22nd Annual Health Sciences Tax Conference Implementing Section 501(r): best practices and pitfalls on the road to compliance December 3, 2012

Page 2 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Disclaimer

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Page 3 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Disclaimer

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit www.ey.com. This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP.

Page 4 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Presenters

► Jeanne Schuster Ernst & Young LLP Boston, MA + 1 617 585 0373 jeanne.schuster@ey.com

► Amy Dosik Ernst & Young LLP Atlanta, GA + 1 404 817 5488 amy.dosik@ey.com

Page 5 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Introduction to IRC Section 501(r)

► Affordable Care Act (ACA) enacted new Internal Revenue Code (IRC) Sec. 501(r); law signed on March 23, 2010

► U.S. Supreme Court upheld ACA on June 28, 2012 ► Sec. 501(r) — added four new requirements for a hospital

to qualify for exemption under Sec. 501(c)(3) ► Sec. 501(r) — affects existing exempt hospitals and new

hospitals applying for exemption

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Introduction to IRC Section 501(r) (cont.)

► Sec. 501(r) imposes four new requirements for hospitals to qualify for Sec. 501(c)(3) exemption: ► Sec. 501(r)(3) — community health needs assessment

► Effective: taxable years beginning after 3/23/12 ► Sec. 501(r)(4) — financial assistance policy ► Sec. 501(r)(5) — limitation on charges ► Sec. 501(r)(6) — billing and collection requirements

► Effective: taxable years beginning after 3/23/10

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Introduction to IRC Section 501(r) (cont.)

► June 26, 2012 — U.S. Treasury Department and IRS issued proposed regulations: ► Sec. 501(r)(4) — financial assistance policy ► Sec. 501(r)(5) — limitation on charges ► Sec. 501(r)(6) — billing and collection requirements

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Introduction to IRC Section 501(r) (cont.)

► Reliance on proposed regulations until final or temporary regulations are issued

► Effective dates of final regulations: taxable years beginning on or after the date that final or temporary regulations are published in the Federal Register

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Introduction to IRC Section 501(r) (cont.)

► Public comments on proposed regulations were due September 24, 2012. ► Comments were received from:

► American Hospital Association ► American Academy of Emergency Medicine ► Arizona Hospital Group ► California Children’s Hospital Association ► Massachusetts Law Reform Institute ► Others

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Introduction to IRC Section 501(r) (cont.)

► Proposed regulations do not address Sec. 501(r)(3), Community Health Needs Assessments (CHNAs). ► Internal Revenue Service (IRS) Notice 2011-52 (July 7, 2011)

addressed many Sec. 501(r)(3) issues. ► Hospitals can rely on Notice 2011-52 until six months after IRS

issues further guidance. ► IRS will issue proposed regulations on CHNAs.

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Introduction to IRC Section 501(r) (cont.)

► Proposed regulations include: ► Extensive detailed explanations ► Many specific rules and definitions ► Many helpful detailed examples

► IRS requests comments on many issues not addressed ► Estimated average annual burden hours per record-

keeper: 11.5

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Key Section 501(r) principle

► A hospital organization that operates more than one hospital facility must meet each Sec. 501(r) requirement separately for each hospital facility.

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Hospital organization

► Two-part definition: ► An organization exempt under Sec. 501(c)(3) (or which has

applied for exemption under Sec. 501(c)(3)) that operates one or more hospital facilities ► Includes a hospital facility operated through a disregarded entity ► Includes “dual status” governmental hospitals also recognized as

exempt under Sec. 501(c)(3) ► Comments requested on alternative methods that 501(c)(3)

government hospitals may use to meet the Sec. 501(r) requirements (except CHNAs)

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Hospital organization (cont.)

► Any other organization if IRS determines that its principal function or purpose for Sec. 501(c)(3) exemption is the provision of hospital care ► Not explained in proposed regulations ► Comments requested on whether additional organizations should be

included ► Until future regulations are effective – applies only to hospital

organizations operating a hospital facility required by a state to be licensed, registered or similarly recognized as a hospital

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Hospital organization (cont.)

