Revenue Enterprises - Resolving Receivables with Compassion, Clarity and Results
Pay NowClient Login

How Hospitals Should Respond to the Final 501(r) Regulations for Maintaining Tax-Exempt Status

Keith Hearle | Monday, March 30, 2015

Requirements in the newly released rules will have major impacts on community health needs assessments and on policies relating to financial assistance, emergency medical care, and billing and collections.

The Affordable Care Act (ACA) materially changed the requirements 
that hospitals must meet to obtain or maintain tax-exempt status under 501(c)(3). The ACA created Section 501(r) in the Internal Revenue Code, which requires each tax-exempt hospital facility to:

  • Conduct a community health needs assessment (CHNA) every three years
  • Adopt an implementation strategy to meet the community health needs identified through the CHNA
  • Establish a written financial assistance policy (FAP) that includes eligibility criteria and the method for applying for financial assistance, among other provisions
  • Establish a written emergency medical care policy (EMCP) that requires the provision of care to individuals for emergency medical conditions regardless of their eligibility for financial assistance
  • Limit amounts charged for emergency or other medically necessary care provided to individuals eligible for financial assistance to not more than amounts generally billed (AGB) to insured patients
  • Refrain from engaging in extraordinary collection actions (ECAs) before making “reasonable efforts” to determine whether individuals are eligible for financial assistance

The ACA left the meaning of important terms such as AGB, ECA, and reasonable efforts to be clarified through regulations. Proposed regulations were published in 2012 and 2013. The IRS received hundreds of comments on these proposals before publishing final regulations on Dec. 29, 2014.

To preserve tax-exempt status and avoid certain excise taxes, 501(c)(3) hospitals must comply with the final regulations by the start of the tax year that begins on or after Dec. 29, 2015. For most hospitals, that means by 
Jan. 1 or July 1, 2016.

CHNA Reports and Implementation Strategies-501(r)(3)

Tax-exempt hospitals already have conducted a first round of CHNAs and adopted implementation strategies based on an IRS notice published in 2011 and proposed rules published in 2013. The final regulations modify some of the proposed rules and describe steps each hospital facility must take to conduct a CHNA.

Define the community to be assessed. The definition must be based on the geographic area and target populations (e.g., children, women, the elderly) served by the hospital facility, and on the hospital’s “principal functions” (e.g., specialties). In defining community, hospitals may not exclude medically underserved, low-income, or minority populations, and must take into account all patients regardless of payer source and eligibility for financial assistance.

Perform the assessment. The CHNA must identify significant health needs, prioritize those needs, and identify resources potentially available to address them. Hospitals may use any criteria, facts, and circumstances when determining which health needs are “significant.” Hospitals must solicit and take into account input received from the following sources:

  • At least one governmental public health department
  • Members or representatives of medically underserved, low-income, and minority populations
  • Written comments received on the most recently completed CHNA and most recently adopted implementation strategy

Document the CHNA in a written report. The report must be adopted by an authorized body, such as a board of directors. It must identify the community and how it was determined, describe the process and methods used to conduct the CHNA, describe how the hospital solicited and took into account community input, include a prioritized description of significant community health needs, describe resources potentially available to address those needs, and include an evaluation of any actions taken to address needs since the hospital conducted its immediately preceding CHNA. The report also must describe data used in the assessment and how the data were collected and analyzed, identify any collaborators and contractors that were involved, and explain the process and criteria used in identifying and prioritizing “significant” needs.

Make the CHNA report widely available to the public. CHNA reports meet this requirement only when they are posted on a website and paper copies are available upon request.

Each hospital must prepare a separate CHNA report, but a “joint CHNA report” is allowed under certain conditions: All collaborating hospitals must be identified in the report, and the same community must be defined for all the hospitals. CHNA reports for hospitals collaborating with other facilities or organizations may contain substantively identical material regarding overlapping areas.

The CHNA is considered “conducted” on the date that all required steps have been completed.

Devise an implementation strategy. The final regulations define an implementation strategy as a written plan that describes how the hospital intends to address each significant health need identified through the CHNA (or through other means). For each identified health need, the implementation strategy must describe actions the hospital intends to take and their anticipated impact, identify resources the hospital plans to commit to address the need, and describe any planned collaborations to address the need. The implementation strategy also must identify any significant needs the hospital does not intend 
to address and provide a brief explanation regarding why not.

Implementation strategies are public documents to be attached to IRS Form 990 or posted on a website (or both).

