On June 26, 2015, the Internal Revenue Service (IRS) issued guidance to clarify how charitable hospitals may comply with regulations issued by the Department of Treasury under the Patient Protection and Affordable Care Act (ACA). The regulations implementing Section 501(r) of the Internal Revenue Code require hospitals to include a list of covered providers in their financial assistance policies. This new guidance is significant because willful or egregious failures to comply with the regulations governing financial assistance policies may result in a revocation of a hospital’s tax-exempt status. 

According to IRS Notice 2015-46, charitable hospitals must list the providers delivering emergency services or other medically necessary care in the hospital facility, and specify which providers are and are not covered by the hospital facility’s financial assistance policy (FAP). The FAP must apply to all care provided in the hospital facility by the hospital itself or a substantially related entity.

To address concerns from the hospital industry that some of the regulations related to the FAPs are overly burdensome, the Notice clarifies that hospitals may:

  • list the names of individual doctors, practice groups, or any other entities that are providing emergency or other medically necessary care in the hospital by the name either used to contract with the hospital or to bill patients for the care provided, e.g., if all of the doctors in a practice group that provides medically necessary services at a hospital are covered by the hospital’s FAP, the hospital may include the name of the practice group rather than the name of each individual doctor in its provider list, and
  • specify providers by reference to a department or type of service if the reference makes clear which services and providers are covered, e.g., if all providers of all services in a department are covered by the FAP, the FAP may include the department rather than the specific names of doctors or practice groups and indicate the services in the department covered by the FAP.

If a provider is covered by the hospital FAP in some circumstances, but not others, the hospital must describe the circumstances in which the care delivered by that provider will and will not be covered by the FAP.  The IRS recognized the concerns of consumer advocates and stated that because patients are typically unaware of relationships between a hospital facility and the healthcare providers working at the facility, “it is important for a hospital facility’s FAP to clearly disclose which services provided in the hospital facility are covered by the FAP and which are not.” Hospitals are not required to indicate whether a provider’s services are or may be covered by another entity’s financial assistance policies.

Rule 501(r) of the Internal Revenue Code requires that the authorized body of a hospital facility must adopt an FAP. In further acknowledgement of hospital concerns, the Notice says that if the only change a hospital facility makes to its FAP is to update the provider list, the hospital’s authorized body does not need to re-adopt the FAP.

The Notice also addresses omissions and errors in a hospital’s provider list. Specifically, a failure to include a provider in the list or to identify a service covered by the FAP, will be considered minor and either inadvertent or due to reasonable cause if the hospital takes reasonable steps to ensure that its list of providers is accurate. A hospital facility that updates its provider list at least quarterly will be considered to have taken reasonable steps to ensure that its list is accurate and will be considered to have corrected any minor omissions or errors in the list, thereby avoiding possible loss of its 501(c)(3) designation.

The Notice is applicable with respect to taxable years beginning after December 29, 2015.  Tax-exempt hospital systems should take this opportunity to review and update their existing FAP policies and procedures regarding the provider list to comply with the clarifications in Notice 2015-46. This includes developing a process to update at least quarterly the provider list by adding new or missing information, correcting erroneous information, and deleting obsolete information.

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