► Partnerships ► Notice 2011-52 (CHNAs):

► States that IRS intends to treat as a hospital organization any Sec. 501(c)(3) organization operating a hospital facility through a partnership

► Comments requested on whether (or under which circumstances) an organization should not be considered to operate a hospital facility as a result of owning a small interest (other than as a general partner) in a partnership that operates the hospital facility

► IRS to address partnerships in separate guidance

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Hospital facility

► A facility required by a state to be licensed, registered or similarly recognized as a hospital ► A hospital organization may treat multiple buildings operated

under a single state license as a single hospital facility. ► Future IRS guidance — whether a hospital organization

operating in a single building under more than one state license is treated as one hospital facility or multiple hospital facilities.

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Failure to meet Sec. 501(r) requirements

► Proposed regulations — consequences not addressed ► IRS to address in separate guidance ► Possible consequences:

► Revocation of Sec. 501(c)(3) exemption ► Correction within specified period ► Financial penalties ► De minimis exception ► Closing agreement ► Voluntary disclosure program ► A combination of these

Page 18 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Discussion of proposed regulations

► Sec. 501(r)(4) — financial assistance policy ► Sec. 501(r)(5) — limitation on charges ► Sec. 501(r)(6) — billing and collection requirements

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Sec. 501(r)(4) — financial assistance policy

► Each hospital facility must establish a written: ► Financial assistance policy (FAP) that applies to all emergency

and other medically necessary care the hospital facility provides ► Emergency medical care policy

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Sec. 501(r)(4) — financial assistance policy (cont.)

► Requirements for FAP must include: ► Eligibility criteria for financial assistance and whether they include

free or discounted care ► Basis of calculating amounts charged to patients ► Method of applying financial assistance ► Actions that may be taken in the event of non-payment (if

organization does not have separate billing and collection policy) ► Measures to widely publicize the FAP in the community served by

the hospital

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FAP eligibility requirements

► The FAP must: ► Specify all financial assistance available under the FAP ► Specify all the eligibility criteria an individual must satisfy to receive

free or discounted care or other level of assistance ► State that an individual determined to be FAP-eligible will not be

charged more for emergency or other medically necessary care than the amounts generally billed (AGB) to individuals with insurance covering such care

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FAP eligibility requirements (cont.)

► The FAP must: ► Describe the method used to determine AGB (the look-back

method or the prospective Medicare method) ► If the look-back method is used, apply one of the following:

► State the AGB percentages and describe how they were calculated ► Explain how this information in writing may be obtained for free

Page 23 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Method of applying for financial assistance

► FAP must describe application process for financial assistance.

► FAP or FAP application form (and instructions) must: ► Describe the information and documentation that may be required

to be submitted ► Provide hospital staff with contact information regarding the FAP

► Financial assistance may not be denied based on an applicant’s failure to provide information or documentation the FAP or FAP application form does not require.

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Actions that may be taken in the event of non-payment

► The FAP (or a separate, written billing and collections policy) must describe: ► Any actions that may be taken to obtain payment of medical bill,

including extraordinary collection actions (ECAs) ► The process and time frames used to obtain payment of a medical

bill, including reasonable efforts hospital facility will make to determine whether an individual is FAP-eligible before engaging in any ECAs

► The office, department or committee having the final authority or responsibility to determine that the hospital facility has made reasonable efforts to determine whether an individual is FAP-eligible

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Sec. 501(r)(4) — financial assistance policy

► If the hospital facility has a separate, written billing and collections policy, the FAP must: ► State that the actions that may be taken in the event of non-

payment are described in a separate billing and collections policy ► Explain how a free copy of the separate policy can be obtained

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Widely publicizing the FAP

► An FAP must explain that the hospital facility will publicize the FAP by: ► Making the FAP, the FAP application form and a plain-language

summary of the FAP widely available on a website ► Making paper copies of the FAP, FAP application form and plain-

language summary of the FAP available free upon request ► Informing and notifying visitors to the hospital facility about the

FAP through conspicuous public displays (or other measures reasonably calculated to attract visitors’ attention)

► Informing and notifying residents of the community about the FAP in a manner reasonably calculated to reach those members of the community most likely to require financial assistance

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Emergency medical care policy

► General rule: each hospital facility must also establish a written emergency medical care policy that requires the hospital facility to provide, without discrimination, care for emergency medical conditions to all individuals whether or not they are eligible for financial assistance.

