IRS Issues Proposed Regulations for Charitable Hospitals Regarding Section 501(r) Financial Assistance and Other Requirements

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On June 26, 2012, the Internal Revenue Service (IRS) published in the Federal Register proposed regulations and a detailed preamble regarding the Internal Revenue Code (IRC) Section 501(r) requirements for charitable hospital organizations relating to financial assistance policies, emergency medical care policies, limitations on charges for care provided to individuals eligible for financial assistance, and hospital billing and collection activities. 

Charitable hospitals’ financial, billing and compliance personnel will need to review these requirements carefully.  The Section 501(r) requirements addressed by the proposed regulations are in effect now.  Accordingly, even though these proposed regulations are not final regulations and, in that sense, are not effective, they nonetheless represent the Treasury Department’s and the IRS’s current interpretation of the existing Section 501(r) requirements.  Therefore, it may be prudent for charitable hospitals to begin complying with the proposed regulations as soon as reasonably possible.  Further, if a hospital uses a third party to perform any billing or collection functions, the hospital would be wise to ensure, through contract or otherwise, that each such vendor also complies with the proposed regulations with respect to services performed on behalf of the hospital, as the hospital will be held responsible for any non-compliance with Section 501(r).  Hospitals may rely on the proposed regulations until final or temporary regulations are issued.

By way of background, Section 9007 of the Patient Protection and Affordable Care Act, enacted into law on March 23, 2010, added new Section 501(r) to the IRC.  Section 501(r) requires hospitals to satisfy four specific additional requirements in order to qualify for tax-exempt status under IRC Section 501(c)(3):

  • Conduct community needs assessments and implement a strategy to address identified needs;
  • Have and widely communicate written financial assistance policies;
  • Limit charges for indigent patients; and
  • Comply with certain billing and collection practices.

In July 2011, the Treasury Department and the IRS issued Notice 2011-52, which provided guidance regarding the Section 501(r) community health needs assessment (CHNA) requirement.  The Treasury Department and the IRS are in the process of drafting proposed regulations regarding the CHNA requirements.  The new June 2012 Section 501(r) proposed regulations do not provide guidance regarding the CHNA requirements but, instead, address the remaining three categories of requirements of Section 501(r). 

The new proposed regulations also do not address the consequences of a hospital’s failure to satisfy the requirements of Section 501(r).  The preamble to the proposed regulations states that the Treasury Department and the IRS are continuing to consider comments on this topic and will address the issue in separate guidance.

Some of the key areas addressed by the new Section 501(r) proposed regulations and the related preamble include:

  • Definition of “hospital facility.”  This is important because Section 501(r) requires a hospital organization to satisfy the requirements of Section 501(r) separately with respect to each hospital facility it operates.
  • Written Financial Assistance Policies (FAPs).  The proposed regulations require a hospital facility’s FAP to include:  (1) eligibility criteria for financial assistance, and whether such assistance includes free or discounted care; (2) the basis for calculating amounts charged to patients; (3) the method for applying for financial assistance; (4) in the case of an organization that does not have a separate billing and collections policy, the actions the organization may take in the event of nonpayment; and (5) measures to widely publicize the financial assistance policy within the community served by the hospital facility.  The proposed regulations and preamble provide detailed guidance regarding each of these requirements.
  • Emergency Medical Care Policy.  The proposed regulations require a hospital to establish a written policy that requires the hospital to provide, without discrimination, care for emergency medical conditions (within the meaning of the Emergency Medical Treatment and Labor Act (EMTALA)), regardless of whether the individual is eligible for financial assistance under the hospital facility’s FAP. 
  • Limitation on Charges.  The proposed regulations provide that a hospital satisfies the requirements of Section 501(r)(5) if the hospital limits the amount charged for any emergency or other medically necessary care it provides to FAP-eligible individuals to not more than the “amounts generally billed” to individuals with insurance covering that care.
  • Calculation of “Amounts Generally Billed.”  The proposed regulations provide detailed specifications regarding how the maximum allowable charge for an FAP-eligible individual may be calculated.  In particular, the proposed regulations provide two methods of determining the “amounts generally billed.”  One is a “look back” method, in which a hospital determines receipts for Medicare patients, or Medicare patients and all other insureds, for the previous year and divides by gross charges for those patients’ services.  This percentage and the method by which it is calculated must be made available to the public.  The second method is a “prospective Medicare method,” pursuant to which the hospital determines how much fee-for-service Medicare (and the Medicare beneficiary) would pay for the services in question, and that amount is the maximum amount that can be charged to the FAP-eligible patient.
  • Billing and Collection Activity.  The proposed regulations provide that a hospital satisfies the requirements of Section 501(r)(6) if the hospital does not engage in “extraordinary collection actions” against an individual before making “reasonable efforts” to determine whether the individual if eligible for financial assistance.  The proposed regulations address two key aspects of the core Section 501(r)(6) limitations on a hospital’s collection practices.  First, the regulations provide a multi-step process, with time frames, for making “reasonable efforts” to determine whether an individual is FAP-eligible before the hospital may engage in “extraordinary collection actions” against that individual.  Second, the regulations provide a non-inclusive list of actions that may constitute “extraordinary collection actions” for purposes of Section 501(r)(6).  Notably, this list includes reporting to credit agencies and selling debt.
  • State Law Billing and Charge Restrictions.  Section 501(r) and the proposed regulations do not preempt state laws or requirements concerning patient billing and charge practices.  Such specific requirements, which may be more stringent, must be meshed with the specific federal requirements.

In the preamble to the proposed regulations, the Treasury Department and the IRS request comments on many aspects of the proposed regulations.  The comment period ends on September 24, 2012. 

King & Spalding plans to host a free educational Roundtable presentation, available via webinar, on July 31, 2012 regarding the new proposed regulations.  Further information about the Roundtable, including how to register, will be available in the near future.

A copy of IRS Notice 2011-52 (regarding CHNA guidance) is available by clicking here.  The new proposed Section 501(r) regulations and preamble are available by clicking here.

Reporter, Constance F. Dotzenrod, Atlanta, +1 404 572 3585, cdotzenrod@kslaw.com.

Published In: Administrative Agency Updates, Business Organization Updates, Health Updates, Nonprofits Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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