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Proposed IRS Regulations: Burying Tax-Exempt Hospitals Under More Red Tape

Health Law and Tax-Exempt Organizations Law Update Sarah E. Coyne, Alyce C. Katayama, Michael A. Levey, Janice E. Rodgers

On June 22, 2012, the Treasury Department released proposed regulations interpreting Section 501(r) of the Internal Revenue Code. Section 501(r), which was enacted as part of the Patient Protection and Affordable Care Act of 2010, creates requirements that tax-exempt hospitals must meet in order to maintain their Section 501(c)(3) tax-exempt status. The proposed regulations address three provisions of Section 501(r): Section 501(r)(4), which discusses Financial Assistance Policies; Section 501(r)(5), which discusses limitations on charges; and Section 501(r)(6), which discusses limitations on collection activities. The proposed regulations, which are available here, are open for public comment until September 24, 2012. Anyone seeking to comment can go to and search for IRS REG 130266-11.

Financial Assistance Policies

Section 501(r)(4) of the Internal Revenue Code requires tax-exempt hospitals to have a comprehensive Financial Assistance Policy ("FAP") that explains what financial assistance is available for low-income patients. The proposed regulations provide detailed requirements regarding what must be contained in a hospital's FAP.

First, the FAP must set forth the eligibility criteria that the hospital uses to determine who can receive financial assistance. The proposed regulations do not list any specific eligibility criteria, but only require that hospitals disclose their criteria in their FAP.

Second, the FAP must describe the financial assistance available for FAP-eligible patients, such as free or discounted care. Discounts must be based on the hospital's "amounts generally billed" for a given service, and the FAP must specify which of the following allowed methods is used to determine these amounts: (a) the look-back method, which calculates either the average amount billed over the prior 12 months to Medicare patients for a given service or the average amount billed over the same period to Medicare patients and all private health insurers; or (b) the prospective method, which is calculated as the amount the hospital would expect to receive if the patient were covered by Medicare. Once a hospital has chosen a method for determining amounts generally billed, the proposed regulations require it to continue to use that method (although, the IRS has requested comments on whether hospitals should be allowed to switch methods after a set period of time).

Third, the FAP must describe how patients can apply for financial assistance.

Fourth, the FAP must include the hospital's billing and collection procedures. This should include what actions the hospital will take to obtain payment, the process and time frame that will be used in taking those actions, the reasonable steps the hospital will take to determine whether the patient is FAP-eligible before beginning "extraordinary collection actions," and the department within the hospital with the authority to order extraordinary collection actions. Hospitals that have a separate billing and collection policy can include these billing and collection procedures in that policy instead of in the FAP.

Fifth, the FAP must be widely publicized, and it must include information on the steps to be taken toward that end. The proposed regulations require hospitals to (1) have paper copies of the FAP, plain language summaries of the FAP, and FAP application forms available free of charge both at the hospital and by mail; (2) inform hospital visitors about the FAP through public displays reasonably calculated to attract their attention, such as signs and brochures; (3) have the FAP, a plain language summary, and the FAP application form available on the hospital website; and (4) take measures to inform the community about the FAP in a way calculated to reach low-income members of the community. The FAP, plain language summary, and FAP application form must also be available, both in print form and on the hospital's website, in the primary language of any group that has a limited proficiency in English and makes up more than 10 percent of the residents in the community served by the hospital.

Finally, the FAP must contain an emergency medical care policy that requires the hospital to provide emergency medical care without discrimination and regardless of the patient's FAP eligibility, consistent with the requirements of EMTALA. In addition to the EMTALA requirements, the policy must prohibit activities that might discourage individuals from receiving emergency medical care, such as requiring individuals to pay before receiving treatment or allowing debt collection activities to occur in the emergency department.

Limits on Charges

Section 501(r)(5) of the Internal Revenue Code prohibits tax-exempt hospitals from charging FAP-eligible patients more than the amounts generally billed for emergency or medically necessary care.[1] For non-emergency care, hospitals must charge FAP-eligible patients less than the "gross charge," which is the price the hospital charges before applying contractual discounts.

The proposed regulations contain a "safe harbor" clause for certain charges above these limitations. Hospitals will not violate the limitations by billing more than the allowed amounts when the patient has not filled out a FAP application, provided that the hospital is making reasonable efforts to determine whether the patient is FAP-eligible, as discussed below. If the hospital subsequently discovers that the patient is FAP-eligible, however, it must then correct the amount charged.

Limits on Extraordinary Collection Actions

Section 501(r)(6) of the Internal Revenue Code prohibits tax-exempt hospitals from engaging in extraordinary collection actions against an individual until they have made reasonable efforts to determine whether the individual is FAP-eligible. The proposed regulations provide guidance on what constitutes extraordinary collection actions and what satisfies the reasonable efforts requirement.

Extraordinary collection actions include any action by a hospital that requires legal or judicial process, such as placing a lien on property or garnishing wages. Extraordinary collection actions also include selling a debt to another party or reporting adverse information to a consumer credit reporting agency.

The proposed regulations provide very specific guidance on what constitutes reasonable efforts to determine whether individuals are FAP-eligible. As part of making reasonable efforts, hospitals must go through a "notification period" that lasts from the first day of treatment until 120 days after patients are provided with their first billing statement. During this notification period, hospitals must (1) distribute a FAP summary and offer a FAP application to patients prior to discharge; (2) distribute a FAP summary with all billing statements, with a minimum of three billing statements being issued during the notification period; (3) inform patients about the FAP in all oral communications relating to their amount due during the notification period; and (4) provide patients with at least one written notice describing the extraordinary collection actions that could be initiated if the patients fail to pay the amount due by a specified deadline, which must be at least 30 days after the written notice is provided, but cannot be prior to the end of the notification period. These notification requirements cannot be bypassed by obtaining waivers from patients stating that they do not want to apply for assistance. Under the proposed regulations, hospitals could only begin extraordinary collection actions after all of these steps have been taken or after a patient has completed a FAP application.

The proposed regulation also creates an "application period" that lasts 240 days after a patient is provided with the first billing statement. If a patient files an incomplete FAP application during the application period, hospitals must suspend extraordinary collection actions, provide the patient with information to aid in completing the application, and give written notice that extraordinary collection actions can resume if the application is not completed by a specified date, which must be at least 30 days after the notice is given. If a patient files a complete FAP application, hospitals must suspend extraordinary collection actions until determining whether the patient is FAP-eligible. If the patient is FAP-eligible, hospitals must send a revised bill and refund any money that has been collected in excess of the revised charges.


The proposed regulations discussed above do not address all aspects of the implementation of IRC Section 501(r). It is important for tax-exempt hospitals to stay tuned for further developments and ultimately to make sure that their policies, procedures, practices and documents conform to IRS requirements. Should you have any questions about this compliance effort, please contact Sarah Coyne at (608) 283-2435 / [email protected], Alyce Katayama at (414) 277-5823 / [email protected], Michael Levey at (414) 277-5171 / [email protected], Janice Rodgers at (312) 715-5034 / [email protected] or your Quarles & Brady attorney.

[1] Neither the Internal Revenue Code nor the proposed regulations provide a definition for "medically necessary care." 

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