Historically, the Internal Revenue Code has provided no specific standards for hospitals to satisfy in order to obtain tax exempt status. Instead, hospitals have obtained tax-exemption as a derivative of the general charitable purpose of serving those in need. Since 1969 the IRS has recognized the promotion of health as a specific charitable purpose. However, now as a result of the enactment of healthcare reform legislation, hospitals must satisfy certain statutory requirements to obtain and maintain tax exempt status.
The Patient Protection and Affordable Care Act contains four specific requirements that hospitals seeking tax exemption are or will be required to meet. One of these requirements, related to conducting and implementing a community health needs assessment, is phased in to law over a three year period. The other three requirements take effect for taxable years beginning after March 23, 2010 (the date of enactment). Essentially, all tax exempt hospitals should now: (1) have a written financial assistance policy (which specifies qualification standards and the application process for obtaining financial help); (2) prohibit certain collection actions until reasonable efforts have been made to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy; and (3) adopt a limitation on charges.
The limitation on charges provision was intended to limit the amounts collected by charitable hospitals from patients qualifying for financial assistance under a partial discount policy. The actual language of this provision states that an organization satisfies the limitation on charges requirement if the organization:
(A) limits amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy to not more than amounts generally billed to individuals who have insurance covering such care, and
Unfortunately, the law as written, and literally interpreted, goes beyond what most professional advisors believe was intended, and beyond what the Joint Committee on Taxation believes the law states according to the Joint Committee’s Technical Explanation of the Act. As written, the prohibition on the use of gross charges is not limited to patients requiring or qualifying for financial assistance – it applies to everyone. For example, if a very wealthy uninsured individual were to seek hospital care, under the language of the law, a hospital should not bill that individual a gross charge amount for services provided. In other words, the law requires the hospital to bill less than it could have historically billed, even though the collection of the additional amount would result in funds that could have been used to serve the vulnerable population that the law was intended to benefit. Maybe this is what the former Speaker of the House meant when she said about healthcare reform that, “we have to pass the bill so that you can find out what is in it.”
The IRS recently released the 2010 version of the tax return schedule used to collect information from charitable hospitals. The revised tax return schedule and related instructions adopt the expansive view of the limitation on the use of gross charges. While the IRS has not published proposed regulations (which would allow a notice and comment period) and it is often easy to place blame on the IRS for being too aggressive in its interpretation of new tax legislation, this issue was not caused by the IRS. Given the fact that this provision is effective for taxable years beginning immediately after the date of enactment, the provision will clearly have unintended consequences. It makes you wonder what else may be lurking in this massive law.