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Protecting the Hospital Tax Exemption Part IV: Billing and Collection Requirements

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Gary J. McRay and Julie C. LaVille
Foster Swift Health Care Law News
April 23, 2015

On December 31, 2014, the Internal Revenue Service (“IRS”) published final regulations providing guidance on how a hospital keeps its tax exemption by complying with Section 501(r) of the Internal Revenue Code. Section 501(r), which was added by the Patient Protection and Affordable Care Act (“ACA”) in 2010, introduced four new sets of requirements that each hospital must meet in order to maintain its 501(c)(3) tax exemption. Throughout the past two months, we have published a series of articles on these regulations, including an overview of Section 501(r), a summary of the community health needs assessment ("CHNA") requirements of Section 501(r)(3), and a summary of the financial assistance policy ("FAP") requirements of Sections 501(r)(4) and 501(r)(5). In this final installment, we will comment on the billing and collection requirements of Section 501(r)(6).

Section 501(r)(6) prohibits a hospital from engaging in extraordinary collection actions ("ECAs") before making reasonable efforts to determine whether that individual is eligible for assistance under the hospital's FAP. The final regulations clarify that a hospital is also prohibited from engaging in ECAs against any other individual who has accepted responsibility for the individual's hospital bill.

A hospital may not circumvent the ECA prohibition by contracting with third parties who engage in ECAs. The final regulations clarify that a hospital will be deemed to have engaged in an ECA if an ECA is taken by (1) any purchaser of the individual's debt, (2) any debt collection agency or other party to which the hospital facility has referred the individual's debt, or (3) any substantially related entity. On the other hand, the hospital will be deemed to have made reasonable efforts to determine whether an individual is FAP-eligible if such efforts are made by any of the entities listed above.

What is an Extraordinary Collection Action?

The final regulations define an ECA to include:

  1. Selling an individual's debt to another party;
  2. Reporting adverse information about the individual to consumer credit reporting agencies or credit bureaus;
  3. Deferring or denying medically necessary care because of an individual’s nonpayment for prior care eligible for FAP coverage; and
  4. Actions that require a legal or judicial process, including:
    1. Placing a lien on an individual’s property;
    2. Foreclosing on an individual’s real property;
    3. Attaching or seizing an individual’s bank account or any other personal property;
    4. Commencing a civil action against an individual;
    5. Causing an individual’s arrest;
    6. Causing an individual to be subject to a writ of body attachment; and
    7. Garnishing an individual’s wages.

Although debt sales are generally considered to be ECAs, the final regulations permit certain debt sales provided that the hospital enters into a written agreement requiring the purchaser to (1) avoid engaging in ECAs, (2) charge interest rates on outstanding amounts that do not exceed IRS-established interest rates, (3) return or recall debt to the hospital upon a positive FAP eligibility determination, and (4) if the debt is not returnable or recallable to the hospital, ensure that the individual not be charged more than he or she would be responsible for paying as a FAP-eligible individual.

The filing of a claim by the hospital in any bankruptcy proceeding is not an ECA.

What is a "Reasonable Effort" to Determine FAP eligibility?

Before engaging in ECAs against an individual, a hospital must make reasonable efforts to determine the individual's FAP eligibility.  A hospital can meet the reasonable efforts requirement through a presumptive FAP eligibility determination based on information from third parties or prior eligibility information, as long as the hospital (i) notifies the individual of the basis for presumptive eligibility, (ii) provides the individual with information on how to apply for more generous assistance, if applicable, within a reasonable period of time, and (iii) reviews whether the person is eligible for a more generous discount if a complete FAP application is submitted requesting more generous assistance.

A hospital can also meet the reasonable efforts requirement if it does all of the following before initiating an ECA:

  • Provides the individual with a written notice indicating that financial assistance is available and notifying the individual of the ECAs that the hospital intends to take to obtain payment;
  • Provides a plain language summary of the FAP; and
  • Makes a reasonable effort to orally notify the individual about the FAP and about how the individual may obtain assistance with the FAP application.

These notification efforts generally must be completed at least 30 days before initiating ECAs. The hospital must also refrain from initiating most ECAs for at least 120 days after the hospital provides the first post-discharge billing statement for the care. A hospital may print any required written notice, including the plan language summary of the FAP, on a billing statement, provided that the required information is conspicuously placed and clearly readable.

If an individual submits an incomplete FAP application, the final regulations require a hospital to give the individual a reasonable opportunity to complete the application. The hospital must suspend any ECAs to obtain payment for care for a reasonable period of time and must provide the individual with a written notice that describes the additional information required under the FAP.

A hospital must either make a presumptive FAP-eligibility determination or comply with the notice requirements above in order to meet the reasonable efforts requirement. A hospital may not satisfy this requirement by obtaining a signed waiver from an individual, such as a signed statement that the individual does not wish to apply for assistance under the FAP.

We encourage all of our hospital clients to review the final regulations to see if any billing and collection policies need to be modified in light of the new regulations. Please contact a member of our Health Care Practice Group with any questions regarding these regulations.