► A hospital facility will comply with this requirement if the policy requires it to provide the care for emergency medical conditions that it is required to provide under EMTALA (Emergency Medical Treatment and Labor Act).

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Emergency medical care policy (cont.)

► Emergency medical care policy must: ► Prohibit the hospital facility from engaging in actions that

discourage individuals from seeking emergency medical care ► For example:

► By demanding that emergency room (ER) patients pay before receiving treatment for emergency medical conditions

► By permitting debt collection activities: ► In the ER ► Elsewhere in the hospital facility, where such activities could interfere

with the provision of non-discriminatory emergency medical care

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Establishing policies

► A hospital has established an FAP, an emergency medical care policy, and a billing and collections policy for a hospital facility only if: ► An authorized body of the hospital has adopted the policy for the

hospital facility ► The hospital facility has implemented the policy

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Sec. 501(r)(5) — limitation on charges

► A hospital facility must limit the amounts charged for the care it provides to any individual eligible for assistance under its FAP: ► In the case of emergency or other medically necessary care:

► To not more than the AGB for individuals who have insurance covering such care

► In the case of all other medical care: ► To less than the gross charges for such care ► Note: “Gross charges” not defined

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Sec. 501(r)(5) — limitation on charges (cont.)

► AGB ► Applies only to emergency or other medically necessary care to

FAP-eligible individuals

► To determine AGB, a hospital facility must adopt and continue to use either: ► The look-back method ► The prospective Medicare method

Page 32 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(5) — limitation on charges (cont.)

► The look-back method ► Multiply hospital facility’s gross charges for the provided care by

one or more percentages of gross charges (AGB percentages) ► AGB percentages

► Numerator: the sum of all claims for emergency and other medically necessary care paid by the hospital facility during the prior 12-month period ► Claims paid by Medicare fee-for-service and amounts paid by

beneficiaries as co-insurance or deductibles ► Or claims paid by Medicare fee-for-service and all private health

insurers and amounts paid by beneficiaries as co-payments, co-insurance or deductibles

► Denominator: the sum of the gross charges for those claims

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Sec. 501(r)(5) — limitation on charges (cont.)

► Under the look-back method, the AGB percentage may be one of the following: ► One average percentage of gross charges for all emergency and

other medically necessary care provided by the hospital facility ► Multiple AGB percentages:

► For separate categories of care (such as inpatient and outpatient care or care provided by different departments)

► For separate items or services

► Start date for using look-back method AGB percentages ► Must begin using AGB percentages by the 45th day after the end

of the 12-month period used to calculate the AGB percentage(s)

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Sec. 501(r)(5) — limitation on charges (cont.)

► Prospective Medicare method ► Use the billing and coding process that would be used if the

FAP-eligible individual were a Medicare fee-for-service beneficiary ► Set AGB equal to the sum of expected payments from:

► Medicare ► Medicare beneficiary

Page 35 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(5) — limitation on charges (cont.)

► Gross charges ► Must charge an FAP-eligible individual less than the gross charges

for any medical care provided to that individual ► A billing statement may state the gross charges as a starting point for

allowances, discounts and deductions

Page 36 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(5) — limitation on charges (cont.)

► Safe harbor for charges more than AGB ► Even if a hospital facility charges more than AGB, it will meet the

Sec. 501(r)(5) limitations if: ► FAP-eligible individual has not submitted a completed FAP application

at the time of the charge ► Hospital facility makes reasonable efforts to determine if the

individual is FAP-eligible during the required time periods

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Sec. 501(r)(6) — billing and collection

► A hospital facility may not engage in ECAs against an individual before the hospital facility has made “reasonable efforts to determine whether the individual is FAP-eligible.”

► ECAs against an individual include: ► ECAs against any other individual who is responsible for the

individual’s hospital bills ► Any ECAs taken by:

► Any purchaser of the individual’s debt ► Any debt collection agency to which the hospital facility has referred

the debt

Page 38 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(6) — billing and collection (cont.)

