IRS Proposes New Detailed Rules for Tax-Exempt Hospitals on Charity Care, Emergency Care, Billing and Collection

by Holland & Knight LLP

On June 22, 2012, the Internal Revenue Service (IRS) released for publication in the June 26 Federal Register a proposed rule implementing several of the new requirements for tax-exempt organizations imposed under Section 9007 of the Affordable Care Act (ACA). This provision and 20 other tax provisions in ACA were upheld by the U.S. Supreme Court’s recent decision on the constitutionality of the healthcare mandate. See the Holland & Knight alert, “Supreme Court Upholds Patient Protection and Affordable Care Act But Modifies Medicaid Provisions” (June 28, 2012).

The lengthy and detailed administrative rule contains proposed regulations governing tax-exempt hospitals’ financial assistance and emergency care policies, as well as their billing and collection policies and procedures. IRS addresses which types of tax-exempt hospitals will be covered by the regulations - confirming that the rules do apply to government hospitals that have been recognized as 501(c)(3) organizations as well as to private nonprofit 501(c)(3) hospitals and to any hospital facilities operated by 501(c)(3) parent organizations.

The proposed rule does not contain additional guidance on requirements relating to community health needs assessments (CHNAs). The preamble notes that CHNA guidance has already been provided in a preliminary format (see IRS Notice 2011-52) and that the IRS will issue proposed regulations on those requirements in a separate rulemaking at a later date. The IRS has also “reserved” on a number of other difficult issues, such as how the new rules apply to hospitals structured as joint ventures.

The IRS invites public comment on the proposed regulations, which are generally due within 90 days, which will be by September 24, 2012; paperwork reduction comments are due by August 27, 2012. While the proposed rules will not be in effect until after they are finalized by the IRS, the preamble to the proposed regulations reminds us that the underlying statutory provisions are currently in effect and that “[t]axpayers may rely on these proposed rules until final or temporary regulations are issued.”

The following summary provides a brief overview of the topics addressed by the IRS proposed rule and highlights what are expected to be controversial aspects.

Financial Assistance and Emergency Medical Care Policies

Internal Revenue Code Section 501(r)(4), added by the ACA, requires tax-exempt hospitals to have both a financial assistance (what most hospitals refer to as “charity care”) policy and an emergency medical care policy.

Financial Assistance

Under Section 501(r)(4)(A), the statute requires the financial assistance policy (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
  5. measures to widely publicize the FAP within the community served by the organization

The proposed IRS regulations spell out in considerable detail how each of these five statutory requirements must be implemented.

Eligibility Criteria. Significantly, the proposed regulations do not mandate any particular eligibility criteria, but they do impose a number of detailed requirements that a FAP must comply with, such as specifying:

  • the financial assistance, including all discounts and free care, available under the FAP
  • all of the eligibility criteria that an individual must meet to receive free, discounted care or another level of assistance

The FAP must also state that following a determination of FAP eligibility, an individual will not be charged more than amounts generally billed (AGB) for emergency or other medically necessary care.

Basis for Calculating Amount Charged to Patients. In addition, the regulations specify that the FAP must either:

  • state the percentage(s) of gross charges the hospital facility applies to determine AGB (the AGB percentage(s)) and how these AGB percentage(s) were calculated (i.e., by describing which of the permitted methods the hospital facility used to determine AGB), or
  • explain how members of the public may readily obtain this information in writing and free of charge

If applicable, a FAP must also specify the amounts, such as gross charges, to which any discount percentages specified in the FAP will be applied. See “Limitation Charges” described in Section II, below.

Method for Applying for Financial Assistance. With respect to the method for applying for the hospital’s financial assistance, IRS regulations specify that FAP must describe how an individual may apply for financial assistance under the FAP, including the following:

  • Either the hospital facility’s FAP or FAP application form (including accompanying instructions) must describe the information or documentation the hospital facility may require an individual to submit as part of his or her FAP application.
  • FAP must provide certain contact information that an individual can use to obtain assistance with the FAP application process.
  • Financial assistance may not be denied based on the omission of information or documentation if either is not specifically required by the FAP or FAP application form.

