The IRS is authorized to strip tax-exempt status from ‘willful and flagrant’ violators of ACA financial rules; pathologists and clinical laboratory managers should take notice

Hospitals and other providers already find it more difficult to collect larger amounts of money from patients who have high deductible health plans (HDHPs). That degree of difficulty increased on January 1, 2014. That’s the date when new regulations of the Affordable Care Act (ACA) kicked in that govern how hospitals can collect money from patients or extend financial aid to them.

Non-profit hospitals need to pay attention to the new requirements set forth by the ACA law. It is likely that these new rules will affect most hospital laboratory managers and hospital-based pathology organizations. That’s because these new rules will affect six out of 10 of the nation’s hospitals.

Rules Establish Limits on How Hospitals May Collect Money from Patients

Under the new ACA regulations, hospital governing boards will be forced to approve policies that set new limits on collection efforts. These regulations also require facilities to make a reasonable effort to identify patients eligible for financial aid, noted a report published by Modern Healthcare.

These new rules came in response to arrogant collection practices. Legal actions such as property liens filed by some non-profit hospitals prompted public outrage and investigations by state and federal regulators. This ACA mandate emphasizes the public’s higher expectation that non-profit hospitals exist for the greater good of society, rather than for generating profits. This was the rationale for providing them tax breaks in the first place, noted the Modern Healthcare article.

Non-profit Hospitals Failing to Comply Could Lose Tax-exempt Status

The stakes for hospitals covered by the new ACA regulations are high: failing to comply will jeopardize the hospital’s tax-exempt status. Under ACA, patients who cannot afford to pay must be identified before the hospital can take legal action to:

1) collect the debt;

2) report them to consumer credit bureaus; or,

3) sell their debt to collection companies.

“Willful and flagrant violations” will result in the Internal Revenue Service (IRS) stripping away the violator’s tax breaks.

“You’ve got to be even more sure that someone [a patient] doesn’t qualify for charity before they end up in bad debt or the collection process,” explained Keith Hearle, President of Alexandria, Virginia-based Verite Healthcare Consulting.

 

Keith Hearle (pictured), President of Alexandria, Virginia-based Verite Healthcare Consulting, cautions nonprofit hospitals to make sure patients do not qualify for financial aid before saddling them with debt or involving them in the collection process. He notes that failure to comply with new ACA “presumptive enrollment” and financial rules could result in loss of tax-exempt status. (Photo copyright Verite Healthcare Consulting)

Keith Hearle (pictured), President of Alexandria, Virginia-based Verite Healthcare Consulting, cautions nonprofit hospitals to make sure patients do not qualify for financial aid before saddling them with debt or involving them in the collection process. He notes that failure to comply with new ACA “presumptive enrollment” and financial rules could result in loss of tax-exempt status. (Photo copyright Verite Healthcare Consulting)

Onus of Enrolling Poor Patients in Financial Aid Shifting to Hospitals

Hearle further noted that states are pushing for so-called “presumptive enrollment.” One example is the state of Illinois. It will soon require hospitals to establish presumptive eligibility policies for financial aid. Illinois will mandate that hospitals try to enroll patients using public data when possible. As a result, some hospitals have already implemented presumptive enrollment policies.

One example is St. Louis-based BJC HealthCare, which operates 13 hospitals in Illinois and Missouri. It established a safety net through its presumptive charity-care process, according to Kim Kitson, BJC spokesperson. “This process is based on a formula and implemented through a third-party provider to screen for patients who have a financial need, but were not identified during the initial encounter,” she explained.

Hoping to Dramatically Reduce Patient Bad Debt

BJC hopes this program dramatically reduces BJC’s bad debt. In 2011, an estimated 93% of uncollectible accounts was attributed to patients who would likely have qualified for financial assistance, according to the Modern Healthcare report.

Federal Tax forms ask hospitals to estimate the amount of bad debt that most likely is attributable to patients who could have qualified for financial aid but did not receive it. However, the IRS does not consider bad debt a subsidized service to the community. While some hospitals deny that potentially needy patients are among their uncollectable accounts, others admit that most unpaid bills are for patients who could have qualified for aid but did not apply.

“For me, that is a system failure,” observed Michael Fine, a Healthcare and Tax Attorney in the Chicago office of the global law firm of McDermott, Will and Emery. He jointly chairs the firm’s Tax Exemption Group. “It’s time to revamp the way you [hospital boards] go about addressing financial assistance.” That means adopting new policies, he added, stressing that under new rules, the “same old boiler-plate, cookie-cutter policies [for collections and financial assistance] won’t work.”

Most low-income, or “working poor,” patients will benefit, from the new ACA rules, stated Jessica Curtis, Director of the Hospital Accountability Project for Community Catalyst, a national nonprofit consumer advocacy group. She explained in the Modern Healthcare report that previously hospital patients had to be aware of financial aid and negotiate to pay the hospital bills they could afford. Curtis went on to say that Healthcare Reform shifts the burden of identifying and enrolling eligible patients in financial aid programs from patients to hospitals.

The Implication of Financial Rules for Laboratories and Pathology Groups

Clinical laboratories and pathology groups should realize the implications of new ACA rules on their own organizations: patients who cannot afford to pay their share of a hospital bill most likely cannot afford to pay for the balance on bills for services by other providers. Therefore, clinical laboratories and pathologists may want to consider a patient’s ability pay in their own billing and collection practices.

Furthermore, with government health insurance exchanges offering low-cost, high-deductible plans and employers increasingly shifting employees to higher deductible insurance plans, most healthcare providers recognize the potential for increased levels of uncollectible debt owed by patients. This is one more reason why clinical laboratories may want to collect deductibles from patients at the time when specimens are collected, whenever possible.

—Patricia Kirk

Related Information:

Across the board: Affordable Care Act prompting hospital trustees to pay closer attention to policies on patient billing, collection and bad debt

Obamacare Won’t Offer Relief On Bad Debt For Hospitals

ACA-compliant plans may not help hospitals cut bad debt

To Handle Increased Bad Debt by Patients in High-Deductible Health Plans, Hospitals Are Offering Loan Programs

Even under ACA, hospital bad debt could mount Hospitals must become more adept at collections