► ECAs are: ► Actions taken by a hospital facility against an individual related to

obtaining payment of a bill for care covered under its FAP: ► Requiring a legal or judicial process ► Involving selling an individual’s debt ► Reporting adverse information about the individual to consumer credit

reporting agencies or credit bureaus

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Sec. 501(r)(6) — billing and collection (cont.)

► Examples of actions requiring a legal or judicial process: ► Placing a lien on an individual’s property ► Foreclosing on an individual’s real property ► Attaching or seizing an individual’s bank account or other personal

property ► Commencing a civil action against an individual ► Causing an individual’s arrest ► Causing an individual to be subject to a writ of body attachment ► Garnishing an individual’s wages

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Sec. 501(r)(6) — billing and collection (cont.)

► “Reasonable efforts to determine whether an individual is FAP-eligible”: ► The hospital facility notifies the individual about the FAP during

the notification period ► For an individual who submits an incomplete FAP application

during the application period, there are certain required actions ► For an individual who submits a complete FAP application during

the application period, there are certain required actions.

Page 41 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(6) — billing and collection (cont.)

► Notification ► A hospital facility notifies an individual about its FAP when it:

► Distributes a plain-language summary of the FAP and offers the individual an FAP application form before discharge from the hospital facility

► Includes a plain-language summary of the FAP with at least three billing statements and with all other written communication regarding the bill given to the individual during the notification period

Page 42 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(6) — billing and collection (cont.)

► Informs the individual about the FAP in all oral communication regarding the amount due for care occurring during the notification period

► Gives the individual at least one written notice that: ► Informs the individual about the ECAs that may be taken if the individual

does not submit an FAP application or pay the amount due by a specified deadline (not before the end of the notification period)

► Is given to the individual at least 30 days before the specified deadline

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Sec. 501(r)(6) — billing and collection (cont.)

► Notification occurs: ► If a complete or incomplete FAP application is submitted and the

hospital facility has met the requirements for addressing a complete or an incomplete FAP

► If no FAP application is submitted and the hospital facility has met the notification requirements

► Notification period ► As to any care the hospital facility provides:

► Begins on the first date care is provided ► Ends on the 120th day after the hospital facility gives the individual

the first billing statement for the care

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Sec. 501(r)(6) — billing and collection (cont.)

► FAP application situations: ► No application submitted ► Incomplete application submitted

► Completed by completion deadline ► Not completed by completion deadline

► Complete application submitted

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Sec. 501(r)(6) — billing and collection (cont.)

► Completion deadline is no earlier than the later of: ► 30 days after the hospital facility gives the individual the

written notice ► The last day of the application period

► Application period ► As to any care the hospital facility provides:

► Begins on the first date care is provided ► Ends on the 240th day after the hospital facility gives the individual

the first billing statement for the care

Page 46 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(6) — billing and collection (cont.)

► No FAP application submitted ► If an individual does not submit an FAP application during the

notification period (or by the deadline specified in the written notice) and the facility has properly notified the individual: ► The facility will have made “reasonable efforts to determine whether

the individual is FAP-eligible.” ► The facility may engage in ECAs against the individual.

Page 47 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(6) — billing and collection (cont.)

► Incomplete FAP application submitted ► If an incomplete application is submitted during the application

period, “reasonable efforts to determine whether the individual is FAP-eligible” will have been made if the hospital facility: ► Suspends any ECAs against the individual ► Gives the individual written notice describing the additional information

and/or documentation required to complete the FAP application, including a plain-language summary of the FAP

► Gives the individual a written notice that: ► Describes the ECAs that may be taken if the FAP application remains

incomplete by the specified completion deadline ► Is given to the individual at least 30 days before the completion deadline

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Sec. 501(r)(6) — billing and collection (cont.)

► If FAP is completed by the completion deadline: ► FAP will be considered completed and timely submitted ► Hospital facility will have made “reasonable efforts to determine

whether the individual is FAP-eligible” if it meets the requirements for complete FAP applications

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Sec. 501(r)(6) — billing and collection (cont.)

