four tax issues general counsel should watch healthcare webinar 2015 11 19

Polsinelli PC. In California, Polsinelli LLP

Under the Radar: Four Tax Issues General Counsel Should Watch

Presented by John F. Crawford and Travis F. Jackson

November 19, 2015

real challenges. real answers. sm

2

Introduction and Overview

� Implementation Issues under Section 501(r)

� Emerging Trends in Healthcare Joint Ventures, Acquisitions, and Other Transactions

� Tax Implications of Accountable Care Organizations/Clinically Integrated Networks

� Developments in State and Local Property Tax Exemption Issues


3

Implementation Issues under Section 501(r)


4

Section 501(r) Overview

� Understanding IRS Oversight of Charitable Hospitals– The Community Benefit Standard– Enactment of Section 501(r)

� Applying Section 501(r) to Charitable Hospitals– Community Health Needs Assessments

– Financial Assistance and Emergency Medical Care Policies

– Charge Limits

– Billing and Collections Restrictions


5

IRS’s View on Charity Care Before Enactment of

Section 501(r)


6

The Community Benefit Standard

� The IRS ruled in 1969 that a charitable hospital had to benefit its community.– Factors that the IRS considered included:

�Open emergency room�Care to Medicare/Medicaid beneficiaries�Use of surplus funds�Open medical staff�Community board


7

The Community Benefit Standard

� There is no charity care requirement imposed by the IRS.

� General rule of thumb: free or discounted care is sufficient but not necessary for a hospital to be a charity.


8

Charitable Hospitals Under Fire


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Scrutiny of Charitable Hospitals

� Community benefit standard remained despite changes that blurred the line between charitable and for-profit hospitals.– EMTALA– Medicaid

� Newspapers, magazines, and other media outlets reported on alleged abuses by charitable hospitals.– Cash Before Chemo: Hospitals Get Tough, The Wall Street Journal– Bitter Pill: Why Medical Bills Are Killing Us, Time Magazine– Debt Collector Is Faulted for Tough Tactics in Hospitals, The New York Times– Best Kept Secrets: Are Non-Profits Informing Patients About Charity Care

Programs?, Community Catalyst

� Congress investigates charitable hospitals.– Senate Finance Committee Hearings– House Subcommittee on Oversight and Investigations


10


11

Section 501(r) and Accompanying

Guidance


12

New Requirements for Hospitals

� The Affordable Care Act created additional requirements that a charitable hospital must satisfy.

� Section 501(r) imposed these requirements in four areas:– Community health needs assessment

– Financial assistance and emergency medical care policies

– Limitations on patient charges

– Billing and collections restrictions

� Final Regulations published on December 31, 2014– Apply to taxable years beginning after December 29, 2015

– Are you prepared?


13

Basic Concepts under 501(r)

� Hospital Organization: – A Section 501(c)(3) organization that operates one or more hospital

facilities.

� Hospital Facility– A facility that is required by a state to be licensed, registered, or similarly

recognized as a hospital.

– Multiple buildings operated under a single state license are considered to be a single hospital facility.

– Hospital facilities operated through partnerships generally considered to be operated by the hospital organization.

– A single building under more than one state license can have joint FAPsand policies as long as the information is accurate for all facilities

– Possible to have joint CHNAs and implementation strategies if they have overlapping communities


14

CHNA – General Requirements

� A Community Health Needs Assessment (CHNA) must be completed at least once every three years– Statutorily applies to taxable years beginning after March

23, 2012

– Solicit and take into account input received from persons who represent broad interests of the community

� Implementation Strategy– Adopted by the Board by the 15th day of the 5th month after

year-end– CHNA and Implementation Strategy Made Widely

Available to Public


15

Financial Assistance Policy (FAP)

� Charitable hospitals must now establish a written FAP that includes:– Eligibility criteria for financial assistance (free or discounted care)

– Basis for calculating amounts charged to patients

– Method for applying financial assistance

– Actions the hospital may take in the event of non-payment (this may be in a separate billing and collections policy)

– A list of providers covered by the FAP and which are not

� The FAP must apply to all emergency and medically necessary care provided in the hospital facility and must be widely publicized within the community served by the hospital


16

Emergency Medical Care Policy

� Each charitable hospital must have a written policy that requires each hospital facility to provide, without discrimination, care for emergency medical conditions (within the meaning of EMTALA) to individuals, regardless of whether they qualify for financial assistance.

