Code Section 501(r) and its corresponding regulations will pose significant challenges for tax-exempt hospital organizations in 2015 and beyond.  While operational personnel will shoulder much of the implementation burden, hospital CEOs and board members must have a general understanding of the new requirements to ensure that the compliance efforts proceed on schedule and to develop and implement strategies that promote the hospital’s charitable purposes and other business objectives.

What Are the Core Requirements of Code Section 501(r)?

Congress added Code Section 501(r) to the Internal Revenue Code through the Patient Protection and Affordable Care Act of 2010.  Under the law, hospitals that are exempt from federal income taxation under Code Section 501(c)(3) must:

  • Conduct a community health needs assessment (“CHNA”) and adopt an implementation strategy to meet the identified health needs at least once every three years;
  • Establish a written financial assistance policy (“FAP”) and written emergency care policy;
  • Limit their charges for individuals eligible for financial assistance to the amount generally billed (“AGB”) to individuals with insurance; and
  • Refrain from any extraordinary collection action (“ECA”) until after making reasonable efforts to determine whether an individual is eligible for financial assistance.

Why Are These Requirements Significant Now?

Since 2010, the IRS and Treasury Department have unveiled a patchwork of guidance to instruct hospitals about the steps they must take to comply with the new law.  The most significant guidance consisted of two separate sets of proposed regulations, but compliance has not been mandatory.  It appears that many hospitals elected to wait for more definitive direction before fully implementing a compliance strategy.  That direction arrived on December 29, 2014, when the IRS and Treasury Department published the long-awaited final regulations.  Like the proposed regulations, these final regulations are detailed and complicated.  Fortunately, the final regulations provide transition relief, as hospitals have until 2016 to come into full compliance.  More specifically, calendar year hospitals have until January 1, 2016, and hospitals with a June 30 year-end have until July 1, 2016.  These deadlines should not lull hospitals into a false sense of security because, even with deliberate action, it will require significant time and effort for hospitals to develop and implement the necessary changes to their policies and procedures.

What Should Hospital Leadership Do Now?

Given the detail of the final regulations, hospital CEOs and boards understandably may wish to delegate the focused analysis and implementation to other hospital personnel.  Even under this approach, however, there is much for the CEO and Board to do.

First, the CEO should identify the specific individual(s) with responsibility for overall Code Section 501(r) compliance.  The CFO or COO would be natural candidates, possibly in combination with the community benefits coordinator (if one exists) for the CHNA requirement.

Second, the CEO and Board should ensure the establishment of a compliance team to be led by the responsible individual(s) identified by the CEO.  Code Section 501(r) and the corresponding regulations will touch numerous areas of hospital operations – including the emergency room, inpatient and outpatient care, patient financial services, patient intake and discharge, collections and community outreach.  Full compliance will demand dialogue between these areas.  Assembling a team that meets regularly over the coming year will enable individuals to work collectively to develop compliance solutions – and ideally to avoid future conflicts between the solutions developed for individual areas.  In addition to representatives of the different affected hospital departments, this team should include legal counsel, who can educate the team about the law’s complexity and may provide attorney-client privilege for sensitive strategic discussions.  Additionally, a member of the team should serve as a liaison to the board and thus keep the hospital’s leadership informed about the team’s progress.

Third, through the liaison, the Board should offer guidance regarding strategic matters implicated by the Code Section 501(r) requirements.  As an example, the final regulations require that the hospital’s FAP identify entities that provide care at the hospital facility (besides the hospital itself) and whether such entities are subject to the FAP.  For hospitals that are part of a system, this presents an opportunity for the Board to evaluate whether related entities, such as affiliated but separately incorporated physician groups, should also be subject to the financial assistance policy.  Similarly, the hospital may desire board involvement in considering what ECAs the hospital will undertake and under what circumstances.


Code Section 501(r) will demand significant effort from Code Section 501(c)(3) hospitals. Hospital CEOs and Boards need to understand the big picture and remain connected to the implementation team in order to ensure effective compliance and facilitate strategic decisions.