Actions That May Be Taken in the Event of Nonpayment. As stated above, if the hospital does not have a separate billing and collections policy, it must describe in the FAP the actions the hospital may take in the event of nonpayment, including:

  • any actions that the hospital facility (or other authorized party) may take related to obtaining payment of a bill for medical care provided by the facility, including, but not limited to, any extraordinary collection actions (ECAs)
  • the process and timeframes the hospital facility (or other authorized party) will use in taking these actions, including any reasonable efforts to determine whether an individual is FAP-eligible before imposing ECAs
  • the office, department, committee, or other body with the final authority for determining that the hospital facility has made reasonable efforts to determine whether an individual is FAP-eligible and therefore engage in extraordinary collection actions against the individual

When the hospital has a separate written billing and collections policy, the FAP must state that the actions the hospital may take in the event of nonpayment are described in a separate policy and explain how the public may readily obtain a free copy of this separate policy.

Widely Publicizing the FAP. Under the proposed IRS regulations, hospital facilities will be required to take the following measures to widely publicize the FAP:

  • Make the FAP, the FAP application form and a plain language summary of the FAP widely available on a website.
  • Make paper copies of the FAP, the FAP application form and a plain language summary of the FAP available upon request and without charge, both for distribution in public locations in the hospital facility and by mail.
    • Each of these documents must be made available in English and in the primary language of any populations with limited proficiency in English that constitute more than 10 percent of the residents of the community served by the hospital facility.
  • Inform and notify visitors to the hospital facility about the FAP through a conspicuous public display or other measure(s) reasonably calculated to attract the attention of visitors to the hospital facility.
    • Informative measures could include, for example, conspicuously posting signs and displaying brochures that provide basic information about the FAP in public locations within the hospital facility.
  • Inform and notify members of the community served by the hospital facility about the FAP in a manner reasonably calculated to reach those members of the community who are most likely to require financial assistance.
    • These measures could include, for example, the distribution of information sheets summarizing the FAP to local government agencies and nonprofit organizations that address the health needs of the community’s low-income populations.

The regulations also specify that “making widely available on the website” means that the hospital complies with each of the following requirements:

  • The hospital conspicuously posts complete and current versions of these document in English and in the primary language of any populations with limited proficiency in English that constitute more than 10 percent of the residents of the community services.
  • Any individual with access to the Internet must be able to access, download, view and print a hard copy of these documents, without requiring special computer hardware or software and without payment of a fee to view.

Hospitals have the option of summarizing these measures in the FAP itself or explaining in the FAP how members of the public may readily obtain a free written summary of these disclosure and accessibility measures.

Emergency Medical Care Policy

Section 501(r)(4)(B) requires tax-exempt hospitals to establish a written policy that requires the hospital to provide, without discrimination, care for emergency medical conditions (within the meaning of EMTALA, 42 U.S.C. 1395dd) to individuals - regardless of whether they are eligible for financial assistance under the hospital’s FAP.

The IRS received numerous comments suggesting that this requirement should not be interpreted as imposing any additional requirements other than to set forth the Emergency Medical Treatment and Active Labor Act (EMTALA) standards in a written policy. However, the IRS proposed regulations would additionally require that the written policy:

... prohibit the hospital facility from engaging in any actions that discourage individuals from seeking emergency medical care, such as by demanding that emergency department patients pay before receiving treatment for emergency medical conditions or permitting debt collection activities in the emergency department or in other areas of the hospital where such activities could interfere with the provision, without discrimination, of emergency medical care.

In the preamble, the IRS suggests that such debt collection activities could jeopardize a hospital facility’s compliance with EMTALA as well as with the new tax exemption requirement under Section 501(r)(4)(B).

This proposal is likely to generate controversy to the extent that it does not clearly delineate between routine requests for payment and so-called “debt collection” activities. However, it should be noted that the prohibition on “demanding” pre-payment for services is limited to patients utilizing the emergency department for the treatment of emergency medical conditions.

