Regulations Issued for Tax-Exempt Hospitals | Plante Moran
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Proposed Regulations Issued for IRC Section 501(r) Impact Tax-Exempt Hospitals

​The Patient Protection and Affordable Care Act (PPACA) established new requirements that a §501(c)(3) tax-exempt hospital must meet to maintain exempt status.  The community benefit standard that has been the basis for exempt status for hospitals since the 1960s has not been changed; instead, the PPACA added the following provisions that must be met for each hospital facility operated by a hospital organization:

  • A community health needs assessment (CHNA) must be conducted at least every three years
  • Both a written financial assistance policy (FAP) that is publicized to the community, and an emergency medical care policy that provides for emergency medical care without regard to eligibility under the FAP must be established
  • Amounts charged under the FAP are limited to not more than the amounts generally charged to individuals who have insurance, and the use of gross charges are prohibited
  • Prohibition against taking extraordinary collection actions prior to making reasonable efforts to determine if patients are eligible under the FAP

The PPACA also requires a review of each hospital’s community benefit activities at least once every three years by the Secretary of the Treasury (or delegate).  This is being accomplished through a behind-the-scenes review process of each hospital’s Schedule H by the IRS, which is being done in waves over the three-year period.  Hospitals will not be notified of this review or its results.  Although the IRS has said that these reviews are not intended to lead to an audit of a hospital, it has not ruled out that the findings could trigger an audit of a specific hospital organization.

These provisions were effective for tax years beginning after the date of the PPACA (March 23, 2010), except for the CHNA requirement – the latter is effective for tax years beginning after March 23, 2012, which is generally the fiscal year ending in 2013.  Although the CHNA is not yet effective, in 2011 the IRS issued Notice 2011-52 to provide guidance to hospitals for the CHNA pending the issuance of regulations.  This notice may be relied upon up until six months after final regulations or other guidance is issued.

Except for the CHNA, the provisions of §501(r) are currently effective for all tax-exempt hospital facilities, but hospitals have been challenged by the lack of official guidance on what they need to do to be compliant with the new law.  Guidance was finally issued this summer in the form of proposed regulations (regs) for §501(r) (excluding the CHNA).  Proposed regulations are not effective until the year beginning after final or temporary regulations are issued; despite this, they do show what the final regulations are expected to look like and allow a hospital facility to review its policies and practices to determine what steps it needs to take to prepare for the final rules. 

The proposed regs as they relate to the specific provisions are summarized below.   A hospital facility is defined in these regulations as a facility that is required by a state to be licensed, registered, or similarly recognized as a hospital.  A hospital organization may treat multiple buildings operated under a single state license as a single hospital facility. The definition also includes hospital facilities operated through a disregarded entity.  (Note – A hospital facility for CHNA purposes also includes a facility operated through a partnership entity, while the proposed regs do not include entities treated as partnerships.  The IRS expects to address this issue in separate future guidance.)

Financial Assistance Policy and Emergency Medical Care Policy (§1.501(r)-4)

A hospital facility’s FAP must include:

  1. Eligibility criteria for financial assistance, and whether such assistance includes free or discounted care.  The proposed regs do not mandate any particular eligibility criteria – instead, they require that the FAP specify the financial assistance available under the FAP and all of the specific eligibility criteria that an individual must satisfy to receive assistance.
  2. The basis for calculating amounts charged to patients.  The FAP must state that FAP-eligible individuals will not be charged more than the amounts generally billed (AGB) for emergency or other medically necessary care.  It also must state which of the permitted methods (described later under Limitation on Charges) the facility uses to determine AGB.
  3. The method for applying for financial assistance.  The FAP or FAP application form must describe the information or documentation the facility may require an individual to submit as part of the application.  The facility may not deny assistance based on the omission of any information or documentation not specifically required by the FAP.
  4. The actions the organization may take in the event of nonpayment (unless it has a separate billing and collections policy), including any extraordinary collection actions described in §501(r)(6).  Either the FAP or the separate policy must describe the process and time frames the facility (or other authorized party) will use in taking these actions, including any reasonable efforts to determine FAP-eligibility.
  5. Measures to widely publicize the FAP within the community served by the hospital facility.  The FAP is required to include four types of measures the facility will take to publicize the FAP.  Specifically, the FAP must include measures the facility will take to:
    • make paper copies of the FAP, FAP application form, and a plain language summary available upon request and without charge.  Each document must be made available in English and in the primary language of populations that constitute more that 10 percent of residents in the community.
    • inform and notify visitors about the FAP through a conspicuous public display or other attention-attracting measures.
    • inform and notify members of the community about the FAP in a manner reasonably calculated to reach those most likely to require financial assistance.
    • make the FAP, FAP application form, and a plain language summary widely available on the hospital’s website, in English and in the primary language of populations that constitute more than 10 percent of residents in the community.

The proposed regs also require a written policy that requires the hospital facility to provide, without discrimination, care for emergency medical conditions to individuals, regardless of whether they are FAP-eligible.  The policy must prohibit debt collection activities in the emergency room or similar venues.

The FAP and other policies above will be considered established only when they are both adopted by an authorized body of the hospital organization and implemented by the facility.  The facility is considered as having implemented the policy if it has consistently carried out the policy.

