Schedule H's PPACA Questions Optional for Tax-Exempt Hospital

by Michael N. Fine

Yesterday, the Internal Revenue Service (IRS) announced that tax-exempt hospitals need not answer certain questions related to the Patient Protection and Affordable Care Act's (PPACA) requirements for their continued tax exemption. 

As you may recall, the PPACA added exemption requirements for tax-exempt hospitals through new Section 501(r) to the Internal Revenue Code.  Earlier this year, the IRS released a redesigned Schedule H, Hospitals,to the Form 990 that included Section 501(r)-related questions focusing on each facility's (i) community health needs assessment practices, (ii) financial assistance policies, (iii) billing and collection practices, and (iv) charges for medical care. 

Today's announcement makes answering these questions optional for the 2010 reporting year.  This gives tax-exempt hospitals more time to analyze the schedule's new questions and better prepare for future disclosures.  No penalties will be assessed against tax-exempt hospitals that choose to leave blank this Schedule H subpart.

Key Takeaways

  • Tax-exempt hospitals must still wait until at least July 1, 2011, to file their 2010 returns.  In February, the IRS directed tax-exempt hospitals to delay filing their Forms 990.  The stated purpose for this unusual delay was to give the IRS additional time to implement changes to the IRS forms and systems to accommodate the additional requirements for charitable hospitals.  Today's announcement does not effect the July 1st delay.
  • While the new Schedule H questions are optional, tax-exempt hospitals must still demonstrate that they comply with Section 501(r)'s requirements or else risk losing their exempt status.  The announcement does not alter Section 501(r)'s effectiveness, just the reporting disclosure timeframe.
  • A tax-exempt hospital must still attach a copy of its most recent audited financial statements to its 2010 Form 990 if its reporting period began after March 23, 2010.  This requirement reflects another Affordable Care Act requirement.
  • The announcement encourages the tax-exempt hospital community to provide comments on how to improve the clarity and reduce the reporting burden of the Form 990 and Schedule H.

A copy of IRS Announcement 2011-37 is attached and available at: http://www.irs.gov/pub/irs-drop/a-11-37.pdf

New Requirements for Tax-Exempt Hospitals

The Facts

The Patient Protection and Affordable Care Act (Pub. L. No. 111-148) includes four primary adjustments to the federal income tax exemption requirements for nonprofit hospitals.  Under the act, tax-exempt hospitals must take the following actions:

  • Conduct a community health needs analysis at least once every three years, soliciting input from the communities that they serve
  • Make widely available their financial assistance policies, which must specify eligibility criteria and, for discounted care, how they determine amounts that are billed to patients
  • Notify patients of financial assistance policies through “reasonable efforts” before initiating various collection actions or reporting accounts to a credit rating agency
  • Restrict charges of uninsured, indigent patients to those amounts generally charged to insured patients

The act imposes penalties on hospitals that fail to timely conduct their community health needs assessments.  Under the act, the Internal Revenue Service must review the exempt status of hospitals every three years.  In addition, the act requires the U.S. Department of the Treasury, in consultation with the U.S. Department of Health and Human Services (HHS), to prepare an annual report for the U.S. Congress on charity care, bad debt expenses, certain unreimbursed costs and costs incurred for community benefit activities.  In five years, Treasury and HHS must also provide Congress with a report on community benefit-related trends.

What’s at Stake

In light of a recent Illinois Supreme Court decision denying property tax exemption to a nonprofit hospital, these new standards contribute to the ongoing dialogue with respect to whether and to what extent nonprofit hospitals are distinguishable from for-profit hospitals and deserve federal income tax exemption.  These provisions can be viewed as requirements that will differentiate tax-exempt hospitals and improve transparency of how they fulfill their charitable, patient-care missions.

Steps to Consider

Tax-exempt hospitals should quickly consider how to comply with the act’s new requirements for federal income tax exemption.  While most of the act’s provisions have postponed effective dates, the tax-exempt specific requirements for hospitals will be effective very soon, perhaps as soon as tax years beginning April 1, 2010.