Limitation on Charges (Billing Policies and Procedures)

Section 501(r)(5)(A) requires a hospital organization to limit its charges for emergency and other medically necessary care provided to FAP-eligible individuals to no more than “amounts generally billed to individuals who have insurance covering such care [.]” Further, Section 501(r)(5)(B) prohibits hospitals from using gross charges - such as charge-master rates - to bill such individuals.

The proposed regulations clarify that tax-exempt hospitals must limit the amount charged to a FAP-eligible individual to:

  • in the case of emergency or other medically necessary care, to not more than the amounts generally billed (AGB) to individuals with insurance covering that care
  • in the case of all other medical care, less than the gross charges for that care

While the legislative history of Section 501(r) indicated that hospitals could determine AGB using one of three alternative methods (i.e., the “best” commercial rate, the average of the three best commercial rates and Medicare rates), the IRS regulations propose that hospitals use one of two different methods and that they continue to use that method once it is selected. The two methods are described as follows:

  • “Look-back” method: a method based on actual past claims paid to the hospital facility by either (a) Medicare fee-for-service only, or (b) Medicare fee-for-service together with all private health insurers paying claims to the hospital facility
  • “Prospective” method: a method based on an estimate of the amount the hospital would be paid by Medicare for the emergency or other medically necessary care at issue if the FAP-eligible individual were a Medicare fee-for-service beneficiary

With respect to the prohibition on gross charges, the proposed regulations clarify that it applies only to FAP-eligible individuals, but for those individuals, it applies to any medical care, not just emergency and medically necessary care. At the same time, the proposed regulations clarify that it is acceptable to include gross charges on hospital bills as the “starting point” to which various contractual allowances, discounts, or deductions are applied, as long as the gross charges are not the actual amount a FAP-eligible individual is expected to pay.

While regulations put the burden of discovering whether an individual is FAP-eligible on the hospital,1 the so-called “safe harbor” applies to certain charges in excess of AGB, which is formulated as follows:

A hospital facility will be deemed to meet [the applicable requirements] even if it charges more than AGB for emergency or other medically necessary care,(or gross charges for any medical care) provided to a FAP-eligible individual if (1) the FAP-eligible individual has not submitted a complete FAP application as of the time of the charge; and (2) the hospital facility has made and continues to make reasonable efforts to determine whether the individual is FAP-eligible.

If an individual is subsequently found to be FAP-eligible, the proposed regulations suggest that the charge should be corrected.

Billing and Collection

Code Section 501(c)(6) imposes new billing and collection requirements on hospitals. Hospitals are prohibited from engaging in “extraordinary collection actions” (ECAs) before making “reasonable efforts” to determine whether the individual is FAP-eligible for assistance under the hospital’s financial assistance policy. The proposed regulations seek to define ECAs and what constitutes “reasonable efforts” to determine FAP eligibility.

Extraordinary collection actions. The proposed regulations include the following actions as included in the term ECAs within the meaning of this provision:

  • place a lien on an individual’s property
  • foreclose on an individual’s real property (legislative history mentions only residential foreclosures)
  • attach or seize an individual’s bank account or any other personal property (legislative history mentions only body attachments)
  • commence a civil action against an individual
  • cause an individual’s arrest
  • cause an individual to be subject to a writ of body attachment
  • garnish an individual’s wages

All of the above actions are described as actions that require a legal or judicial process.

In addition, the proposed regulations would treat the following collection actions as ECAs:

  • reporting adverse information about the individual to consumer credit reporting agencies or credit bureaus
  • sale of an individual’s medical debt to a third party

In the preamble to the proposed regulations, IRS suggests that it included credit agency reporting as an ECA because such reporting “can cause significant financial harm to an individual for many years” and, in some states, credit agency reporting is restricted by state law applicable to hospital debt collection. It further explained that it treated the sale of medical debt as an ECA because “after a hospital facility has sold a debt, it may have a more limited ability to control the purchaser’s actions to control the debt.” The preamble notes that the proposed regulations do not treat the following actions as ECAs even though some commenters had requested such classifications:

  • deferring or denying care based on pattern of nonpayment
  • requiring deposits before care
  • charging interest

But the preamble cautions that such actions may violate a hospital’s emergency medical care policy, acknowledges that some state laws restrict these practices and requests comments on whether these three additional actions should be treated as ECAs.

