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Sign of the Times? IRS Complaint from Non-Profits Alleges Florida Health System Failed to Follow 501(r) Requirements

on Wednesday, 22 October 2014 in Health Law Advisory: Zachary J. Buxton, Editor

Two non-profits serving low-income families in Florida are attempting to hold one of the state’s largest providers of charity care accountable to the requirements for tax-exempt hospitals adopted under the Patient Protection and Affordable Care Act (ACA). Florida Legal Services, Inc. (FLS) and the National Health Law Program (NHeLP) filed a complaint with the Internal Revenue Service (IRS) alleging Jackson Health System (JHS) has largely failed to comply with the requirements for community benefit under the ACA.

The August 25, 2014, complaint against the nearly 2500-bed system, the first of its kind under §501(r) of the Internal Revenue Code, alleges JHS has not satisfied its obligations under its financial assistance policy (FAP) and has not restricted extraordinary collection actions (ECAs) within proposed IRS regulations. It further alleges the health system has not published its Community Health Needs Assessment (CHNA) and has failed to produce a copy of the CHNA after multiple requests.

FLS and NHeLP’s complaint focuses on the proposed regulations issued in 2012 outlining the IRS’s vision for tax-exempt hospitals under §501(r). It alleges that JHS has no “conspicuous” public displays of its FAP for qualified patients, and contends JHS’s collection efforts against FAP-eligible patients constitute “extraordinary collection actions” within the meaning of the ACA.

Historically, tax-exempt health systems were permitted to justify their §501(c)(3) status under the Internal Revenue Code through the community benefit standard. Under the standard, providers counted charity care and uncompensated care within their measured benefit to the communities they serve for foregoing federal taxes. However, Section 9007 of the ACA added explicit requirements tax-exempt §501(c)(3) hospitals must satisfy in order to maintain tax-exempt status, including the following:

  • § 501(r)(3) – Community Health Needs Assessment – Once every three tax years perform and adopt a CHNA in accordance with published IRS guidance, make the report widely available to the public, and adopt an implementation strategy that addresses the community needs identified in the CHNA.
  • § 501(r)(4) – Financial Assistance Policy – Adopt a written financial assistance policy that sets forth (1) eligibility criteria for financial assistance, and whether such assistance includes free or discounted care; (2) the basis for calculating amounts charged to patients; (3) the method for applying for financial assistance; (4) [….] the actions the organization may take in the event of nonpayment; and (5) measures to widely publicize the FAP within the community served by the hospital facility.
  • § 501(r)(5) – Limitation on Charges – Limit the amount charged for any emergency or other medically necessary care to a FAP-eligible patient to not more than the amounts generally billed to insured patients receiving the same care and not charge FAP-eligible patients gross charges for any care provided.
  • § 501(r)(6) – Billing and Collection – Not engage in ECAs against an individual before making reasonable efforts to determine whether the individual is FAP-eligible.

Even though the IRS has not responded publicly to the complaint, the document, filed on IRS Form 13909, will be sent to the IRS Exempt Organizations Classifications Office in Dallas, Texas. From there, an agent will recommend one of four courses of action ranging from least to most severe: (1) the complaint requires no further action, (2) the complaint requires re-evaluation at a later date, (3) the complaint requires evaluation by a committee of Exempt Organization managers and agents, or (4) the complaint requires an examination of the organization based on the referral.

The IRS is inundated with new responsibilities with respect to holding tax-exempt hospitals accountable under the ACA, but the FLS and NHeLP complaint represents a reminder about the changing world of community benefit for tax-exempt health systems. The ACA amendments were designed to introduce an increased level of accountability and scrutiny intended to justify the tax benefit provided to §501(c)(3) hospitals, and the complaint may represent an unanticipated method of enforcement for the agency with respect to §501(r). It should also serve as a reminder that the public is aware of the responsibilities of tax-exempt hospitals brought about by the ACA. Tax-exempt §501(c)(3) hospitals should be adopting and implementing §501(r)-compliant policies and procedures in order to avoid the same types of allegations levied against JHS and the negative publicity associated with the complaint.

Andrew D. Kloeckner

Zachary J. Buxton

 

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