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To Maintain Tax-Exempt Status, Hospitals Must Comply With IRS Code Section 501(R)

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Gary J. McRay
Foster Swift Health Care Law E-News
September 28, 2012

As part of the 2010 Healthcare Reform Act, Code Section 501(r) of the Internal Revenue Code (“Code”) was added to provide that a hospital would lose its tax exemption unless the hospital:

  1. conducts a community health needs assessment (see my article from September 2011);
  2. adopts a financial assistance policy (“FAP”);
  3. adopts an emergency medical care policy;
  4. adopts a limitation on charges; and
  5. adopts certain billing and collection restrictions.

Proposed regulations were published June 26, 2012, which help define all five requirements.  This article discusses the latter four.

Financial Assistance Policy

A hospital must adopt a written FAP that applies to all emergency and other medically-necessary care provided by the hospital.  A FAP must include:  (i) eligibility criteria for financial assistance and whether such assistance includes free or discounted care; (ii) the basis for calculating amounts charged to patients; (iii) the method for applying for financial assistance; (iv) a list of the actions it may take in the event of nonpayment, including collections actions and reporting to credit agencies (if the hospital does not have separate billing and collections policy); and (v) the hospital’s measures to widely publicize its FAP within the local community.  Proposed regulations also require that the FAP specify all of the financial assistance available, including all discounts and free care and, if applicable, the amounts (for example, gross charges) to which any discount percentage will be applied.

To widely publicize the FAP, a hospital is required under the proposed regulations to: (i) make the FAP and the FAP application form and a plain language summary of the FAP widely available on a hospital website; (ii) make paper copies of the FAP, FAP application form and the plain language summary available upon request and without charge in public locations in the hospital and by mail (in English and in the primary language of the populations with limited proficiency in English that constitute more than 10% of the residents of the community served by the hospital facility); (iii) inform and notify visitors to the hospital about the FAP through conspicuous public displays; and (iv) inform and notify residents of the community served by the hospital about the FAP in a way to reach those patients who are most likely to require financial assistance.

Emergency Medical Care Policy

Code Section 501(r)(4) also requires a hospital to establish a written policy relating to emergency and other medically necessary care.  Most hospitals have equal treatment policies in place because of the Emergency Medical Treatment and Active Labor Act ("EMTALA").  Code Section 501(r) goes beyond EMTALA because it prohibits hospital organizations from discouraging individuals from seeking emergency medical care.  So, for example, the proposed regulations specifically prohibit hospitals from demanding emergency room ("ER") patients pay before receiving treatment and prohibit debt collection activities in an ER or in other areas of a hospital where such activities could interfere with providing emergency medical care.

Limitations on Charges

Under this requirement, Code Section 501(r) requires that a hospital not charge a person eligible under its FAP any amount: (i) for emergency or other medically-necessary care greater than the “amount generally billed” (“AGB”) to individuals who have insurance coverage and (ii) for all other medical care no amount equal to gross charges.  In determining AGB, a hospital may calculate its AGB percentage through a look-back method.  The look-back method is basically the sum of all claims for emergency and other medically-necessary care paid during the prior 12-month period divided by the sum of the associated gross charges for these claims.  The calculation can be based upon Medicare fee for service or both Medicare fee for service and private health insurers.

As an alternative, the hospital may use a prospective Medicare method to calculate AGB.  The hospital would calculate AGB based upon what would be paid by Medicare and the Medicare beneficiaries as if the FAP patient was a Medicare fee-for-service beneficiary.  The regulations do provide a safe harbor if the hospital charges more than AGB if (i) the FAP-eligible individual has not submitted a completed FAP application at the time of the charge and (ii) the hospital makes reasonable efforts to determine whether the patient is FAP eligible.  Naturally, if the person is eligible for assistance, the hospital must refund the excess payments under the FAP policy.

Billing and Collection Restrictions

Code Section 501(r) does not allow a hospital to engage in extraordinary collection actions (“ECAs”) before the hospital has made reasonable efforts to determine whether the patient is eligible for assistance under the FAP.  The proposed regulations conclude that ECAs include any legal or judicial process or involve selling an individual’s debt to another party or reporting adverse information to a consumer credit agency or credit bureau.  Legal or judicial processes include: liens; foreclosures; attaching one’s bank account or personal property; garnishing wages; commencing a civil action; or causing a person’s arrest.  A hospital has used reasonable efforts to determine whether a patient is FAP eligible only if: (i) the patient receives a plain language summary of the FAP and a FAP application prior to discharge from the hospital, or (ii) the patient receives a plain language summary of the FAP with the first three billing statements.  A FAP notification must occur within 120 days after the hospital gives the patient the first billing statement and the hospital must accept the FAP application any time within the application period (which does not end until 240 days after the hospital gives the patient the first billing statement).  And finally, the patient must receive at least one notice from the hospital that tells the patient about the ECAs the hospital may take if the individual does not submit a FAP application or pay the amount due by the deadline (set forth in the notice).  The deadline is no earlier than the end of the notification period, but at least 30 days from the notice.

Board Action

The proposed regulations make it clear that the board of directors of a hospital must formally adopt the FAP, the billing and collection policy and the emergency medical care policy for the required policies to actually be "established" for purposes of the regulations.  In lieu of the board of directors, it is possible that a board committee may adopt these policies.  If an entity has more than one hospital facility, the board may adopt one policy for each hospital organization, modified to fit each hospital as necessary.

The proposed regulations are complicated but, any hospital wishing to protect its tax exemption should incorporate the guidance found in the proposed regulations into its policies.

If you have any questions about the proposed regulations, please contact Gary McRay at 517.371.8285.