Proposed Internal Revenue Service Regulations for Charitable Hospitals - Section 501(r)

July 24, 2012
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On June 22, 2012, the Internal Revenue Service (IRS) released its proposed regulations that provide guidance for charitable hospital organizations regarding the following:
  • Financial assistance and emergency medical care policies
  • Charges for certain care provided to individuals eligible for financial assistance
  • Billing and collections processes
These requirements, in addition to the community health needs assessment (CHNA) requirement, were added by the Patient Protection and Affordable Care Act, Public Law 111-148 (the “Affordable Care Act”) and are described in Section 501(r).  The Affordable Care Act does not otherwise affect the standards for tax exemption that hospitals are required to meet under Section 501(c)(3).  The Affordable Care Act established four new and complex requirements.
Section 501(r)(3) - Community Health Needs Assessments
Hospitals are required to conduct a CHNA at least once every three years and adopt an implementation strategy to meet the community health needs identified through the CHNA.  In July 2011, the U.S. Treasury Department and IRS issued Notice 2011-52, which addresses CHNA requirements described in Section 501(r)(3).  Hospitals may rely upon the guidance contained in this notice for any CHNA made widely available to the public and for any implementation strategy adopted on or before six months after the date that further guidance regarding CHNA requirements is issued.  These proposed regulations do not address CHNA requirements.
Section 501(r)(4) - Financial Assistance Policies and Emergency Medical Care Policies
In general, a hospital’s financial assistance policy (FAP) must include eligibility criteria for financial assistance, including:
  • Free or discounted care
  • The basis for calculating amounts charged to patients
  • The method for applying for financial assistance
  • The actions taken by a hospital in the event of nonpayment should the hospital not have a separate billing and collections policy
  • Measures to widely publicize the hospital’s FAP within the community it serves
In regard to a hospital widely publicizing its FAP, regulations require the following measures be taken: 
  • The hospital must develop a FAP and a FAP application form.
  • The hospital must widely publicize a summary of its FAP (in easy-to-understand language) either on its hospital website or on a website established and maintained by another entity.
  • The hospital must conspicuously post complete and current versions of these documents in English and in the primary language of any populations with limited proficiency in English that constitute more than 10% of the residents of the community the hospital serves.
Section 501(r)(4) - Emergency Medical Care Policy
A hospital must establish a written policy (within the definition of the Emergency Medical Treatment and Active Labor Act [EMTALA]) that requires a hospital to provide services to individuals without discrimination for emergency medical conditions regardless of whether said hospitals are FAP eligible.  The proposed regulations stipulate that a hospital’s emergency medical care policy specifically prohibit debt collection activities from occurring in the emergency department or any other hospital venue where such activities could interfere with the treatment of emergency medical conditions.
Section 501(r)(5) - Limitation on Charges
Proposed regulations limit the amount a hospital can charge for any emergency or other medically necessary services provided to a FAP-eligible individual to be not more than the amount generally billed (AGB) to an individual with insurance coverage.  A hospital is also required to limit the amount charged for any medical service it provides to a FAP-eligible individual to less than the gross charge for the service.
There are two proposed methods to limit the amount charged for emergency or other medically necessary care:
  • The “look back” method is based on actual past claims paid to the hospital by either Medicare fee for service only or Medicare fee for service together with all private health insurers paying claims to the hospital.
  • The second, “prospective” method requires a hospital estimate the amount it would be paid by Medicare and/or a Medicare beneficiary for emergency or other medically necessary services at issue if the FAP-eligible individual were a Medicare fee-for-service beneficiary.
These two methods are mutually exclusive, and a hospital can use only one method to determine AGB.Once a method is chosen, the hospital must continue to use that method.
The proposed regulations provide that whether an individual is FAP eligible is determined without regard to whether that individual has applied for assistance under the hospital’s FAP.  However, there is also a safe harbor under which a hospital will not violate Section 501(r)(5) if it charges more than AGB for emergency or other medically necessary services or charges gross charges for any medical care to a FAP-eligible individual who has not submitted a complete FAP application at the time of the charge, as long as the hospital has made and continues to make “reasonable efforts” to determine whether the individual is FAP eligible, including correction of amounts charged, if the individual is subsequently determined to be FAP eligible.
Section 501(r)(6) - Billing and Collections
The proposed regulations require a hospital to make “reasonable efforts” to determine whether an individual is FAP eligible prior to engaging in any extraordinary collection actions (ECA) against that individual.  Section 501(r)(6) lists several actions that would be considered ECAs (including reporting to credit agencies and selling debt) and outlines steps that must be taken to be considered as having made “reasonable efforts.”  In general, the IRS is proposing a 120-day notification period from the first billing statement, during which time the hospital is required to distribute a plain-language summary of its FAP and offer a FAP application form to an individual before being discharged.  During the notification period, the hospital must also provide the individual a plain-language summary of the FAP with all (at least three) billing statements for the services provided and all other written communications regarding the bill.  In addition, there is a 240-day application period from the first billing statement, wherein an individual is allowed to apply for financial assistance.
If a FAP application is received during the designated application period, the hospital must suspend any ECAs it has initiated against an individual until the application process is completed.  If an individual is determined to be FAP eligible, the hospital must terminate any ECAs against that individual and promptly refund any overpaid amounts.
In summary, the IRS has issued 93 pages of proposed regulations regarding Section 501(r) that relate primarily to a hospital’s policies.  This area of tax-exemption requirements is very dependent upon the adoption of specific written policies by the hospital’s governing body or a committee of the governing body.
For more information on these proposed regulations, please contact Terri Rexrode at or your Wipfli relationship executive.

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