� The policy must prohibit debt collection activities from occurring in the emergency department or in other hospital venues where such activities could interfere with the treatment of emergency medical conditions without discrimination.


17

IRS Notice 2015-46

� Requirements of FAP:

– FAP must apply to all emergency and medically necessary care provided in the hospital facility only to the extent the care is provided by the hospital facility itself or a substantially-related entity.

– FAP must clearly disclose which services are provided in the hospital facility are covered by the FAP and which are not.

– Include list of providers that are covered by FAP and which are not.

� IRS Notice provides some relief allowing hospital to list providers by group or department or type of service.

� Provider list can be a separate document from FAP and does not have to be adopted by the authorized body each time it changes.

� However, the list should be updated at least quarterly.


18

Charge Limits

� A hospital may not charge an individual who qualifies for financial assistance more than the “amounts generally billed.”

� Calculating Amounts Generally Billed

– Look-back Method

� Based on actual past claims allowed for all emergency or medically necessary care by (i) Medicare fee-for-service, (ii) combination of Medicare fee-for-service and all private insurers, or (iii) Medicaid, either alone or in combination with (i) or (ii).

– May calculate one percentage or separate for categories

– 120 days after the end of 12-month period to apply

– Prospective Method

� Based on estimates of the amount that would be paid if the individual were a Medicare fee-for-service beneficiary or Medicaid beneficiary.


19

Billing and Collection Restrictions

� General Rule– Charitable hospitals may not engage in extraordinary

collections actions (ECAs) before making reasonable efforts to determine whether an individual qualifies for financial assistance.

� ECAs include:– Sale of debt to another party (with exceptions)

– Reporting to credit agencies

– Deferring, denying, or requiring a payment before providing medically necessary care because of previous nonpayment

– Any actions taken that require a legal or judicial process (e.g., liens, foreclosure, civil actions, garnishment)


20

Reasonable Efforts

� Notify the individual of the FAP and refrain from ECAs for at least 120 days after first post-discharge billing statement

� Must notify those who submit incomplete FAP application about how to complete FAP application and reasonable amount of time to do so (suspension of any ECA within 240 day application period))

� Must make determination about whether someone is FAP-eligible if they submit complete FAP application

� Notification:– Provides written notice that indicates financial assistance is

available, identifies ECAs that may be taken, states a deadline in which ECAs may be taken (at least 30 days before initiating an ECA)

– Plain language summary of FAP

– Reasonable efforts to orally notify individual of FAP


21

Exception to Reasonable Efforts

� A hospital is permitted to defer or deny medically necessary care based on an unpaid bill for previously provided care immediately if it does the following:– Provides the patient a FAP application form, and gives the patient

written notice that financial assistance is available and stating the deadline, if any, after which the hospital will no longer accept and process a FAP application for the previously-provided care at issue;

– Provides the patient with a plain language summary of the FAP;

– Makes a reasonable effort to notify the patient about the hospital’s FAP and how the patient may obtain assistance with the FAP process; and

– Expedites the review process of a FAP application submitted under these circumstances


22

Exception to Reasonable Efforts

� When a patient schedules an appointment or presents themselves at the hospital for medically necessary care and they have an unpaid bill for previously provided ca re, a hospital may deny this care if it follows these steps:

– Step 1: The hospital should provide patient with a FAP application form and plain language summary of the FAP.

– Step 2: If a financial assistance determination for the unpaid bill has not already been made, the hospital should notify the patient, in writing, about the availability of financial assistance and the deadline, if any, after which the hospital will no longer accept and process an application for previously provided care.

� This deadline must be at least 30 days after the date that the written notice is provided or 240 days after the date that the first post-discharge billing statement for the previously provided care was provided.

– Step 3: The hospital must make reasonable efforts to orally notify the patient about its FAP and about how the patient may obtain assistance with the FAP application process.

