501(r) — What Does it Mean for You?

The Internal Revenue Service has released proposed regulations on financial assistance policy and emergency medical care policy requirements under the Patient Protection and Affordable Care Act. These new requirements continue the IRS focus on the activities and policies of tax-exempt hospitals and the implication that tax-exempt hospitals must be required to "justify" their tax-exempt status, especially with regard to serving patients unable to pay for the costs of their medical care. Internal audit and compliance plans will need to include oversight of these new policies.  

Financial assistance policy and emergency medical care policy

Section 501(r) was added to the IRS code by the PPACA and imposes new requirements on 501(c)(3) organizations that operate one or more hospital facilities (a facility is determined by state or local licensing requirements). These rules are also mandatory for governmental hospitals that have applied for 501(c)(3) status. Each hospital is required to meet several general requirements on a facility-by-facility basis including:

  • Establish written financial assistance and emergency medical care policies;
  • Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital's financial assistance policy; and
  • Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital's financial assistance policy before engaging in extraordinary collection actions against the individual.

These requirements will require the involvement of expertise beyond that of a tax professional. These policies must be developed, implemented and monitored across the hospital organization with close collaboration among regulatory compliance, operations and billing to ensure appropriate action is taken to address this tax-exempt status requirement.    

What's it all about?

The statutory guidance under section 501(r) is law and must be followed to maintain tax exempt status. Under the proposed regulations, the IRS is providing its thoughts on the statutory rules. Proposed regulations do not have to be followed, but in the absence of authoritative guidance, organizations must be prepared to represent a "good faith effort" toward compliance. Under the proposed regulations, the financial assistance policy must be in writing and should apply to all emergency and other medically necessary care provided by the hospital. The FAP should describe the following information with specific details and procedures for associated items including:

  • Eligibility criteria;
  • Basis for calculating amounts charged to patients;
  • Method of applying for financial assistance;
  • Actions that may be taken by hospital for nonpayment;
  • How the public may receive a written description on how the FAP is publicized;
  • Adoption of the FAP by the authorized body of the hospital; and
  • Consistent and ongoing utilization of the FAP.

The emergency medical care policy is a written policy that must include:

  • Requirement of hospital to provide care, without discrimination, for emergency medical conditions to individuals regardless of whether they are FAP-eligible; and
  • Prohibits the hospital from engaging in actions that discourage individuals from seeking emergency medical care, such as demanding payment prior to service or permitting debt collection activities in the emergency department.

Both the FAP and EMCP have numerous definitions and "fine print" requirements that will impact all areas of the organization from the emergency department intake staff to the billing staff and various departments and levels of staff in-between.

How does it work?

If finalized, the proposed regulations will significantly increase the amount of specificity and the requirements that a hospital must follow in order to be compliant. Listed below are just a few of the items that the FAP must describe according to the proposed rules:

  • All financial assistance available, including all discounts or free care, and amounts such as gross charges to which any discount percentages are applied;
  • Describe the method (either a look-back approach or a prospective Medicare based method) for the determination of the amount generally billed to individuals who have insurance for various services;
  • Ensure an FAP-eligible individual is not charged more than amounts generally billed to individuals who have insurance  for any medical service;
  • Efforts that should be made and the time periods over which these efforts should be made to determine whether an individual is FAP-eligible before engaging in any extraordinary collection actions; and
  • Inform and notify residents of the community about the FAP.


The role of internal audit and compliance

These new IRS requirements should be evaluated and considered areas of opportunity for monitoring by hospital internal auditors and compliance officers.

Internal auditors should include in their work plan the need to determine if FAP and EMCP have been properly implemented and consistently followed and test the effectiveness of their hospital's controls such as:

  • Does the hospital have controls in place to assess patient FAP eligibility?
  • Does the billing system track and maintain information on all patients with indications of FAP status?
  • Was the patient billed the correct amount according to FAP?
  • Does the hospital appropriately calculate the amounts generally billed to individuals who have insurance under the described policy method?
  • Does the billing system have controls to ensure FAP-eligible patients do not receive extraordinary collection actions?
  • Is there appropriate documentation to indicate FAP eligibility and communication with the patient?
  • Are there effective monitoring controls over the FAP and the EMCP?

In addition to testing the effectiveness of internal controls, compliance officers should be testing the organization's compliance with the statutory requirements including:

  • Validate that patient eligibility is assessed as provided in the proposed regulations.
  • Validate that the hospital has billed patients the amounts generally billed to individuals who have insurance or less for specific services.
  • Assess the organization's use of referral to collection agencies in accordance with FAP.
  • Validate that the written description of the measures taken to publicize the FAP is complete and in accordance with the requirements, including on the website and in multiple languages as applicable.
  • Validate the organization is meeting the appropriate actions in the emergency department and other similar areas to ensure the hospital is not engaging in actions that discourage individuals from seeking emergency medical care.

Scrutiny of tax exempt healthcare organizations continues to increase, particularly by the federal government. Hospital board members and executives should ensure that the organization's internal auditors and compliance officers are regularly assessing and reviewing their organization's risks to evaluate if the FAP and EMCP have been appropriately developed, implemented and operating effectively and in compliance with the current rules and regulations.

W. Edward "Eddie" Phillips is a principal in the Tax practice at Draffin & Tucker where he focuses on the healthcare industry. With more than 32 years of experience, he specializes in providing tax compliance and tax advisory services to multi-entity healthcare systems and large physician group practices. He has also represented several organizations in IRS examinations, including two successfully appealed tax exempt revocation cases.

More Articles on Hospital Tax Exemption:

Hospital Groups Urge Government to Ease Tax-Exempt Regulations
A Sheep in Wolf's Clothing: Form 990 Is an Opportunity, Not a Burden


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