Sidebar: Response Strategies: CHNA Requirements

FAP Regulations-501(r)(4)

Each tax-exempt hospital must establish a written FAP that applies to all emergency and medically necessary care. The policy must be adopted by an authorized body such as the hospital’s board of directors, and include:

  • All eligibility criteria an individual must satisfy 
to receive each type and level of financial assistance (i.e., all available discounts and free care)
  • Whether and how the hospital uses any information from sources other than the applicant to grant financial assistance on a presumptive basis
  • A list of any providers delivering care in the hospital facility (other than the hospital facility itself) that specifies which are covered by the FAP and which are not
  • A statement that eligible individuals will not be charged more for emergency or other medically necessary care than AGB to insured individuals
  • Identification of which allowed method the hospital uses to determine AGB (i.e., either the “look-back” method or the “prospective Medicare/Medicaid” method)
  • A statement that the hospital will not apply gross charges to FAP-eligible individuals for any medical care
  • A description of how an individual applies for financial assistance (including information and documentation that must be submitted, unless specified in an FAP application form)
  • Hospital or community not-for-profit agency contact information for obtaining assistance with the application process
  • A description of actions the hospital or an authorized party (e.g., a third-party collections agency) may take in the event of nonpayment, unless those actions are described in a separate billing and collections policy
  • An explanation of how individuals may 
obtain a copy of the billing and collections policy, if collections actions are described in that policy

When describing collections actions, the hospital must describe the “process and time frames” used and the reasonable efforts that will be made to determine whether an individual is FAP-eligible before ECAs are pursued. The hospital also must identify the office, department, committee, or other body with final authority to determine that ECAs are permissible because the reasonable efforts have been made.

The final regulations describe the following other rules regarding FAPs.

Presumptive eligibility for financial assistance. If an applicant does not submit required information, the final regulations allow hospitals to grant financial assistance on a presumptive basis (based on “other evidence of eligibility”) or based on applicant attestations.

Measures to widely publicize the FAP. The final regulations require hospitals to implement four measures to “widely publicize” the FAP. (Unlike the proposed regulations, the final regulations do not require the FAP itself to describe these measures.) The measures include:

  • Making the FAP, the application for financial assistance, and a plain-language summary (PLS) of the FAP available on a website
  • Making paper copies of these documents available upon request, in public locations, and by mail
  • Notifying and informing hospital patients about the FAP by offering a paper copy of the PLS as part of the intake or discharge process, including a conspicuous written notice on billing statements (with the phone number of the office or department that can provide information about financial assistance), and conspicuously displaying information about the availability of financial assistance in public locations in the hospital (including, at a minimum, the emergency department and admissions areas)
  • Notifying and informing members of the community served by the hospital about the FAP “in a manner reasonably calculated to reach those members who are most likely to require financial assistance from the hospital”

Translation requirements. The FAP, FAP application form, and PLS must be translated for populations with limited English proficiency (for any group that constitutes the lesser of 1,000 individuals or 5 percent of the community served or likely to be affected or encountered by the hospital facility).

Required PLS contents. The final regulations require the PLS to contain:

  • A brief description of the eligibility requirements and assistance offered under the FAP
  • A brief summary of how to apply for assistance under the FAP
  • The direct website address and physical locations where copies of the FAP and FAP application form can be obtained
  • Instructions on how individuals can obtain a free copy of the FAP and FAP application form by mail
  • Contact information (telephone number and physical location) of the hospital facility office or department that can provide information about the FAP, or of not-for-profit organizations or government agencies that can assist with FAP applications
  • A statement that translations of the FAP, FAP application form, and PLS are available, if applicable
  • A statement that an FAP-eligible individual may not be charged more than AGB for emergency or other medically necessary care

The hospital may include additional information in the PLS, such as a statement regarding patients’ responsibilities to cooperate with the FAP application process.

Sidebar: Response Strategies: FAP Regulations

EMCP Regulations-501(r)(4)

A hospital must have a written EMCP attesting to its commitment to provide, without discrimination, care for emergency medical conditions regardless of whether individuals are FAP-
eligible, and to refrain from taking actions that discourage individuals from seeking emergency medical care (e.g., demanding payment before treatment will be delivered). The final regulations state that a policy that requires the hospital to comply with the Emergency Medical Treatment & Labor Act is sufficient.

Regulations that Limit Charges to 
FAP-Eligible Individuals-501(r)(5)

Under the final regulations, hospitals must limit the amounts charged to FAP-eligible individuals to no more than AGB for emergency or other medically necessary care, and to less than gross charges for all other medical care. The regulations specify how to calculate AGB, how AGB applies to underinsured patients, and how up-front charges apply to FAP-eligible patients.

AGB calculation methods. Hospitals may choose between the “look-back” method and the “prospective Medicare/Medicaid” method for calculating AGB. A hospital may change its chosen method at any time.