– Step 4: The hospital immediately defers or denies medically necessary care to patient.

– Step 5: If the patient submits a FAP application for previously provided care during the application period, the hospital must process the application on an expedited basis, to ensure that medically necessary care is not unnecessarily delayed.


23

Consequences of Failure to Comply

� Certain minor and inadvertent omissions and errors or due to reasonable cause are not considered a failure to comply

– Must be corrected within reasonable period after becoming aware

� Certain failures will be excused if:

– Failure is neither willful nor egregious and

– Failure is corrected and disclosed


24

Consequences of Failure to Comply, continued

� Failures that are not ignored or excused may result in revocation of exemption– Have the same types of failures previously occurred?

– Relative size, scope, nature and significance of failures

– Reasons for the failure(s)

– Does the hospital facility have and routinely follow practices and procedures designed to

� Promote and facilitate compliance

� Identify problems as they arise

– Safeguards

– Corrections


25

Emerging Trends in Healthcare Joint Ventures, Acquisitions, and

Other Transactions


26

Current Trends

� There is a current trend in the healthcare industry towards consolidation and integration resulting in nontraditional alliances and partnerships.

� Examples of nontraditional alliances/partnerships:– Taking advantages of scale: Vidant Health in Greenville, NC; Wake

Forest Baptist Medical Center in Winston-Salem, NC; and WakeMedHealth & Hospitals in Raleigh, NC formed shared services operating company (2014)

– Affiliations with academic medical centers: Baylor Scott & White Health in Texas joining The Cleveland Clinic’s cardiovascular network (2014)

– Accountable care organizations/clinically integrated networks: 744 ACOs as of January 2015, Leavitt Partners


27

Current Trends

� 294 healthcare transactions reported during the first quarter of 2015, with mergers and acquisitions involving providers accounting for $18 billion in transaction value.

� Hospital affiliation activity has declined slightly since its peak in 2012, but deal volume remains high.

� The deals occurring are not necessarily the traditional mergers and acquisitions that the hospital sector has experienced in years past. – A shift has occurred towards affiliations and strategic

partnerships between hospitals, including joint ventures between for-profits and nonprofit hospitals.

– In May 2015, alone, hospitals announced 23 affiliations.


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Current Trends

� What is driving this trend?– Healthcare reform– Reimbursement changes– Incentives to form accountable care organizations– Prohibitions against physician ownership– Lower margins– High cost of capital

� IT upgrades� Aging facilities


29

Healthcare Affiliations

Affiliations

Physicians

Hospitals

Payors


30

Physician Practice Alignment

� Doctors and hospitals increasingly see each other as saviors in an uncertain economic environment.

� Increasingly, physicians fresh out of medical school skip joining a practice to become employed directly by a hospital or one of its affiliates. – According to Modern Healthcare, hospital employment of physicians

increased by 3.8% between 2013 and 2014.– The Advisory Board reports that nearly 25% of specialists are now

hospital employees.� Hospitals are also buying more established physician practices.

– Nationally, hospitals seem split on pursuing specialists. Fields that remain in demand include cardiology, obstetrics, and orthopedics.

– Some see an “arms race” for primary-care providers, particularly in states like California that have expanded Medicaid and embraced the Affordable Care Act.


31

Hospital Reasons to Align

� Hospitals– Fear and frustration– Preparing for population health management– Developing networks to support captive

insurance plans– Moving away from office-based services to

embrace walk-in/urgent care clinics– Aligning hospital services with key specialties


32

Hospital-Physician Alignment Risks

� Repeating mistakes of the 1990s – Not identifying the right productivity-based compensation formula– Guaranteeing compensation for too long

� Identifying the wrong practice– Cultural fit– Productivity– Quality– Geography– Strategic plan

� Not realizing the costs incurred with acquiring a physician practice– Information technology– Benefits– Maintaining office space, equipment, and staff


33

Hospital Affiliations


34

Joint Ventures

� Cooperative arrangements, short of a merger, where two or more entities contribute resources to achieve a common objective

� May involve creation of new corporate entity or may be formed through contractual relationships

� May involve varying degrees and types of control and integration among the JV partners

� May be horizontal, vertical, or conglomerate– Horizontal collaborations tend to raise most antitrust concern


35

Why a Joint Venture?

