Although not a focus of discussions leading up to the Supreme Court’s decision, Section 9007 of the ACA contains mandatory provisions applicable to “hospital organizations” (hospitals and non-profit clinics organized under Section 501(c)(3) of the Internal Revenue Code (the “Code”)). Section 9007 is codified in the Code as 501(r), and applies to organizations that operate a facility required by a State to be licensed as a hospital and organization which have the provision of hospital care as their principal function.¹ At the end of June, 2012, the Department of the Treasury (the “Department”) issued proposed rules implementing Section 501(r).²

These requirements should not be taken lightly, because failure to follow them may result in the revocation of a hospital’s non-profit, 501(c)(3) status.³ As is often the case with the administrative process, the Department has requested that interested parties provide comments on a variety of different aspects of the rules. Because adherence to the provisions of 501(r) is crucial in preserving their 501(c) (3) status, charitable hospitals should examine the proposed rules and consider submitting comments concerning them.

Genesis of Section 501(r)

During the period leading up to the enactment of the ACA, numerous parties, among them Senator Charles Grassley of Michigan, determined that some 501(c) (3) hospitals had engaged in aggressive billing and collection efforts that seemed to belie their “charitable” status. The adage about bad facts leading to bad laws may apply here. While few, but newsworthy nonetheless, the actions of some charitable hospitals led to the enactment of section 501(r). These included failing to publicize their charity care policies, billing the uninsured at higher rates than insured, and engaging in extremely aggressive collection actions against patients and former patients. As a result, Congress sought to have 501(c) (3) hospital organizations demonstrate that they were, in fact, providing “charitable care.” Section 501(r) presents new requirements that hospitals must follow in order to continue to be treated for tax purposes as 501(c) (3) charitable entities.

The Requirements of Section 501(r)

Section 501(r) explicitly (1) requires hospitals to conduct and document a Community Health Needs Assessment, (2) imposes requirements on hospitals’ financial assistance policies, (3) limits the “type” of charges that hospitals may seek to recoup, and (4) places new standards on billing and collection activities. The Department’s proposed regulations outline how Section 501(r) will be implemented.

Community Health Needs Assessment

Although hospitals already conduct a community needs analysis, the Code now explicitly requires that a “hospital organization” conduct a Community Health Needs Assessment (“CHNA”) at least once every three years. In conducting the CHNA, a hospital must take into account input from persons who represent the broad interests of the community served by the hospital. In January, 2011, the Department issued IRS Notice 2001-52 for guidance concerning these assessments, and the preamble to the proposed rules states that hospitals should continue to rely upon this guidance until further notice.

Hospital organizations that operate more than one hospital facility need to document a CHNA for each hospital. The documentation requires, among other items, a description of the community served by the hospital, a description of the processes and methods used to conduct the assessment, including how the CHNA accounted for input from persons who represent the “broad interests” of the community served by the hospital, and a prioritized list of all of the community health needs identified through the CHNA.⁴

Financial Assistance Policy and Emergency Medical Care Policy

Because Section 501(r) of the Code requires that hospitals establish written financial assistance policies (“FAPs”), the proposed regulations specify particular criteria that a hospital’s FAP must include. Section 501(r) does not mandate any particular eligibility criteria for financial assistance, but it does require that an FAP specify the financial assistance available, including all discounts and free care, available under the hospital’s FAP as well as the eligibility criteria for an individual to receive those discounts, free care, or other levels of assistance. Finally, the FAP must specify the amounts, such as gross charges, to which any discount percentages specified in the FAP will be applied.

The requisite elements of the FAP include (1) eligibility criteria for financial assistance, including whether such assistance includes free or discounted care; (2) the basis for calculating amounts charged to patients; (3) the method for applying for financial assistance; (4) the actions that the hospital may take in the event of nonpayment (for those facilities that do not have separate billing and collections policies); and (5) the measures to publicize widely the FAP within the hospital’s community.

The proposed rules require that the FAP be made available in English and in the primary language of any population with limited proficiency in English that constitutes more than 10% of the residents of the community served by the hospital. In addition, the FAP also must inform and notify visitors to the hospital facility about its existence through a conspicuous public display “reasonably calculated” to attract the attention of visitors to the facility. Hospital facilities likewise are required to inform and notify those members of the community served by the hospital who are most likely to require financial assistance. The proposed rules suggest one avenue to accomplish this is for hospitals to distribute information concerning the FAP to those agencies and non-profits which assist their communities’ low income populations. In addition, the regulations require that the FAP be posted on the hospital organization’s website in English and in the primary language of populations that constitute more than 10% of the residents of the community.

