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

9
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 FAPs
and 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 care, 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 WakeMed
Health & 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.

28
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-profit
counterparts.
– Prices are based on pricing formulas common in retail
businesses – organization should have “below-cost pricing.”
– Organization uses promotional materials and “catch
phrases” 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
56
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57
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