mosaic), a Section 501(c)(3) hospital, after hearing news reports indicating that Mosaic had placed thousands of low-income persons in debt collection and sued many of them. His investigation found that many of the patients whose accounts were placed in collection should have qualified for Mosaic's financial assistance program, Medicaid, or private insurance. Although Mosaic denied that its actions were improper, it changed its billing and collection practices and instituted a debt forgiveness program that provided $16.9m in debt forgiveness to approximately 3,300 low-income patients. In his letter to the IRS Commissioner, Sen. Grassley also referred to an Indiana non-profit hospital, Deaconess, which had its collection practices scrutinized in the media as a result of Sen. Grassley's investigation into Mosaic. Sen. Grassley noted that, after having its collection practices questioned in the media, Deaconess reconsidered its current policies and enhanced its financial assistance policy to provide further assistance to low-income patients. Sen. Grassley welcomed the changes Mosaic and Deaconess had made and encouraged other hospitals to follow the examples they set to better fulfill their charitable missions.

In light of the Mosaic investigation, Sen Grassley asked the IRS to identify for him how many nonprofit hospitals the IRS has found to be out of compliance with the FAP requirements, billing and collection requirements, or both, as well as to inform him whether the noncompliance was determined to be willful and/or egregious or minor and/or inadvertent. Additionally, Sen Grassley asked the IRS to provide information regarding whether any enforcement action has been taken against hospitals found to be noncompliant with either the FAP or billing and collection requirements. He also asked for information on the number of hospitals associated with each type of enforcement action taken, including whether they were allowed to take corrective action to fix the noncompliance, had their exemption revoked or were subject to any other enforcement action. Sen. Grassley also requested information on the status of the 2016 report covering the 2012 calendar year that the IRS and the Department of Health and Human Services (HHS) must provide to Congress regarding the financial assistance provided by tax-exempt hospitals, taxable hospitals, and government hospitals. The IRS and HHS issued their first report in January 2015 (covering calendar year 2011).

Implications

Sen. Grassley's investigation and his subsequent letter to the IRS Commissioner serves as a reminder to all tax-exempt hospitals to review their FAP and billing and collection practices to ensure compliance with Section 501(r) requirements. Tax-exempt hospitals have been required to make a good faith effort to comply with the statutory 501(r) requirements of the Affordable Care Act since the law was enacted 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. Although failure to comply with any of the Section 501(r) requirements will not automatically result in the loss of a hospital's tax-exempt status, any omissions or errors must be corrected, and may need to be reported on a hospital's Form 990, to avoid noncompliant facility tax. In addition, Sen. Grassley's letter reflects the public's interest in actual or perceived noncompliance with the Section 501(r) requirements. (For background, see Tax Alert 2015-553 {}.)

Please contact your EY professional for further information.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.

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