501(r) Audits Are Here: What You Need to Know

by Nilan Johnson Lewis PA

[co-author: Fred Struve]

The Affordable Care Act imposed new requirements on tax-exempt hospitals under Section 501(r) of the Internal Revenue Code. Section 501(r) and its implementing regulations present a complex framework intended to promote “charitable” behavior by tax-exempt hospitals. By way of example, 501(r) requires a hospital to assess and address community health needs and to adopt billing and collection practices aimed at ensuring that patients who have a limited ability to pay for care are treated fairly.

The IRS is obligated to review each hospital’s compliance with Section 501(r) at least every three years. To date, approximately 40% of hospitals reviewed by the IRS for 501(r) compliance have received follow up requests for information from the IRS. These requests appear to seek information about compliance with all of the following aspects of 501(r):

Community Health Needs Assessment (CHNA). The IRS has requested that hospitals provide a copy of the most recent and historical CHNA and Implementation Strategy documents. The IRS wants to see evidence of adoption of these documents by the hospital’s board of directors. The IRS has also asked for the name of the hospital employee most familiar with the hospital’s CHNA process and documents.

Financial Assistance Policy (FAP). The IRS is checking to see that all required FAP documents (translated into the languages required by the regulations) have been made available on the hospital’s website. The required FAP documents include the policy itself, a list of providers covered by the policy, a plain language summary of the policy, the financial aid application form, and a billing and collection policy. In addition, there are specific ways patients must be able to obtain a financial aid application, and specific locations within the hospital where patients must be notified about the existence of financial aid. The IRS has been checking compliance with these technical requirements.

Limitation on Charges. The IRS has asked hospitals to show their math as to the calculation of the hospital’s “amount generally billed” (AGB). The AGB is determined via a complicated calculation of amounts paid to the hospital by certain payers. 501(r) provides that a hospital may not charge a patient who qualifies for financial aid more than the hospital’s AGB. The IRS has also requested copies of patient complaints alleging that the hospital overcharged patients.

Billing and Collection. The IRS has asked hospitals to provide copies of the hospital’s billing statement, and billing and collection policies. In addition, the IRS has requested copies of contracts between the hospital and third-party debt collection agencies. Finally, the IRS has requested the name of the hospital employee most familiar with the hospital’s billing and collection practices.

Hospitals should prepare to receive an IRS information request related to 501(r) by taking the following steps:

  1. Identify the person(s) who will coordinate the hospital’s response to any 501(r)-related IRS inquiry. Be sure the appropriate staff know to whom an IRS communication should be routed.
  2. Conduct an internal “audit” of compliance with 501(r), especially with respect to the FAP requirements (including translation, signage and website placement of FAP related documents).
  3. Review patient complaints related to billing and collection issues regularly throughout the year. Assign a point-person to respond to (and maintain records related to) billing and collection complaints.
  4. Identify hospital employees best suited to talk to the IRS about (a) billing and collection issues and (b) the CHNA. Be sure those people have recently reviewed the requirements of 501(r) with hospital compliance and/or legal counsel.

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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