By Bailey, William A.; Tidd, Ronald R.; Cahalan, Ryan
The CPA Journal , Vol. 83, No. 5
The New IRC Section 501 (r) and the CPAs Role
On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (ACA) into law. Part of the new legislation included the addition of Internal Revenue Code (IRC) section 501(r), "Additional Requirements for Certain Hospitals for Exemption from Tax." Nearly 60% of hospitals in the United States are tax-exempt under the IRC. The new subsection adds additional requirements for current and future tax-exempt hospitals to keep or receive tax-exempt status. Failure to comply with the IRC section 501 (r) requirements can result in monetary penalties, as well as the loss or denial of a hospital's tax-exempt status.
In June 2012, two significant events relating to IRC section 501(r) occurred. On June 28, the U.S. Supreme Court upheld the constitutionality of the ACA, ending litigation that had cast some legal doubt on the law's future, and provided hospitals some assurance of the ACA's existence into the foreseeable future. The week before the Supreme Court's ruling, the Treasury Department issued 94 pages of proposed regulations regarding IRC section 501(r), specifically concerning how tax-exempt hospitals must proceed with respect to the following issues: 1) a new requirement for tax-exempt hospitals to develop a "financial assistance policy" (FAP) that determines whether a patient qualifies for financial assistance related to their healthcare, 2) a limitation on charges that can be assessed to patients, and 3) new requirements for billing and collection procedures. A tax-exempt hospital that fails to meet these requirements may lose its tax-exempt status.
In addition, IRC section 501(r)(3) requires that tax-exempt hospitals provide a Community Healthcare Needs Assessment (CHNA) every three years on the organization's Form 990. The 1RS gave initial guidance for an exempt hospital's CHNA in July 2011, in the form of 1RS Notice 2011-52. The highlights of the recently enacted section 501(r) requirements are discussed below, along with an overview of the 1RS guidance concerning CHNAs and the new proposed regulations regarding the FAP rules, charge limitation rules, and required billing and collection procedures.
In the past decade, several highly publicized news stories highlighted negative issues regarding the provision of care at some tax-exempt hospitals. One article discussed a man whose wife had received care 20 years previously that left him heavily in debt. Although he had been paying his bills since that time, his debt kept growing due to interest charged by the hospital (Lucette Lagnado, "Twenty Years and Still Paying," Wall Street Journal, Mar. 13, 2003). The article also noted that although one tax-exempt hospital reported having $35 million set aside for "free bed funds" to support the uninsured, the hospital was billing many low-income individuals and implementing aggressive collection practices, including wage garnishments, liens, and home foreclosures.
Other articles highlighted related issues, such as the concern that uninsured individuals who did not have access to the deep discounts negotiated by private insurers and government payers were often expected to pay two or three times more than insured individuals for the same healthcare services. In other words, those least able to pay were charged the most for healthcare services (Julie Appleby, "Hospitals Sock Uninsured with Much Bigger Bills, Insurance Companies, Medicare Get Huge Discounts Individuals Can't," USA Today, Feb. 25, 2004).
Healthcare pricing and collection practices became a focus of federal and state investigations. In 2005, the U.S. Government Accountability Office (GAO) issued a report regarding charitable care (free or discounted care for the poor) that revealed no substantial difference in the level of charitable care provided by tax-exempt and for-profit hospitals. The report concluded that tax policy at the time lacked specific standards "that would allow nonprofit hospitals to be held accountable for providing services of benefit to the public commensurate with their favored tax status" ("Non-Profit, For-Profit, and Government Hospitals: Uncompensated Care and Other Community Benefits," Statement of David M. …