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Jan 2016

Facing Section 501(r) in 2016 to Avoid Dire Consequences from Feds

Give the Affordable Care Act credit for creating twice as many headaches as it espouses to treat. The ACA established in Section 501(r) of the Internal Revenue Code a requirement for nonprofit hospitals that these facilities make sure that they provide charity care to patients who need it. This requirement requires that these hospitals make their charity-care policies clear and well communicated to patients, charge reasonable rates to charity-care patients, and refrain from extraordinary debt collection practices.

Since the ACA (aka “Obamacare”) was passed in 2010, non-profit hospitals had advance notice of this new requirement. This mandatory requirement did not come out of left field. The hospitals were active in helping set the policy in an effort to try and minimize this requirement beforehand. Even before Obamacare took root, providing charity care has been a primary issue for nonprofit hospitals for many years. Therefore, non-profit hospitals have had plenty of time to draft policies that would meet the minimal requirements of the ACA.

Non-profit hospitals that do not comply with the ACA requirements risk incurring harsh penalties, including the loss of their tax-exempt status, when the changes take effect in 2016.

However, just two years into the ACA, the data in 2012 indicated that the nonprofit hospitals were slow to adapt to the requirements. In the October 26 issue of Modern Healthcare, reporter Beth Kutscher highlighted a study from the New England Journal of Medicine which suggests that the charity care provisions of 501(r) may not have had their intended effect regarding nonprofit hospitals’ policies and practices.

The Modern Healthcare article reported that even with a two-year lead time, many nonprofit hospitals were not prepared to comply:

“While as many as 94 percent of hospitals had written charity-care and emergency-care policies, only 29 percent were charging charity-care patients the same as insured patients. Similarly, while 80 percent of hospitals did not report unpaid medical debt to credit agencies or pursue extraordinary collection practices, only 44 percent regularly informed patients of their potential eligibility for charity care before beginning the debt collection process.

The article further reported about the inequitable adoption of charity care rules:

“The communities with the worst health outcomes also tend to be those that haven’t expanded their Medicaid rosters and have the least generous charity-care policies. The study found, for instance, that hospitals in states that did not expand eligibility for Medicaid had less generous charity-care policies and a lower average income ceiling to qualify for free care, or 179 percent of the federal poverty level compared with 202 percent in hospitals in expansion states.”

This study, like many, is not flawless. However, the normal weakness of having small sample sizes or low participating rates in a study does not exist here. University of Michigan Institute for Healthcare Policy and Innovation researchers examined the 501(r) compliance forms of 1,800 nonprofit hospitals for 2012, the first year that the data on 501(r) compliance was available. The importance is as plain as the hand in front of our face: In the wake of the enactment of the ACA, the provision requiring charity care for underinsured and uninsured patients is one of the critical elements by which hospitals can keep their tax exempt status.

Like the criticisms of nonprofit hospitals over the year, the study findings suggest that many nonprofit hospitals still have no clue or are dangerously ignoring the importance of charity-care policies as necessary to their non-profit birth and existence.

As devastating as the 501(r) charity care noncompliance might be for non-profit hospitals, there is another section of 501(r) that also yielded disturbing findings in the University of Michigan study. The researchers, in looking at the data, found only 11 percent of the hospitals had conducted a “community health needs assessment” during the previous three years. That means 89 percent of non-profits were either unaware CHNAs are requirements of Section 501(r) or chose to ignore this requirement.

Nonprofit hospitals will argue that the United States Federal Government was extremely slow in rolling out the 501(r) regulations. These hospitals would state it was better for business to stand on the sideline until more clarity was provided by the Feds. However, the charity care rules are fairly flexible. The rules allow non-profit hospitals a bit of latitude in compliance had they decided to get started. For the CHNAs, the requirements are flexible and hardly difficult

The federal health insurance mechanics seem to have been a little lackluster in calling out the nonprofit hospitals for their inadequate preparation for and implementation of the 501(r) rules. To this point, there hasn’t been IRS enforcement with respect to Section 501(r). However, the IRS has released guidance on what kinds of enforcement actions are likely under specific circumstances. How the IRS will police hospital compliance is still a mystery.

For the hospitals, who knows what will happen in 2016? However, behaving like Sgt. Schultz in Hogan’s Heroes is not the solution for dealing with 501(r). Since 2016 is an election year, either the media will be too distracted to make this an issue or the election creates a back-draft that flames 501(r) non-compliance to the forefront. So the best advice might be for nonprofits to take a page from the Boy Scouts and be prepared in 2016.

So here is the nonprofit hospital to-do list: establish a Community Health Needs Assessment (CSNA), draft well written financial assistance and emergency care policies, limit the amounts charged to individuals eligible for assistance under these policies, and make reasonable efforts to determine eligibility for assistance prior to engaging in extraordinary collections action.

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