The proposed regulations state that a hospital facility will be deemed to have engaged in an ECA against any individual if it engages in an ECA against any other individual who has accepted or is required to accept responsibility for the individual’s hospital bills. In addition, the hospital facility will be considered to have engaged in an ECA against an individual if any purchaser of the individual’s debt or any debt collection agency or other party to which the hospital facility has referred the individual’s debt has engaged in an ECA against the individual.

Reasonable Efforts. The statute included no definition of the term “reasonable efforts,” but the legislative history indicated that the term was intended to include “notification by the hospital of its financial assistance policy upon admission and in written and oral communication with the patient regarding the patient’s bill, including invoices and telephone calls, before collection action or reporting to credit agencies is initiated.” S. Rep. No. 89, 111th Cong., 2d Sess. 311. The proposed regulations appear to go considerably beyond what the legislative history suggests.

Under the proposed regulations, a hospital facility will have made “reasonable” efforts to determine whether the individual is FAP-eligible if the hospital:

  1. appropriately notifies the individual about the FAP during a 120-day “Notification” period2
  2. in the case of an individual who submits an incomplete FAP application during a 240-day “Application period,” provides the individual with information relevant to completing the FAP application
  3. in the case of an individual who submits a complete FAP application, makes and documents a determination as to whether the individual is FAP-eligible (and meets certain other specified requirements)

With respect to the notification prong of the “reasonable efforts” test, the hospital will be deemed to meet this requirement only if it does all of the following :

  • distributes a plain language summary of the FAP and offers a FAP application form to the individual before discharge from hospital
  • includes a plain language summary of the FAP with all (and at least three) billing statements for the care and in all other written communications regarding the bill provided during the notification period.
  • informs the individual about the FAP in all oral communications regarding the amount due for the care that occur during the notification period.
  • provides the individual with at least one written notice that:
    • informs the individual about the ECAs that the hospital facility (or other authorized party) may take if the individual does not submit a FAP application or pay the amount due by a date that is no earlier than the last day of the notification period
    • is provided to the individual at least 30 days before the deadline specified in the written notice

If a hospital facility has met all of the notification requirements and the individual has failed to submit a FAP application by the end of the notification period, the hospital may engage in ECAs against the individual.

However, the proposed regulations further provide that a hospital facility must still accept and process FAP applications submitted by an individual during a longer “Application period” that ends on the 240th day after the hospital facility provides the individual with the first billing statement for the care. If it turns out that the individual is FAP-eligible, the hospital must seek to correct any ECAs undertaken.

Special rules are provided with respect to many aspects of the above requirements, including:

  • What constitutes a plain language summary of the FAP and what must it include?
  • What steps must be taken if an individual submits an incomplete FAP application during the application period (including suspension of ECAs and the provision of written notices)?
  • What steps must be taken upon receipt of a complete FAP application during the application period (including the refund of excess payments and reversal of ECAs)?
  • What protections must a hospital put in place when it refers an individual’s debt for collection by a third party?

The proposed regulations also contain what is referred to as an “anti-abuse” rule. Under that rule, a hospital facility will not be treated as having made reasonable efforts if the hospital bases a determination that the individual is not FAP-eligible on information the hospital has reason to believe is unreliable or incorrect, or on information obtained from the individual under duress or through the use of coercive practices (which the rule defines as including the denial of emergency medical care to an individual until the individual has provided the requested information). Further, the proposed regulations specify that a hospital will not be treated as having made reasonable efforts to determine whether an individual is FAP-eligible simply because it obtains a signed waiver from the individual.


Now that the Supreme Court has confirmed the constitutionality of the Affordable Care Act, the IRS will likely move expeditiously to implement its various provisions, including the new requirements applicable to tax-exempt hospitals. Tax-exempt hospitals are therefore well-advised to adopt compliance measures based on IRS administrative guidance as well as to work with hospital associations on regulatory comments to further shape such guidance.

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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