By: Kim Hunwardsen

On December 29, 2014, the IRS released the long-awaited final regulations to provide guidance on the requirements hospitals exempt under 501(c)(3) must meet in order to retain their tax-exempt status and avoid penalties.

As a reminder, the requirements under IRC Section 501(r) were established in the 2010 Patient Protection and Affordable Care Act and sought to ensure that patients who may require financial assistance will have access to medical care. Specifically, the rules address four major requirements:

• Conducting a community health needs assessment
• Establishing written financial assistance and emergency care policies
• Providing a limitation on charges
• Establishing billing and collection policies and procedures

The final regulations allow hospitals flexibility in determining how to implement the 501(r) rules to best meet the needs of the communities they serve, but provide a framework within which hospitals must operate. The regulations will apply for tax years beginning after December 29, 2015.

The rules under 501(r) apply to 501(c)(3) organizations that operate one or more facilities that are required to be licensed or registered as hospitals under applicable state law. These rules also apply to governmental hospitals if they have 501(c)(3) status in addition to governmental status. Organizations that operate multiple hospitals must meet the requirements with respect to each licensed hospital, even if multiple hospitals operate in the same building. In addition, the rules apply to hospitals that are operated by a 501(c)(3) organization through a joint venture unless the organization does not control the hospital facility and treats the income from the partnership as unrelated business income.

The IRS can revoke the tax-exempt status of organizations that fail to meet the requirements of Section 501(r) and the final regulations with respect to their hospital facilities. In determining whether to revoke exemption, the IRS will consider all relevant facts and circumstances. The IRS will not revoke exemption because of minor errors or omissions in policies that are inadvertent or due to reasonable cause as long as they are corrected promptly after the organization discovers them. In addition, more significant failures to comply will not result in revocation if the failure is not willful or egregious and the hospital facility corrects the failure and discloses it publicly.

The final regulations resulted in a number of clarifications and changes from the proposed regulations. Some specific changes to note:

Community Health Needs Assessments (CHNA) 

• A hospital may update an existing CHNA rather than starting over every three years. However, they still must solicit public input at the time of the update.
• The regulations acknowledge that while the hospital must solicit input from the community, they may not receive input. The regulations clarify they must take into account input they do receive and document the efforts made to obtain input.
• A draft of the CHNA report may be made available for public comment, but it is not required. However, future CHNA processes must consider any comments or public feedback on the most recently completed CHNA process.
• If the hospital relies on data collected or created by others, they may simply cite the data sources and do not have to describe the methods used by the other resource.
• The timeframe for adoption of the implementation strategy has been extended until the 15th day of the fifth month following the end of the tax year in which the hospital approves the CHNA.

Written Financial Assistance and Emergency Care Policies

• The financial assistance policy (FAP) must identify all providers, other than the hospital, delivering emergency or other medically necessary care and whether they are covered under the financial assistance policy.
• The hospital may grant financial assistance based on information from sources other than the individual and use prior FAP-eligibility determinations in determining eligibility. In addition, the hospital can obtain information from patients either orally or in writing.
• The FAP is only required to disclose discounts under the FAP and not additional discounts the hospital may provide.
• The FAP no longer needs to disclose how the hospital makes the FAP widely available. However, the hospital still must provide a plain language summary to patients upon discharge. It also must make documents available via paper copies, on the website, on conspicuous display in the hospital and provide to other organizations likely to have contact with members of the community most likely to require assistance.
• Billing statements must include a conspicuous notice of the availability of financial assistance and the telephone number or website address where FAP documents may be obtained; they no longer need to include a plain language summary of the policy.
• All documents must be made available in English and the primary language of any population with limited English proficiency which constitutes greater than 5% of the community served or 1,000 individuals, whichever is less. This is a change from 10% in the proposed regulations.
• With respect to emergency care, the final regulations prohibit debt collection activities that interfere with the provision of emergency medical care, regardless of where the debt collection activities occur. However, asking for insurance information or collecting co-payments is permissible to the extent EMTALA allows those activities.

Limitations on Charges  
 

• The final regulations maintain the two approved methods for determining the limitations on charges (amounts generally billed (AGB)) a hospital can bill someone qualifying for financial assistance-the Look-back Method and the Prospective Method. The final regulations provide Treasury and the IRS the ability to establish additional methodologies in future published guidance as circumstances warrant.
• A facility can change the AGB method it uses at any time; it just needs to update its FAP to reflect the method and/or percentage discount applied.
• The regulations clarify that the AGB limitation applies only to the amount the patient is personally responsible for paying after deductions, discounts and insurance have been applied.
• Medicaid can be included in the calculation for either the look-back or prospective method; either alone or in conjunction with the other payors.
• The look-back method has been revised in the following ways:
  • The numerator is changed from "amount paid" by Medicare, patient and private insurers to the "amount allowed". The use of the "allowed amount" clarifies that claims allowed during the look-back period can be included, even if they have not yet been fully paid.
  • The AGB can be calculated based on all services provided by the hospital versus just emergency and medically necessary services.
  • Extends the time period for implementation from 45 to 120 days from the last day used in the 12-month look-back calculation period.
  • A reasonable allocation of capitated or other lump-sum payments made by an insurer can be incorporated.

Billings and Collections

• Liens placed on a portion of potential settlement proceeds when the patient has sued a third party due to an auto accident or other type of accident is not considered a collection action and thus is not an extraordinary collection action (ECA).
• Sale of debt to a third party is not considered to be an ECA, if: 1) purchaser agrees not to engage in any ECAs to obtain payment of the debt; 2) the purchaser agrees not to charge interest in excess of the federal short-term rate plus three percentage points and 3) the purchaser will return the debt to the hospital or ensure the individual does not pay more than he or she is personally responsible to pay if the individual is determined to be FAP eligible.
• Deferring, denying or requiring payment before providing medically necessary care because of nonpayment of one or more previous bills is considered to be an ECA. In addition, a special process must be followed to implement this ECA. A hospital must first notify the individual in writing of the availability of financial assistance, include a FAP application, and notify the individual of a deadline for submitting the application form (at least 30 days before the deadline). In addition, at least 240 days must have passed since the date of the prior post-discharge bill that has not yet been paid.
• The rules with respect to "notification" have been simplified. At least one bill post-discharge must contain a plain language summary of the FAP (not every bill). In addition, an oral notification of the FAP and how to obtain assistance with the FAP process is required once, at least 30 days before initiation of an ECA. A summary of the ECAs the hospital intends to initiate must be provided to the patient before initiation.
• If an incomplete application is received, only ECAs related to the current care must cease. They only need to be stopped for a reasonable period of time in order to obtain additional information. The definition of reasonable depends on the amount of information missing and the documentation being requested.

Based on the application date of tax years beginning after December 29, 2015, all organizations will have at least one year to ensure compliance with the final regulations. For tax years before then, a reasonable and good-faith interpretation of Section 501(r) is required. This would mean the organization may comply with either the 2012 or 2013 proposed regulations or the final rules.

For additional information and discussion regarding these requirements, please join us for a one-hour webinar on Monday, February 9th from 2:00 p.m. to 3:00 p.m. CT. Click here to register for this webinar (CPE: 1 Credit).

In addition, look for a more comprehensive article on these rules to be released at a later time.