► If FAP is not completed by the completion deadline and hospital facility has met the requirements for an incomplete FAP application: ► Hospital facility will have made “reasonable efforts to determine

whether the individual is FAP-eligible” if it meets the requirements for complete FAP applications

Page 50 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(6) — billing and collection (cont.)

► Complete FAP application ► If a complete FAP application is submitted during the application

period: ► Hospital facility will have made “reasonable efforts to determine

whether the individual is FAP-eligible” if it: ► Suspends any ECAs ► Determines (and documents) whether the individual is FAP-eligible ► Notifies the individual in writing of the eligibility determination, the

assistance available, if any, and the basis for this determination

Page 51 Implementing Section 501(r): best practices and pitfalls on the road to compliance

Sec. 501(r)(6) — billing and collection (cont.)

► If the individual is determined to be FAP-eligible, the hospital facility: ► Gives the individual a billing statement showing the amount owed,

explanation of how it was determined and explanation of the AGB ► Refunds any payments made in excess of amount owed as an

FAP-eligible individual ► Takes reasonable measures to reverse any ECAs taken to collect

the debt

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Sec. 501(r)(6) — billing and collection (cont.)

► Special rules: ► Anti-abuse rule for complete FAP applications ► Presumptive eligibility permitted ► Suspending ECAs during a pending FAP application ► Waiver not included in reasonable efforts ► Agreements with debt collectors ► Placement of notices and communications

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Sec. 501(r)(6) — billing and collection (cont.)

► Anti-abuse rule for complete FAP applications ► A hospital facility will not have made “reasonable efforts to

determine whether an individual is FAP-eligible” if its determination that the individual is not FAP-eligible is based on information: ► That the facility has reason to believe is unreliable or incorrect ► Obtained from an individual under duress or through coercive

practices

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Sec. 501(r)(6) — billing and collection (cont.)

► Presumptive eligibility permitted ► A hospital facility will have made “reasonable efforts to

determine whether an individual is FAP-eligible” if: ► It determines that the individual is eligible for the most generous

assistance (including free care) available under the FAP based on: ► Information other than that provided by the individual in a complete FAP

application ► The determination that the hospital facility meets the requirements for

actions involving a complete FAP application

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Sec. 501(r)(6) — billing and collection (cont.)

► Suspending ECAs during a pending FAP Application ► If a complete or incomplete application is submitted during the

application period, the hospital facility will have made “reasonable efforts to determine whether the individual is FAP-eligible” if, after receiving the application, it: ► Does not initiate or pursue any ECAs until either:

► The hospital facility has met the requirements for actions involving a complete application

► The application is incomplete and the completion deadline has passed without completion of the FAP application

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Sec. 501(r)(6) — billing and collection (cont.)

► Waiver is not included in reasonable efforts ► Obtaining a signed waiver that an individual does not wish to apply

for FAP assistance or receive FAP application information will not meet the requirement to make “reasonable efforts to determine whether the individual is FAP-eligible” before engaging in ECAs.

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Sec. 501(r)(6) — billing and collection (cont.)

► Agreements with debt collectors ► If a hospital facility refers or sells a debt to a debt collector during

the application period, it will have made “reasonable efforts to determine whether the individual is FAP-eligible” if it obtains (and enforces) a legally binding written agreement that the debt collector: ► As to debts referred during the notification period, will not engage in

ECAs until the hospital facility has documented that it has met the reasonable efforts requirements

► As to an application submitted during the application period, the third party will suspend any ECAs

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Sec. 501(r)(6) — billing and collection (cont.)

► As to an application submitted during the application period and the hospital facility having determined the individual is FAP-eligible, the debt collector will: ► Adhere to procedures specified in the agreement that ensure the individual

will not pay any more than required as an FAP-eligible individual ► Take all reasonable measures to reverse any ECAs already taken

► If the debt collector refers or sells these debts to another party during the application period, it will obtain a written agreement from the other party that includes all these requirements.

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Sec. 501(r)(6) — billing and collection (cont.)

► Placement of notices and communications ► A hospital facility may print any required written notice or

communication (including a plain-language summary of the FAP) on a billing statement or along with other descriptive or explanatory matter if the required information is conspicuously placed and large enough to be clearly readable.

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Questions