Paige Gerich

This proposed act for health care reform (also known as Chairman’s Mark) was released September 19, 2009, by the Senate Finance Committee and passed by the committee on October 13, 2009. While the legislation is still in the early stages, new requirements for 501(c)(3) hospitals regarding policies, processes, reporting and disclosure indicate continued scrutiny of exempt organizations, and the proposed amendments to the legislation give the same indication.

Proposed requirements in the legislation would apply to any exempt organization operating at least one hospital facility or any other facility providing hospital care as its primary exempt purpose as determined by the Secretary of the Treasury (Secretary).

Proposals included:

Community health needs assessment
Each hospital facility would conduct a community health needs assessment at least once every three years and adopt an implementation strategy to make necessary improvements. Failure to complete the assessment could result in a penalty of up to $50,000. In addition, the organization would have to disclose how it is meeting the needs identified in its annual Form 990. Organizations not meeting those needs would disclose the reasons for not addressing the identified needs. Failure to disclose would be subject to incomplete return penalties.

Financial assistance policy
Each hospital facility would adopt, implement and widely publicize a written financial assistance policy that should indicate application process, eligibility criteria, whether assistance includes free or discounted care and any actions taken if a bill is unpaid (collections actions, reporting to credit agencies, etc.). Each hospital also would adopt and implement an emergency medical treatment policy. This policy should prevent discrimination by providing medical treatment for people eligible for financial assistance through the policy.

Limitation on charges
Charges to patients who qualify for financial assistance would be limited to the amount generally billed to insured patients.

Collection processes
Each hospital facility would follow current Medicare law and regulations for debt collection practices and may not use extraordinary collection actions (lawsuits, liens on residences, arrests, etc.) without reasonable attempts to inform the patient about the hospital’s financial assistance policy. Future guidance would help determine what “reasonable attempts” would include.

Reporting and disclosure
The Internal Revenue Service (IRS) would be required to review a hospital’s community benefit activity at least once every three years. The Treasury Secretary and Secretary of Health and Human Services would be required to report annually to Congress on charity care levels, bad debt expenses and unreimbursed costs of certain government programs all hospitals incurred as well as cost of community benefit activities of private exempt hospitals. The secretaries also must conduct a study to analyze the trends of these costs over the first five years of the act. A hospital’s audited financial statements, including any consolidated financial statements, would have to be widely available to the public as well.

In addition to the proposed legislation, Grassley recently suggested two proposed amendments directly affecting the tax exempt community.

Grassley’s first amendment would require organizations to report governance practices and conflict of interest information in the annual Form 990. This amendment intends to protect the IRS against legal challenges from exempt organizations opposed to including this information in the annual Form 990.

More importantly, Grassley’s second amendment removes the rebuttable presumption of reasonableness regarding compensation but retains the due diligence requirements. Currently, the due diligence requirements include review by an authorized body comprised of members without a conflict of interest, use of appropriate data for comparability and adequate and contemporaneous documentation. Historically, organizations meeting the rebuttable presumption of reasonableness standard placed the burden of proof as it relates to compensation levels on the IRS. Grassley’s proposed amendment would move the burden of proof for compensation comparability from the IRS to the taxpayer. Studies conducted by the IRS have concluded that it is difficult for the IRS to challenge the reasonableness of compensation since most exempt organizations complied with the rebuttable presumption standard. However, in justifying compensation amounts, many organizations have included comparable data for for-profit organizations, both within the same industry and in a completely different industry. In addition to shifting the burden of proof regarding the reasonableness of compensation, the amendment would require additional Form 990 disclosure summarizing the comparable information used in determining an executive’s compensation.

Even if these two amendments are not part of the final bill, it is possible that they may be included in future legislation.