Charity Care and Tax-Exemption Issues for Healthcare Providers Hospitals Bernard Smith Tucker Ellis & West LLP 925 Euclid Ave., Suite 1150 Cleveland, Ohio ▪ 216·696·3952

2Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Obtaining tax-exempt status Qualifying as charitable –Before 1956 –1956 – 1969 – –After health care reform What led us here What are the rules What should you do Overview

3Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals If You Remember Nothing Else… July 1, 2010 January 1, 2011

4Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals If You Remember Nothing Else… Most new charitable qualification requirements are effective as of tax years beginning after the date of enactment of the PPACA, i.e., March 23, In other words, a hospital with a June 30 tax year must begin complying with the new rules on financial and emergency care policies and billing and collection practices as of July 1, 2010.

5Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals General Rules for Tax-Exemption (pp 1- 4) Distinguish –Tax-exempt general description of many entities multiple categories under 501(c)(3) (e.g., religious, scientific, educational, etc) –Charitable one type of tax-exempt

6Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals General Rules for Tax-Exemption (pp 1- 4) Organizational Test Based on organizing document, typically, articles of incorporation –Empower for exempt activities only –No more than insubstantial non-exempt activities –Limited lobbying; no political –Dedicate assets to charity

7Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals General Rules for Tax-Exemption (pp 1- 4) Organizational Test Based on organizing document, typically, articles of incorporation –Empower for exempt activities only –No more than insubstantial non- exempt activities –Limited lobbying; no political –Dedicate assets to charity Operational Test Based on activities/operations –Actually conduct exclusively exempt activities –No private inurement –Not an action organization

8Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals General Rules for Tax-Exemption (pp 1- 4) Organizational Test Based on organizing document, typically, articles of incorporation –Empower for exempt activities only –No more than insubstantial non- exempt activities –Limited lobbying; no political –Dedicate assets to charity Everyday Rules Operate for exempt purposes No inurement Limited private benefit No political activity Limited lobbying Insubstantial unrelated trade or business activities Operational Test Based on activities/operations –Actually conduct exclusively exempt activities –No private inurement –Not an action organization

9Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying as Charitable (pp 4-5) Pre –Relief of illness and distress –Care of the poor –Eleemosynary concept

10Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying as Charitable (p 5) Pre eleemosynary Hospital is charitable if it is “operated to the extent of its financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay.”

11Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying as Charitable (pp 6-7) Pre eleemosynary charity care community benefit

12Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Impetus for Reform (pp 8 -10; Appendix I) State property tax-exemption challenges Wide variety of Congressional oversight –were hospitals “earning” their tax-exemption benefits –executive compensation Uninsured patients

13Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (pp 11-12) Patient Protection and Affordable Care Act of 2010, P. L (“PPACA”) Health Care and Education Reconciliation Act of 2010, P. L

14Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (pp 11-12) PPACA sections 9007 and IRC sections –501(r) –4959 –6033(b)(10) and (15)

15Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (p 12) Effective date for most provisions is hospital's next taxable year

16Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (p ) Definition of hospital organization Operating multiple hospital facilities Penalty if facility fails – what does it mean?

17Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (pp ) Community Health Needs Assessment Statute not helpful State law examples Frequency

18Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (pp 18) Financial Assistance Policy Contents Absence of quantitative standards

19Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (pp ) Emergency Medical Care Policy Contents Absence of quantitative standards

20Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (p 19) Limitation on Charges Applies to persons eligible for financial assistance No standards provided –either the best, or an average of three best, negotiated commercial rates, or Medicare rates JCT 18-10

21Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Qualifying As Charitable After HCR (pp ) Billing and Collection Practices Not engage in extraordinary collection actions before the organization has made reasonable efforts to determine if person is eligible for assistance under the financial assistance policy – what about after? No standards provided Extraordinary collection actions include lawsuits, liens on residences, arrests, body attachments or other similar collection processes.” JCX at page 82

22Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Other PPACA Changes (pp ) Excise Tax –For failure to perform community health needs assessment –Ambiguity about when effective Additional Reporting –Contents of community health needs assessment –Audited financials –Payment of excise taxes

23Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals IRS Obligations under PPACA (p 21) Reports on –Charity Care –Trends

24Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Was This Really Necessary (pp 22-27) Were hospitals really not caring for the community? Effect of health care reform’s individual mandate State law

25Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Was This Really Necessary (pp ) So more than 54% of hospitals spent 3% or more of revenue on uncompensated care $4.5M if $150M in GR

26Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Action Steps (pp ) Learn Educate Use the Form 990 NOW Don’t forget the old rules

27Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Action Steps (pp ) BEGIN NOW By NEXT TAXABLE YEAR ( e.g., July 1, 2010 or January 1, 2011) hospitals must have in place –financial assistance plan –emergency medical care plan –limitations on charges –revised billing and collection practices

28Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals Action Steps (pp )

29Charity Care and Tax-Exemption Issues for Healthcare Providers - Hospitals THANK YOU