Question: Can our tax exempt physician organization, which employs all the physicians in the system, limit the number of Medicaid and indigent patients that it accepts?
Answer: Yes, but that doesn’t mean that someone won’t challenge it.
The IRS uses the so-called “community benefit standard” as the test for determining if a health care provider like a physician organization or clinic is operated to promote health in a way that accomplishes a charitable purpose. The community benefit standard was enunciated in Revenue Ruling 69-545, 1969-2 C.B. 117. Prior to Rev. Rul. 69 545, tax-exempt health care providers were required by Rev. Rul. 56-185, 1956-1 C.B. 202 to admit and treat patients who were unable to pay, either without charge or at rates below cost. This requirement was referred to as the “financial ability standard” because this uncompensated care had to be provided to the extent of the hospital’s financial ability. Rev. Rul. 69-545 modified the financial ability standard by introducing additional considerations known as the community benefit standard. Although a formal policy to provide charity care is still relevant, the new standard also takes into account a number of additional factors indicating that the operation of the health care provider benefits the community as a whole.
The most current IRS guidance (albeit informal) about how tax-exempt physician practices or clinics can meet the community benefit standard can be found in Internal Revenue Manual Exhibit 7.20.4-9, Healthcare Provider Guidesheet. Among other things, the Guidesheet lists participation in Medicare and Medicaid as well as the adoption of a charity care policy as key criteria that will be considered by the IRS when granting an exemption to non-hospital healthcare providers like clinics.
Specifically, the Guidesheet states: “Participation in Medicare…or Medicaid…is a factor that helps establish that a health care provider meets the community benefit standard.” With respect to charity care, the Guidesheet says: “many [healthcare providers] demonstrate community benefit by implementing a charity care policy and by providing a significant amount of charity care.” Among other things, the charity care policy must be available to the public and must provide “that certain patients will be offered free or reduced-cost care, often using a sliding scale, based on the patient’s ability to pay. Health care providers should be in a position to describe the amounts expended or anticipated to be expended on charity care.”
It is critical to note that the IRS has never said that any specific amount of Medicaid or charity care must be provided as a condition of an organization’s tax-exempt status, or that tax-exempt physician practices are prohibited from limiting the number or geographic location of patients who are covered by Medicaid or eligible for charity care. Therefore, if a nonprofit health system adopted a consistently enforced policy that closed its physician practices to new indigent patients, that would not jeopardize its tax-exempt status.
It should also be noted that hospital organizations exempt under Section 501(c)(3) are subject to additional requirements relating to charity care imposed by new Section 501(r), added to the Internal Revenue Code by Section 9007(a) of the Patient Protection and Affordable Care Act. However, Section 501(r)(2) defines “hospital organizations” as including: (1) an organization that operates a facility required by a State to be licensed, registered, or similarly recognized as a hospital; and (2) any other organization that the Secretary determines has the provision of hospital care as its principal function or purpose constituting the basis for its exemption under Section 501(c)(3). Physician clinics that are not an integral part of a hospital do not fit within this definition, so the new Section 501(r) rules do not apply.
Federal law requires physicians to enroll with the states as Medicaid providers to receive payment for services provided under the Medicaid program; enrollment does not require physicians to serve a specific number of program beneficiaries or accept all program beneficiaries seeking care, unless the physician works for a Federally Qualified Health Center. Therefore, if a clinic adopted a consistently enforced policy that closed its physician practices to new indigent patients it would not violate the Medicaid law.
However, Medicaid provider agreements usually require physicians to provide services without discrimination as required by Title VI of the Civil Rights Act of 1964 and Section 504 of the Rehabilitation Act of 1973. The Office of Civil Rights (“OCR”) of the federal Department of Health and Human Services has taken the position that Title VI could be violated, for example, if Medicaid providers, on the basis of race, color, or national origin, (1) deny services, financial aid or other benefits to Medicaid beneficiaries; (2) provide Medicaid beneficiaries a different service, financial aid or other benefit, or provide them in a different manner from those provided to others; or (3) segregate or separately treat individuals in any matter related to their receipt of any service, financial aid or other benefit. 45 C.F.R. Part 80. The same general prohibitions would apply to actions which discriminate on the basis of handicap.
Therefore, it is OK to decline to accept indigent patients without regard to the race, color, national origin or handicap status of those patients. However, it is possible that indigent patients who were unable to access the physicians as a result of such a policy might try to argue that the policy has a disparate effect on minorities and/or handicapped individuals to the extent that those populations are more likely to be indigent patients than those who are not.