Industry Insights

Schedule H & 501(r) – Commonly Misunderstood Questions

February 2016
Author:  Brian Todd

Brian Todd

Partner

Tax

Health Care

910 E. St. Louis Street, Suite 200
P.O. Box 1190
Springfield, MO 65801-1190 (65806)

Springfield
417.865.8701

For calendar year-end hospitals, the time for compliance with the final Internal Revenue Code (IRC) Section 501(r) regulations has arrived. Fiscal year-end hospitals have until the first day of their fiscal year-end beginning in 2016 to fully comply.

Many hospitals have focused significant attention and resources on revising policies and updating procedures to comply with 501(r). Keep in mind, much of this information also will be reported on Schedule H of Form 990. It’s important to have open lines of communication between those in your hospital charged with 501(r) compliance and those responsible for Form 990 data accumulation.

The IRS continues to add questions to Schedule H that could become red flags if answered inappropriately. While gathering benchmarking data for industry analysis, BKD tax professionals have noted several of these commonly misunderstood questions. A sampling of these questions from the 2015 Schedule H is discussed below. The IRS slightly revised some of the questions for the 2015 Form 990, so pay close attention if you just completed your 2014 form.

Schedule H, Part V, Section B, Questions 18 - 20

Question 18 instructs the hospital to check all of the following actions permitted against an individual under the hospital’s financial assistance policy (FAP) during the tax year before making reasonable efforts to determine that individual’s eligibility under the facility’s FAP:

  1. Reporting to credit agencies
  2. Selling an individual’s debt to another party
  3. Actions that require a legal or judicial process
  4. Other similar actions
  5. None of these actions or other similar actions were permitted

IRC § 501(r)(6) says a hospital won’t meet the 501(r) requirements if it engages in extraordinary collection actions (ECA) before making reasonable efforts to determine whether an individual is eligible for assistance under its FAP. Responses a) through d) in Question 18 represent ECAs, according to the final regulations. The key to Question 18 is the phrase “before making reasonable efforts.” For example, if a hospital selects item a), it’s saying it permits reporting to credit agencies before making reasonable efforts to determine if patients are eligible for financial assistance. Reporting to credit agencies before making reasonable efforts is a violation of § 501(r)(6). 

Question 19 is similar to Question 18, except that it asks whether the hospital facility or a third party engaged by the hospital actually performed (rather than permitted) any of the actions listed above. Again, “yes” answers are a red flag.

Question 20 asks the hospital to indicate which efforts the hospital facility or other authorized party made before initiating any of the actions listed (whether or not checked) in Line 19:

  1. Notified individuals of the FAP on admission
  2. Notified individuals of the FAP prior to discharge
  3. Notified individuals of the FAP in communications with individuals regarding the individuals’ bills
  4. Documented its determination of whether individuals were eligible for financial assistance under the hospital facility’s FAP
  5. Other
  6. None of these efforts were made

Each of these items represent actions that could be considered reasonable efforts by the hospital to determine whether an individual is eligible for financial assistance. Therefore, if the hospital makes these efforts before initiating the actions listed in Question 19, it shouldn’t check any of the boxes indicated in Question 19. Question 19 hasn’t been updated to reflect the more stringent requirements for meeting the reasonable efforts standard. 

Schedule H, Part V, Question 22

Question 22 instructs the hospital to indicate how the hospital facility determined, during the tax year, the maximum amounts that can be charged to FAP-eligible individuals for emergency or other medically necessary care:

  1. The hospital facility used its lowest negotiated commercial insurance rate when calculating the maximum amounts that can be charged
  2. The hospital facility used the average of its three lowest negotiated commercial insurance rates when calculating the maximum amounts that can be charged
  3. The hospital facility used Medicare rates when calculating the maximum amounts that can be charged
  4. Other (describe in Section C)

This question hasn’t yet been updated to reflect the final 501(r) regulations. The instructions for this question state that under § 501(r)(5), the maximum amount that can be charged to financial assistance-eligible patients is the amount generally billed (AGB) to individuals with insurance covering the care. In the final regulations, choices a) and b) are no longer options for computing AGB, so marking these after the effective date of the final regulations could represent red flags. Choice c) remains a valid option under the regulations. Medicare, either alone or in combination with commercial insurers and/or Medicaid, generally will be used if the look-back method for computing AGB under the final regulations is used by the hospital facility and also may be used with the prospective method.

In our experience, many hospitals have selected choice d) but inadequately addressed the question in their narrative explanation. A hospital should describe how it has determined AGB in this narrative. Until the question is modified to better reflect the final regulations, we anticipate most hospitals will select option d) and describe the AGB percentage and computation. Because a description of the AGB computation also is required in the hospital’s FAP, the hospital should consider using the same description for Schedule H.

Schedule H, Part V, Question 24

Question 24 asks if, during the tax year, the hospital facility charged any FAP-eligible individual an amount equal to the gross charge for a service provided to that individual. IRC § 501(r)(5) prohibits the use of gross charges for financial assistance-eligible individuals, so hospitals answering ”yes” are indicating they are in violation of 501(r)(5).

This is one of the more common red-flag answers we see in hospital Forms 990. This question is widely misunderstood by hospitals and practitioners alike. The IRS has clarified in the Form 990 instructions and in the regulations that a hospital may begin billing statements for FAP-eligible individuals with gross charges as long as the appropriate discounts are applied on that statement. Hospitals following this practice should answer “no” to this question. The IRS has gone further to define the term “charge” in the final regulations. While the term typically is used interchangeably with the term “billed” by the health care community, the IRS has, in this instance, defined the word “charge” to mean the amount the patient is responsible for after considering payments from insurance, governmental programs, discounts, etc. In this case, Question 24 only would be answered “yes” if the hospital facility expected a patient eligible for financial assistance to be personally responsible for the entire gross charge amount.

Final Thoughts

This is a small sample of the complex considerations associated with completing Schedule H. Schedule H will continue to provide a road map to potential 501(r) compliance issues for the IRS, media and other agencies. Given the lead time needed by the IRS to make changes to the IRS forms, changes in Schedule H and the related instructions likely will continue over the next few years. It’s imperative not only to understand the final regulations and related questions when completing Schedule H, but also to pay close attention to the wording on each year’s form and the related instructions.

An upcoming BKD webinar will take a much deeper look at Schedule H. In the meantime, if you have any questions about these or other issues, contact your BKD advisor.

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