Under the look-back method, AGB is calculated annually by dividing 12 months of allowed claims by associated gross charges. The calculations may include claims and charges for Medicare (or Medicaid) fee-for-service only, or for Medicare (or Medicaid) in combination with all private health insurers. The result provides the maximum percentage of gross charges that an FAP-
eligible individual may be asked to pay (with the inverse representing the minimum financial assistance discount that must be offered).

Hospitals may use a single, hospitalwide percentage or multiple, service-specific percentages (e.g., one for inpatient services and a second for outpatient services). Any new AGB percentage must be made effective by the 120th day after the 12-month period used to calculate AGB ends.

Under the prospective Medicare or Medicaid method, hospitals use the Medicare fee-for-service or Medicaid billing and coding process to set AGB based on amounts that Medicare or Medicaid and a corresponding beneficiary together would be expected to pay.

An organization operating multiple hospital facilities may have different AGB percentages and methods of determining AGB at each facility.

AGB and underinsured patients. Several comment letters suggested that the final regulations indicate how AGB amounts should be applied to underinsured patients. Specifically, should the AGB percentage apply to charges for a low-income insured patient’s entire account or to the amount the patient is expected to pay after insurance? The final regulations clarify that AGB applies only to the amount for which the patient is responsible. The amount paid by an underinsured, FAP-eligible patient and the insurer together thus may be greater than AGB.

Up-front charges and FAP-eligible patients. The final regulations also include an important statement regarding up-front charges: “If a hospital facility requires an individual to make an up-front payment for medically necessary care that exceeds the AGB for the care and the individual turns out to be FAP-eligible, the hospital facility will have failed to meet the requirements … .” Care will be needed to ensure compliance with this 501(r) requirement.

Billing and Collections Regulations-501(r)(6)

The final regulations echo ACA language that hospital facilities may not engage in ECAs against an individual before making reasonable efforts to determine whether the individual is FAP-eligible. It should be noted that individual here includes account guarantors and hospital facilities include any purchaser of an individual’s debt, any debt collection agency, or any party to which the hospital has referred the debt.

Collections actions that meet the definition of ECAs. The final regulations state that four types of collections actions are ECAs and thus are subject to the requirements concerning reasonable efforts:

  • Taking actions that require legal or judicial process (e.g., liens, foreclosures, garnishments, seizure of bank accounts or property, civil action, arrest, body attachment)
  • Selling debt to third parties
  • Reporting adverse information to credit agencies or bureaus
  • Deferring or denying (or requiring a payment before providing) medically necessary care because of nonpayment for previously provided care that is covered under the FAP

Selling debt to a third party is not considered an ECA if the purchaser is prohibited from engaging in any ECAs, if affected patients are not required to pay more than AGB, and if FAP-eligible accounts are returnable to or recallable by the hospital.

Reasonable efforts prior to ECAs. To comply with the requirement to undertake “reasonable efforts” prior to initiating any of the above ECAs, hospitals must:

  • Ensure that the FAP has been “widely publicized” (as described in the FAP requirements)
  • Refrain from initiating any ECAs for at least 120 days from the date of the first post-
discharge billing statement for the care
  • Provide a written notice about the FAP (including a copy of the PLS, a statement regarding any ECAs the hospital or an authorized third party intends to initiate, and reasonable efforts to notify the individual orally about the FAP) 30 days prior to initiating any ECAsa
  • Accept financial assistance applications for at least 240 days from the date of the first post-discharge billing statement
  • Notify individuals who submit an incomplete FAP application during the application period about how to complete the application (and provide contact information for assistance), and suspend any ECAs for these individuals until eligibility is determined
  • Determine whether individuals are FAP-eligible when completed applications are submitted during the 240-day application period

Then, if a completed application is submitted during the 240-day application period, the hospital, acting in a timely manner, must:

  • Suspend any ECAs to obtain payment for the care
  • Make a determination as to FAP eligibility and notify the individual in writing of this determination (including the assistance for which the individual is eligible)
  • Provide a billing statement indicating the amount owed and how it was determined, in the event the individual is not eligible for free care
  • Refund any amounts paid above the amount required by the FAP
  • Reverse any ECAs (e.g., removing adverse information from the credit report)

High Stakes for Hospitals, Communities

Tax-exempt hospitals have nine to 15 months to bring their CHNA- and FAP-related work into compliance with the new 501(r) rules. The final regulations, published almost five years after the ACA was signed, clarify important terms and many compliance requirements. As tax-exempt hospitals respond to the final regulations, report their achievements on IRS Form 990 and Schedule H, and describe the impact of their community health strategies in CHNA reports, they will continue to demonstrate how they benefit communities across the nation.