The Baucus Bill & Requirements for Tax Exempt Hospitals

The Facts
The Baucus Bill contains a specific section dedicated to tax exempt hospitals. The section "Additional Requirements for Section 501(c) (3) Hospitals" would establish a series of four new requirements for hospital tax exempt status, which are in addition to the core requirements for tax exempt status currently established under the controversial "Community Benefit Standard,” and include:

  • Performance of a periodic community needs assessment
  • The adoption, implementation and publicizing of written policies on financial assistance and providing emergency care
  • Limitations on bills to patients who qualify for financial assistance
  • Prohibition of "extraordinary collection actions" (even those permitted by law)

The Bill also provides for increased reporting and disclosure requirements with respect to Form 990, and for continuing governmental oversight of community benefit related indicators.

What's At Stake
This portion of the Baucus Bill serves as a supplement to, rather than a replacement of, the Community Benefit Standard for hospital tax exempt status under the Internal Revenue Code. It excludes the controversial excise tax and minimum patient charity care standards originally proposed by the Senate Finance Committee last May. In many respects, this may be perceived as a moderate alternative to other, more significant proposals to revise or replace the entire Standard. However, what presently remains unclear are the long-term implications of the proposals relating to mandated IRS review of the Schedule H information, financial statement disclosure and the ongoing Health and Human Services study and review of community benefit expenditures.

Steps to Consider

  • Plan for the preparation of a community needs assessment as a tax exemption requirement
  • Evaluate the sufficiency of existing policies and procedures on financial assistance, emergency room access and patient billings
  • Anticipate clear internal policies prohibiting aggressive collection practices

Senate Finance Proposes Health Reform Funding Options

The Facts
On May 18, 2009, the Senate Finance Committee released the last of its three anticipated health reform option papers.  The proposals under consideration would make significant changes in the obligations of tax-exempt hospitals to provide charitable patient care, as well as changes in Medicare provider payments, beneficiary cost-sharing and taxability of employer-sponsored health benefits.

Charity Care Obligations of Tax-Exempt Hospitals
Tax-exempt hospitals could be required to do a periodic community needs analysis, provide minimum amounts of free care to the poor, not refuse services to patients who are unable to pay and adhere to restrictions in patient collection practices.  Senator Charles Grassley (R-Iowa) has justified these proposed new requirements because making health insurance coverage available to everyone should, in theory, minimize the amount of hospital uncompensated care.  Under this proposal, in addition to revoking federal tax-exempt status, the Internal Revenue Service could impose significant excise taxes (intermediate sanctions) on exempt hospitals that fail to comply with these new requirements.

Click here for the comment letter from McDermott partner Douglas Mancino outlining reasons to reject the Finance Committee's proposals to require tax-exempt hospitals to regularly conduct a community needs analysis and to provide a minimum annual level of charitable patient care.  This letter includes a copy of the new schedule H for tax-exempt hospitals and Mr. Mancino's article, "The Charity Care Conundrum for Nonprofit Hospitals."

Payments to Providers and Drug Manufacturers
Medicare would propose “spending reductions in [regional] areas...above a certain threshold compared to the national average.”  Medicare would reduce graduate medical education or disproportionate share payments.  Physician payments could be tied to outcomes and productivity, and reduced by a panel of experts if determined to be “misvalued.”  There would also be adjustments made to beneficiary cost-sharing, including a single annual maximum or other combined approach.  Beneficiaries would also face higher Part D prescription drug premiums, perhaps based on income.  Prescription drug makers could be subject to higher Medicaid rebate requirements.  Home health agencies would also face significant reductions in their Medicare payments.

Taxability of Employer-Sponsored Health Benefits
Various proposals were advanced for eliminating deductions for, as well as taxing the value of, employee health benefits, for all or just higher-income taxpayers.  The taxable amount could be the full value of the benefits or just their value above a benchmark basic plan such as the Federal Employees Health Benefits Program.

What’s at Stake
Tax-exempt hospitals may be required to provide substantial additional amounts of free and heavily discounted care to patients who cannot afford to pay, or risk punitive excise taxes. Providers and pharmaceutical companies would face a wide variety of payment adjustments, which are likely to be adverse in many if not most cases.  Higher-income employees and perhaps all employees would face the elimination, in whole or in part, of the current tax exclusion for health benefits.

Steps to Consider

  • Tax-exempt hospitals should examine their current approaches to charitable patient care and consider the financial impact of being required to expand their current federally mandated emergency room services obligations to include non-emergency care.
  • Employers should carefully monitor taxable health benefits proposals and prepare to adapt to the elimination or reduction of the current tax exclusion