This Health Care Tax News article is Part IV in a series discussing the proposed regulations under Code Section 501(r).  Part I provided a general overview of why Hospital Organizations should move forward to comply with the proposed regulations, Part II provides an overview of preparing for a Community Health Needs Assessment and Part III reviews the importance of your organization's financial assistance policy.

The Affordable Care Act significantly restricts what Hospital Facilities may charge certain patients and prohibits certain collection actions before determining financial assistance eligibility.  The detailed nature of the restrictions on patient charges and billing and collection activities demands careful review and periodic evaluation of billing and collection policies, procedures and practices applicable to each Hospital Facility. 

The Basics of the Law

Under Code Section 501(r)(5), Hospital Organizations and each of their Hospital Facilities must limit charges for emergency and other medically necessary care provided for "Eligible Individuals," meaning individuals eligible for financial assistance under the financial assistance policy ("FAP").  Specifically, Code Section 501(r)(5) prohibits Hospital Facilities from charging Eligible Individuals more than the amount generally billed ("AGB") to insured individuals for emergency or other medically necessary care.  Code Section 501(r)(6) requires a Hospital Organization and each of its Hospital Facilities to make "reasonable efforts" to determine whether an individual is an Eligible Individual before it engages in any extraordinary collection actions ("ECA") with respect to that individual.

Guidance from the IRS

In the proposed regulations that were issued on June 26, 2012, the IRS expanded on and provided specific guidance with respect to the statutory requirements in Code Sections 501(r)(5) and 501(r)(6).  Hall Render previously published a series of articles analyzing the various facets of these proposed regulations, including the limitations on charges provisions  and the ECA restrictions.  As discussed in these articles, the proposed regulations impose very specific obligations on Hospital Organizations and Hospital Facilities such as acceptable methods of calculating AGB.  Once the proposed regulations are finalized, each Hospital Organization will have a limited time to evaluate applicable billing and collection policies, procedures and practices to ensure that it and each of its Hospital Facilities complies with Code Sections 501(r)(5) and 501(r)(6) in order to avoid jeopardizing its tax-exempt status or paying excise taxes.

Review by Counsel and Other Practical Steps Toward Compliance

Hospital Organizations should review the billing and collection policies, procedures and practices applicable to each of their Hospital Facilities.  To ensure that such review takes into account all applicable law, including the proposed regulations, and that any recommendations are protected by attorney-client privilege, Hall Render recommends skilled counsel conduct this review.

During its review, a Hospital Organization should take the following practical steps:

  • Consider the Eligible Individual determination process.  To avoid running afoul of Code Sections 501(r)(5) and 501(r)(6), Hospital Organizations should:
    • Ensure that Hospital Facility policies and procedures, including the required FAP (discussed in more detail here), are consistent with the specific requirements noted in the proposed regulations.  At minimum, the policies and procedures must include all elements described in Code Sections 501(r)(5) and 501(r)(6);
    • Examine the FAP application process to ensure adequate communication between the patient, billing department and any other department involved in the FAP application or decision process;
    • Confirm that each Hospital Facility is following up with applicants who submit incomplete applications; and
    • Confirm that each Hospital Facility is documenting other "reasonable efforts" it is taking to identify Eligible Individuals.
  • Review applicable billing policies and processes. The FAP requirement, limitation on charges and ECA restrictions materially affect many facets of a Hospital Facility's billing processes.  To facilitate compliance with applicable requirements, Hospital Organizations should:
    • Confirm that safeguards are in place within the billing system that identify Eligible Individuals and prevent them from being billed more than the AGB for emergent and medically necessary care;
    • For non-emergent and non-medically necessary care, ensure that such safeguards prevent billing Eligible Individuals at gross charges (the full chargemaster amount); and
    • Confirm that the Hospital Facility's calculation of AGB complies with one of the two calculation methods permitted by the proposed regulations, neither of which allow a Hospital Facility to use only private health insurance data in the calculation.
  • Evaluate collection activities taken on behalf of the Hospital Organization.  Hospital Organizations are responsible for any actions taken by their third-party vendors in violation of Code Sections 501(r)(5) and 501(r)(6).  Consequently, a Hospital Organization must ensure that any vendors performing billing or collection services are obligated to comply with these Sections.  Reviewing third-party vendor contracts for consistency with Code Sections 501(r)(5) and 501(r)(6), as well as imposing affirmative compliance obligations on the vendor, is advisable.  A Hospital Organization should also educate its vendors on the FAP and revisions to applicable billing and collection policies and procedures for compliance with Code Sections 501(r)(5) and 501(r)(6).


Until final regulations are published, Hospital Organizations are advised to comply with the proposed regulations, which, in the eyes of the IRS, implement and interpret the already-effective statutory limitation of charges and billing and collection restriction provisions.  Once the IRS releases final regulations, Hospital Organizations will also want to review and revise their policies, procedures and processes.