� Raise Capital� Pool Resources� Share Costs� Diversify and Spread Risk� Provide New Services to Community


36

Tax Overview

� Charitable healthcare providers operate within a framework of tax rules designed to ensure that they further a charitable purpose, such as promoting health or lessening the burdens of government.

� This framework generally consists of the prohibition against private inurement, the private benefit doctrine, the commerciality doctrine, restrictions on excess benefit transactions, limitations on unrelated business income, requirements for certain governance rights and, potentially, Section 501(r).

� Charitable healthcare providers may further their charitable purposes through joint ventures with physicians or for-profit organizations, so long as they take steps to ensure their activities fall within this framework.


37

Prohibition Against Private Inurement

� Two Basic Elements– Non-FMV transaction

– With an insider

� Non-FMV Transaction– Rental arrangements

– Lending arrangements

– Sales transactions

– Partnerships and joint ventures

� Insider– Ability to control, e.g. officers and directors


38

Excess Benefit Transactions

� Background/Rationale– Revocation is too harsh– Penalize the people who make charities do bad things

� Requirements– Applicable tax-exempt organization

� 501(c)(3), (c)(4), and (c)(29)– Disqualified person

� Exercised “substantial influence” over the organization� Was a family member of someone who exercised substantial

influence� Was a 35% controlled entity

– Excess benefit transaction� Consideration exceeds FMV/Reasonableness


39

Private Benefit Doctrine

� An organization cannot qualify as a tax-exempt, charitable entity unless it serves a public rather than a private interest.– The concept of private benefit is broader than and

subsumes private inurement.

– Insiders are not required for impermissible private benefit.

– The law tolerates incidental private benefit.� Qualitatively incidental� Quantitatively incidental

– The doctrine arises frequently in the joint venture context.


40

Commerciality Doctrine

� A tax-exempt, charitable organization cannot act too much like a commercial organization.– Organization sells goods and services to public – this factor

makes operations “presumptively commercial.”

– Organization is in direct competition with for-profitcounterparts.

– Prices are based on pricing formulas common in retailbusinesses – organization should have “below-cost pricing.”

– Organization uses promotional materials and “catchphrases” to enhance sales.

– Management has business ability and training.

– Organization relies on employees, rather than volunteers.

– Organization does not receive gifts and grants.


41

Unrelated Business Income

� Unrelated Business Income– Trade or business

– Regularly carried on

– Not substantially related to the exempt purposes of the organization

� Issues in Examining UBIT– Related v. unrelated

– Governance


42

Governance Rights

� Revenue Rulings– The charitable organization must maintain a level of control over the joint venture

that corresponds with the scope of the joint venture’s activities.– Rev. Rul. 98-15 involved a “whole hospital” joint venture. IRS focused on

structural and operational controls, e.g. charitable override, board composition, etc.

– Rev. Rul. 2004-51 focused on an ancillary joint venture. Interpreted as providing relief because it did not require complete control by the charitable organization.

� Potential Joint Venture Entities– Limited Liability Company– Partnership– For-Profit Corporation

� Entity Selection Considerations– Governance– Control/Reserved Powers– Scope of Joint Venture Activities– Form 990 Considerations


43

Section 501(r)

� The ACA added Section 501(r) to the Internal Revenue Code in an effort to address perceived abuses by charitable hospitals.

� Section 501(r) requires hospital facilities operated by charitable hospital organizations to do the following:– Establish written financial assistance and emergency medical care policies.

– Limit amounts charged for emergency treatment or other medically necessary care to individuals eligible for financial assistance.

– Make reasonable efforts to determine whether an individual qualifies for financial assistance before undertaking certain extraordinary collection actions.

– Conduct a community health needs assessment and adopt an implementation strategy at least once every three years.

� Section 501(r) potentially applies to hospital facilities operated through joint ventures.


