After 40 years without major change, hospitals recognized (or seeking recognition) as charitable organizations described in Section 501(c)(3) of the Internal Revenue Code (the “Code”) became subject to a host of additional requirements when Section 501(r) was added to the Code by 2010’s Patient Protection and Affordable Care Act. Specifically, taxexempt hospitals, including those operated through a joint venture and governmental hospitals that have been recognized as Section 501(c)(3) organizations, must now meet the (1) community health needs assessment (the “CHNA”) requirement, (2) financial assistance policy (“FAP”) requirement, (3) limitation on charges requirement, and (4) billing and collections requirement.

IRS proposed regulations1 have provided hospitals with long-awaited guidance on how to satisfy some of these requirements. This first tranche of regulations does not address the CHNA requirements or the repercussions for failing to satisfy any of the requirements. However, the regulations do provide guidance on the FAP, limitation on charges, and billing and collections rules. They also provide generally applicable definitions for implementing Section 501(r) and the regulations. Pursuant to these definitions, a “hospital organization,” to which the regulations apply, includes only organizations operating one or more “hospital facility”, which, in turn, is defined as one required by a state to be licensed, registered, or similarly recognized as a hospital. While patient advocacy groups have generally lauded the regulations (in some cases, they’re even suggesting they have not gone far enough), health care provider associations and providers have panned them, taking the position that the regulations are overly burdensome and restrictive and do not provide hospitals enough flexibility to meet the requirements of Section 501(r).

The regulations — which apply on a facility by facility basis, rather than on the more typical single-corporate entity basis — are summarized below.

Financial Assistance Policy

Each hospital must have a written FAP meeting the requirements specified in Section 501(r)(4). The regulations address each of the required components of a FAP.

  • Eligibility criteria. Neither Section 501(r) nor the regulations mandate any particular eligibility criteria. Rather, they require a FAP to specify the financial assistance available under it and all the eligibility criteria an individual must satisfy in order to be eligible for each level of assistance.
  • Basis for calculating amounts charged to patients. A FAP must indicate that, if an individual is determined to be FAP-eligible, he will not be charged more than the amounts generally billed to individuals who have insurance covering the care (the “AGB”). The FAP also must describe the method used to determine AGB.
  • Methods for applying for financial assistance. A FAP must inform persons how to apply for assistance and describe the information and documentation the hospital may require the person to submit as part of the application.
  • Actions that may be taken in the event of nonpayment. If not contained in a separate billing and collections policy, a FAP must describe the actions a hospital may take, including any extraordinary collection actions (“ECAs”), against the individual, and the time frame for taking any such actions.2
  • Wide publication. Generally, the FAP, a plain language summary of the FAP, and FAP application must be made widely available on the web, summaries must be made available in public locations and by mail, and conspicuous public displays informing visitors and the community of the FAP’s existence must be maintained. Depending on the demographics of the community served by the hospital, each of these documents/displays may have to be provided in languages other than English.

Emergency Medical Care Policy

Section 501(r)(4) also requires a hospital to have a written policy requiring it to provide emergency medical care on a nondiscriminatory basis. The regulations require the policy to specifically prohibit the hospital from engaging in actions that discourage individuals from seeking emergency medical care, such as demanding prepayment for services or conducting debt collection activities in the emergency room.

Limitation on Charges

Section 501(r)(5) requires a hospital to limit the amount it charges FAP-eligible patients for emergency or medically necessary care to no more than AGB. The regulations provide that a hospital may use one of two mutually exclusive methods to determine AGB.

  • Look back method. AGB is determined by multiplying the hospital’s gross charges for the care provided by the AGB percentage, which is the sum of all Medicare fee for service, Medicaid fee for service and private pay amounts for emergency or medically necessary care paid in full to the hospital during the previous 12 months divided by the gross charges for those claims.
  • Prospective method. AGB is equal to the amount Medicare and the Medicare beneficiary would be expected to pay for the care if the patient were a Medicare fee-for-service beneficiary.

A hospital will not violate these rules, however, if it has not received a FAP application and bills an individual more than AGB, provided the hospital has made and continues to make reasonable efforts to determine the individual’s FAP eligibility.

Billing and Collections Requirements

Code Section 501(r)(6) provides that a hospital organization must not engage in ECAs unless it has made reasonable efforts to determine whether an individual is FAP-eligible. Under the regulations, the legal protections afforded patients under these rules cannot be waived.

  • Defining ECA. The regulations define ECAs as actions that require a legal or judicial process or involve selling an individual’s debt to another party or reporting adverse information to a credit reporting agency or credit bureau. Examples of ECAs include, but are not limited to, placing liens on a person’s property, foreclosing on a person’s property, attaching or seizing a person’s bank account or any other personal property, commencing a civil action against a person, causing the person’s arrest, causing the person to be subject to a writ of body attachment, and garnishing a person’s wages.
  • Reasonable Efforts to Notify and Determine FAP-Eligibility. In general, a hospital must notify a person of its FAP during a 120-day “notification period”. However, it must continue to accept and process FAP applications during a longer, 240-day “application period.” In making reasonable efforts, a hospital must distribute a plain language summary of the FAP and offer a FAP application to patients prior to discharge. In addition, the hospital must include a plain language summary of the FAP with all (and at least three) billing statements and inform the patient of its FAP in all other written and oral communications regarding the bill during the notification period. In addition, a hospital must warn people in writing, at least 30 days before payment is due, of the ECAs it may take if payment or a FAP application is not received.
  • If the hospital receives a FAP application during the application period, whether complete or incomplete, it must suspend any ECAs. If the application is incomplete, it must inform the person, in writing, what information is still required in order to complete the application. If the hospital receives a completed FAP application during the application period, it must make and document a determination as to the individual’s FAP eligibility, and provide written notice of its determination along with its reasoning to the individual.

The regulations provide that, if a hospital refers or sells an individual’s debt to a thirdparty during the application period, the hospital must obtain a legally binding written agreement from the party with certain enumerated stipulations that generally require the third party to adhere to the same guidelines applicable to the hospital under the regulations. Notwithstanding the foregoing, a hospital is not permitted to sell an individual’s debt during the application period, because such sale would constitute an ECA under the regulations.