Grassley Questions IRS on Status of ACA Tax-Exempt Hospital Provisions

Although nonprofit hospitals must be in compliance with requirements related to community benefit, financial assistance for low-income and uninsured individuals, billing and collection practices, and emergency medical care under provisions of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), the Internal Revenue Service (IRS) and the Department of Health and Human Services (HHS) have fallen behind in implementing guidance for nonprofit hospitals and reporting to Congress. In an April 4, 2014,  letter to John Koskinen, IRS Commissioner, Senator Charles Grassley (R-Iowa) requested information on the status of several of the measures included in the law after noting that the IRS has not implemented all of the ACA requirements and the IRS and HHS have not issued annual reports on nonprofit hospitals to Congress for fiscal years 2012 or 2013 as required by the ACA.

ACA Provisions and Proposed Regulations

Grassley began a review of nonprofit hospitals in 2005 that revealed that “the practices of many of these hospitals were virtually indistinguishable from their for-profit counterparts.” Among Grassley’s findings were that some of the hospitals were providing very little charitable care or other community benefits, failing to publicize charitable care to patients, charging indigent uninsured patients more than insured patients, and using very aggressive collection practices. The ACA provisions, which arose from Grassley’s review, imposed standards for the tax-exemption of nonprofit hospitals for the first time,” according to the news release.

Section 9007 of ACA, which added 501(r) to the Internal Revenue Code (Code) requires the IRS to establish more oversight of nonprofit hospitals and hold hospitals accountable for their tax-exempt status. Under 501(r), 501(c)(3) organizations that operate one or more hospital facilities (hospital organizations) are required to meet four general requirements on a facility-by-facility basis, which except for the community needs assesment became effective for tax years beginning after March 23, 2010:

  • Community health needs assessment: For tax years beginning after March 23, 2012, hospitals must conduct a community health needs assessment (CHNA) and adopt an implementation strategy at least once every three years. The ACA also added Code sec. 4959, which imposes an excise tax of $50,000 for failure to meet the CHNA requirements, and added reporting requirements under Code sec. 6033(b), which requires the IRS to analyze the CHNA report.
  • Financial assistance and emergency care policies: Establish and make public financial assistance policy (FAP) and emergency medical care policies.
  • Limitation on charges for individuals who qualify for financial assistance: Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy.
  • Collections procedures: Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions against the individual.

Although these requirements may have existed in one form or another before, the ACA formally put the requirements into the tax Code and provided for specific penalties for noncompliance. In addition to the requirements for nonprofit hospitals, Sec. 9007 requires the IRS and HHS to ensure that nonprofit hospitals are in compliance with the law and report to Congress annually on the effectiveness of the provisions.

The IRS issued proposed regulations (77 FR 38148) on June 26, 2012, which provided guidance for establishing and publicizing the FAP as well as clarification of the written emergency care policy requiring hospitals to provide care for emergency medical conditions to individuals without discrimination (within the meaning of the Emergency Medical and Active Labor Act (EMTALA) regardless of whether they are eligible for financial assistance. It also addressed the prohibition of certain collection methods until the hospital makes reasonable efforts to determine whether an individual is eligible for financial assistance and the limitation on charges. The 2012 proposed rule did not address CHNA; however, on April 5, 2013, the IRS issued a proposed rule (78 FR 20523) addressing CHNA requirements and the related reporting obligations under sec. 6033 and excise tax under sec. 4959.

The IRS issued Notice 2014-2 (reliance on proposed regulations for tax-exempt hospitals) and Notice 2014-3 (providing guidance regarding correction and disclosure procedures for hospital organizations to follow so that certain failures to meet the requirements of sec. 501(r) will be excused) announcing that hospitals could rely on all of the provisions of the proposed regulations issued in 2012 and 2013 pending publication of final or temporary regulations or other applicable guidance. In addition hospitals may rely on reg. sec. 1.501(r)(3) of the 2013 proposed regulation for any CHNA conducted or implementation strategy adopted on or before the date that is six months after final or temporary instructions are published.

Request for Status

Grassley stated that the IRS and HHS’ failure to provided Congress with access to the information required to be reported by law “raises serious concerns both about the oversight of nonprofit hospitals and the government’s ability to faithfully execute laws passed by Congress.”  He has requested the IRS Commissioner to provide information regarding the status of (1) a Memorandum of Understanding (MOU) between the IRS and HHS, recommended in 2012 by the Treasury Inspector General for Tax Administration, but not finalized; (2) the annual reports; and (3) regulations implementing the provisions of ACA for nonprofit hospitals. He also requested information regarding the IRS’ reviews of the community benefit activities of nonprofit hospitals, including how many hospitals had been reviewed and the results of the review in terms of compliance. According to Grassley, the IRS and HHS’ failure to provided Congress with access to the information required to be reported by law “raises serious concerns both about the oversight of nonprofit hospitals and the government’s ability to faithfully execute laws passed by Congress.”