44

Tax Implications of Accountable Care Organizations/Clinically

Integrated Networks


45

Accountable Care Organizations

� ACOs provide a structure for:– Defining common clinical standards– Modifying practice patterns– Creating a high degree of integration among health

care providers– Establishing accountability for quality and cost of

health care� ACOs may participate in shared savings

arrangements with:– Medicare Share Savings Program (MSSP)– Commercial health insurers– Managed care plans– Self-insured programs


46

ACOs – Choice of Entity

� An ACO may be formed as a:

– Partnership

– Limited Liability Company (LLC) taxed as a partnership for federal tax purposes

– Single member LLC

– Nonprofit corporation

� If taxable entities participate as owners, they will prefer entity taxed as a partnership


47

ACOs, continued

� ACO structured as a partnership or multiple member LLC requires consideration of the tax issues present in any joint venture between a Section 501(c)(3) entity and for-profit co-venturers:

– Capital proportional to ownership

– Governance protections

– Characterization of JV activities as exempt or UBI

– Transactions with venture partners must be at FMV


48

IRS Notice 2011-20

� Issued March 31, 2011 (2011-16 IRB 652)

� IRS expects no private inurement or impermissible private benefit to private party participants in a MSSP ACO where:– Arm’s length written agreement

– ACO accepted into the MSSP

– EO’s share of economic benefits is proportional to its contributions

– EO’s share of losses does not exceed the share of benefits to which it is entitled

– All contracts and transactions at FMV


49

IRS Notice 2011-20 (cont.)

� IRS expects that any MSSP payments received by an EO from and ACO would be derived from activities that are substantially related to the charitable purpose of lessening the burdens of government

� IRS expressed concern that ACO activities unrelated to the MSSP are unlikely to lessen the burdens of government

� IRS also noted that while promotion of health has been recognized as a charitable purpose, not every activity that promotes health furthers charitable purposes

� If an EO is a member or partner in an ACO treated as a partnership, the ACO’s activities will be attributed to the EO.


50

FS-2011-11

� On October 20, 2011, the IRS issued Facts Sheet 2011-11

� The IRS confirmed that Notice 2011-20 continues to reflect IRS positions

– MSSP ACOs lessen burdens of government, so any incentive payments received by EO from the ACO will not be treated as UBI

– For a MSSP-only ACO, control is not required

– For ACOs treated as partnerships that engage in activities other than MSSP, IRS joint venture guidance applies

� Governance/control

� UBI analysis

� An ACO engaged exclusively in MSSP activities can qualify for tax-exempt status


51

FS-2011-11 (cont.)

� An EO need not satisfy all five factors described in Notice 2011-20 to avoid private inurement/impermissible private benefit

� A written agreement is sufficient if it describes the methodology for determining an ACO’s allocation of shared savings payment to the exempt and non-exempt participating providers

� An ACO’s termination from the MSSP will not automatically jeopardize a participating EO’s exempt status

� Whether the EO’s share of economic benefits derived from the ACI is proportional to the benefits or contributions provided by the EO is based on all the facts and circumstances

� The May 2007 Memorandum relating to electronic health records applies to EO’s participating in an ACO


52

Notice 2014-67

� Interim Guidance related to private business use of bond-financed facilities (October 24, 2014)

� Same five factors

– Arm’s length written agreement

– ACO accepted into the MSSP

– EO’s share of economic benefits is proportional to its contributions

– EO’s share of losses does not exceed the share of benefits to which it is entitled

– All contracts and transactions at FMV

� Use as safe harbor – Opinion letters

� Management Contracts


53

Developments in State and Local Property Tax Exemption Issues


54

New Jersey Tax Court

� AHS Hospital Corp. d/b/a Morristown Medical Center v. Town of Morristown, 2015 WL 3956132 (N.J. Tax Ct. June 25, 2015)– Involved separately incorporated flagship hospital of a large

regional health system

– Typical structure: Health system contained affiliated hospitals, foundations, owned and controlled physician groups, insurance company, and various other types of business interests

– Tax Court determined that property was being used for a profit-making purpose because of a “substantial commingling” of the hospital activities and operations with for-profit entities

– Property tax exemption revoked


55

Property Tax Exemption Issues

� Other Examples

� Implications in Other States

� What should you do?


Thank You

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