When the 501(r) compliance regulations went into effect in 2016, the industry reaction was complacency.
For a while, that approach seemed safe. The IRS didn’t go after any violators that year. But all that changed in August 2017 when the IRS revoked the tax-exempt status of a yet-to-be-identified hospital over the issue. Since then, the IRS fined hospitals in New Jersey and Texas for non-compliance. At this writing, about 40 percent of hospitals reviewed by the IRS have received follow-up requests for more information.
For compliance officers, such statistics should be alarming. If the IRS finds a hospital in non-compliance of 501(r), it can revoke the hospital’s tax-exempt status, or levy a fine, as we have seen. To avoid either of those fates, hospitals need to fully understand what 501(r) is and take steps to limit their exposure. Here, the right kind of data can provide immense help.
What 501(r) is
501(r) is a section of the IRS Code for charitable hospitals seeking exemption from federal income tax. The section, which was part of the Affordable Care Act and has remained intact under the Trump Administration, is designed to ensure patients are screened for charity prior to extraordinary collections activities. To comply, hospitals need to do the following:
• Establish a written Financial Assistance Policy (FAP) and a charity policy for emergency medical care.
• Limit the amount they can charge patients eligible for financial assistance under their FAP.
• Limit methods of collecting outstanding charges before making a reasonable effort to see if a patient is eligible for financial assistance under the hospital’s FAP.
• Conduct a Community Health Needs Assessment (CHNA) at least every three years.
Compliance challenges
One of the main challenges of compliance surrounds creating a comprehensive FAP. It can be labor-intensive, costly, and the level of detail can be daunting. IRS regulations dictate the FAP must include the eligibility criteria for financial assistance for uninsured and underinsured patients, methods for applying financial insurance and calculating amounts for charity care discounting and actions the hospitals can take for non-payment.
But creating the FAP is only one challenge. Other regulations were ratified to ensure that the hospital is following its own guidelines and documenting everything to ensure they meet audit standards and external review. The hospital also needs to notify patients of their options in layman’s terms and direct low-income patients to financial assistance early in the process, among other steps.
The role of data
The good news about 501(r) is that was implemented at a time when effective use of data could greatly aid hospitals in meeting its requirements. For instance, third-party data can help streamline eligibility and support credible and defensible positions. 501r opened a lot of doors for presumptive eligibility as well.
Some data, of course, is better than others. Generally, data like public records is good. So is credit-based data from credit reports. But the best is a combination of the two since each can fill gaps from the other source. Thin or no hit files are common for charity-eligible patients, and as such a cascading approach should be in place to ensure 100% of patients can be scored and classed into various payment and charity buckets.
Such data can quickly determine if a patient is eligible for charity care or other financial assistance. Data can also identify which self-pay accounts can be segmented for payments and collections and which can be qualified for charity care.
Those types of tools can go a long way towards helping hospitals comply with 501(r) and avoid the revenue disruption and uncertainty that comes with IRS action. Now that the IRS has gotten serious about going after 501(r), hospitals need to get serious about a data-driven solution too.