Limitation on Charges (§1.501(r)-5)

Each hospital facility must limit the amount charged for any emergency or other medically necessary care provided to a FAP-eligible individual to not more than amounts generally billed (AGB) to individuals with insurance covering that care.  Also, the amount charged for any medical care provided to a FAP-eligible individual is limited to an amount that is less than the gross charges for that care.

Amounts Generally Billed

The proposed regs provide two methods for calculating AGB:

  1. A “look-back” method based on actual past claims paid to the facility by either Medicare fee-for-service only, or Medicare fee-for-service together with all private health insurers paying claims to the facility (including portions paid by Medicare beneficiaries or insured individuals).
  2. A “prospective” method based on the facility’s estimate of the amount it would be paid by Medicare and a Medicare beneficiary for emergency or other medically necessary care if the FAP-eligible individual were a Medicare fee-for-service beneficiary.

These two methods are mutually exclusive, and a facility may only use one method to determine AGB – once chosen, the facility must continue to use that method.

Gross Charges

A gross charge (or chargemaster rate) is defined as a hospital facility’s full established price for medical care that the hospital facility consistently and uniformly charges all patients before applying any contractual allowances, discounts, or deductions.  A facility is prohibited from charging FAP-eligible individuals gross charges for any medical care.  The gross charge amount is permitted to be the starting point to which contractual allowances, etc., are applied, as long as the gross charge is not the amount a FAP-eligible individual is required to pay.

Billing and Collection (§1.501(r)-6)

A hospital is prohibited from engaging in extraordinary collection actions (ECAs) before making reasonable efforts to determine whether the individual is FAP-eligible.

Extraordinary Collection Actions

ECAs include any actions taken by a hospital against a FAP-eligible individual to obtain payment for a patient care bill that requires a legal or judicial process.  These include, but are not limited to, actions to:

  • Place a lien on an individual’s property;
  • Foreclose on an individual’s real property;
  • Attach or seize an individual’s bank account or other personal property;
  • Commence a civil action against an individual;
  • Cause an individual’s arrest;
  • Cause an individual to be subject to a writ of body attachment; and
  • Garnish an individual’s wages.

ECAs also include reporting to credit agencies and the sale of an individual’s debt to another party.  However, a facility is permitted to refer an individual’s debt to a debt-collection agent or other party without selling the debt.

Reasonable Efforts

The proposed regs provide that a hospital facility will have made reasonable efforts to determine if the individual is FAP-eligible if it:

  1. Notifies the individual about the FAP;
  2. Provides an individual who submits an incomplete FAP application with information relevant to completing the application; and
  3. Makes and documents a determination as to whether an individual is FAP-eligible for an individual who submits a complete FAP application.

The proposed regs provide both a “notification period” and an “application period” for purposes of meeting the above requirements. 

  • The notification period is the period during which the facility must notify an individual about the FAP.  This period begins on the date care is provided and ends on the 120th day after the facility provides the first billing statement to the individual.  At the end of the notification period, the facility may engage in ECAs if all notification requirements have been met and the individual has failed to submit a FAP application.
  • The application period is the period during which the facility must accept and process FAP applications submitted by an individual.  This period ends on the 240th day after the facility provides the first billing statement to the individual.

The notification component of the “reasonable efforts” requirement is met if the hospital:

  1. Distributes a plain language summary of the FAP, and offers a FAP application form, to the individual before discharge from the facility;
  2. Includes a plain language summary of the FAP with all (and at least three) billing statements and all other written communications regarding the bill during the notification period;
  3. Informs the individual about the FAP in all oral communications regarding the amount due that occur during the notification period; and
  4. Provides the individual with at least one written notice that informs the individual of the ECAs the facility (or other authorized party) may take if the individual does not submit a FAP application or pay the amount due by a date that is not earlier than the last day of the notification period.  This written notice must be provided at least 30 days before the deadline specified in the notice.

If an individual submits an incomplete FAP application during the application period, the facility will be considered to have made reasonable efforts only if it: (1) suspends any ECAs against the individual; (2) provides the individual with written notice describing the additional information and/or documentation that must be submitted (including the plain language summary of the FAP); and (3) provides the individual with at least one written notice about the ECAs it may take if the application is not completed or the amount due is not paid by a completion deadline that is no earlier than the later of 30 days from date of the written notice or the last day of the application period.

Once the complete application is received, the hospital facility must make and document the determination of eligibility in a timely manner, and notify the individual in writing of the determination and basis for determination.  If the individual is FAP-eligible, the facility must take three additional steps:

  1. Provide a billing statement indicating the amount owed as a FAP-eligible individual;
  2. Refund any excess payments made by the individual;
  3. Take all reasonable available measures to reverse any ECA’s (with the exception of a sale of debt) taken against the individual.

The hospital facility will not have made reasonable efforts to determine FAP eligibility if it simply obtains a signed waiver from an individual.

The provisions summarized above (and detailed in the proposed regs) will not be effective until they are issued as final or temporary regulations.  However, hospital facilities may rely on these proposed regs until final or temporary regulations are issued.  Although this summary of the proposed regs includes as much information as space allows, hospitals are encouraged to review the proposed regs to ensure that all applicable requirements have been addressed.

Hospital organizations are advised to review their policies and practices to assess compliance with these proposed rules, and to plan what new policies, or revisions to current policies, will be needed to be compliant with the regulations once they are finalized. 

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