Double Dose of Relief for Non-Profit Hospitals and Certain Insurance Companies Under Health Care Reform

Over the past week the IRS has doled out a double dose of relief for non-profit hospitals and health insurance organizations that were facing reporting and compliance deadlines created by the Affordable Care Act: (1) delayed reporting of community care/community benefit activities by tax-exempt hospitals; and (2) temporary reprieve for certain insurance companies from tax penalites associated with failure to meet the minimum medical loss ratio requirement. IRS Notice 2011-51 and Announcement 2011-37 came as welcome news to affected health insurance companies and non-profit hospitals, and provide further evidence that neither government agencies nor health care organizations are as far along as they’d hoped to be in complying with the requirements of health care reform.

Community Care/Community Benefit Activities

The Affordable Care Act added new Code Section 501(r), which creates an obligation for non-profit hospitals to:

• Conduct a community health needs assessment at least once every 3 years;
• Develop written emergency care standards that ensure all patients get emergency care on an equal basis;
• Limit the fees charged to patients who need financial assistance; and
• Determine whether a patient is eligible for financial help before resorting to more aggressive tactics to collect unpaid bills.

Hospitals are required to initiate these “social responsibility” activities beginning in 2010 and were supposed to report on them on Schedule H of Form 990. Though hospitals must still undertake these activities on a current basis, Announcement 2011-37 provides that Schedule H’s Part V.B, used to report on policies and practices required by new Code Section 501(r), will be optional for the 2010 tax year. (All other sections of Schedule H must be completed.) This is intended to give hospitals more time to familiarize themselves with the kind of information the IRS seeks to collect and to address any ambiguities arising from the extensive revisions of the form and instructions.

According to the Announcement, the IRS welcomes comments on “how to improve the clarity and reduce the burden” of the reporting obligation. (You can find details on how to submit comments on p. 46 of the instructions to the 2010 Form 990.)

Medical Loss Ratio Requirements

The Affordable Care Act requires health insurers to spend at least 85% of large group premiums and 80% of individual and small group premiums on health care and quality improvement efforts. Insurance companies that fail to meet the medical loss ratio requirement must send rebates to customers. Additionally for certain non-profit health insurance companies, those having the attributes described in Code Section 833(c) to be precise, a failure to meet the medical loss ratio requirement (by spending at least 85% of premium revenue on health care and quality improvement efforts) results in the loss of sizeable federal tax deductions. These deductions are designed to mitigate the negative financial impact of high claims costs (and related expenses) that exceed a company’s adjusted surplus for the year. The punitive loss of the deduction had first been slated to go into effect for an affected organization’s first taxable year beginning after December 31, 2009. Last fall the IRS delayed enforcement of this requirement until an affected organization’s first taxable year beginning after December 31, 2010. Now Notice 2011-51 pushes the enforcement date out to the first taxable year beginning after December 31, 2011.