With respect to the emergency medical care policies, these regulations mandate that hospitals must provide, without discrimination, care for emergency medical conditions within the meaning of the Emergency Medical Treatment and Labor Act (EMTALA). However, the regulations do state that a hospital will not meet the requirements of Section 501(r) if the emergency medical care policy does not prohibit debt collection activities from occurring in either the emergency department or other areas of the hospital where those activities could interfere with the treatment of emergency medical conditions, and thus charitable hospitals will need to review their existing EMTALA policies for compliance.

Limitation on Charges to “Amounts Generally Billed”

Section 501(r)(5)(A) limits a hospital from charging for emergency or other medically necessary care to FAP-eligible individuals to not more than the “amounts generally billed” to other individuals who have insurance covering such care. This concept of “amounts generally billed” (“AGB”) requires the FAP to state that after a determination of FAP-eligibility an individual will not be charged more than AGB for emergency or other medically necessary care.

Hospital facilities have two methods for determining AGB. The first is a “lookback” method based on actual past claims paid to hospital by either Medicare only or Medicare fee-for-service together with private health insurance. The second method is based upon a “prospective” estimation of the amount that the hospital facility would pay to Medicare or other medically necessary care if the FAP-eligible individual were a Medicare fee-for-service beneficiary. The Department and the IRS have requested comments on both methods.

Limitations on “Gross Charges”

In enacting Section 501(r), Congress also expressed concern that the uninsured and under-insured may have been charged rates that far exceeded those of insured individuals. Thus, Section 501(r)(5)(B) prohibits the use of a “chargemaster rate” or gross charges, defined as “a hospital’s full, established price for medical care that the hospital facility consistently and uniformly charges all patients before applying any contractual allowances, discounts, or deductions.” The proposed rules state that this prohibition on gross charges only applies to FAP-eligible individuals. Moreover, the proposed rules clarify that this prohibition applies to any medical care, not just emergency care, provided to a FAP-eligible individual.

Rules Concerning Billing and Collections

Harsh examples of the use of collection agencies by charitable hospitals provided Congress with the impetus to enact Section 501(r). As a result, Section 501(r) (6) specifies that hospitals must make “reasonable efforts” to determine whether individuals are FAP-eligible prior to engaging in “extraordinary collection actions” or “ECA.”

The rules provide some guidance in that the hospital will be considered to have engaged in extraordinary collection activity (“ECA”) against an individual if these actions are directed towards a family member, for instance, who has accepted responsibility for the patient’s hospital bill. In addition, a hospital will be considered to have engaged in an ECA against an individual if a purchaser of the individual’s debt or a debt collection agency has engaged in an ECA against the individual.

What are Extraordinary Collection Actions?

The proposed regulations state that ECAs include any actions taken by a hospital facility against an individual related to obtaining payment of a bill for care covered under the hospital’s FAP that require legal or judicial process. These include, but are not limited to, the following actions: placing liens on an individual’s property; foreclosure of real estate; attaching bank accounts; commencing civil actions; causing an individual’s arrest for non-payment; and causing the garnishment of an individual’s wages.

The proposed regulations clarify that ECAs also include the sale of an individual’s debt to another party. The sale of debt is considered an ECA because the Department and the IRS believe that after a hospital has sold its debt, the hospital may have limited ability to control the purchaser’s actions to collect the debt. The preamble to the proposed rules contrasts this to a hospital’s referral of an individual’s debt to a debt collection agency without selling such debt, presumably because a hospital can maintain greater control over its third-party agent. Thus, an ECA does not include the referral of a patient’s debt to a third-party without selling it. Both the IRS and the Department have requested comments concerning these proposals. In addition, the Department has requested comments concerning whether a hospital should obtain governing body approval before engaging in specific ECAs.

“Reasonable Efforts” to Determine FAP-Eligibility

As preliminary guidance to hospitals, the proposed rules set forth specific actions that constitute “reasonable efforts” to determine whether an individual is FAP-eligible. In short, a hospital will be deemed to have made reasonable efforts if it (1) notifies the individual about the FAP; (2) assists the individual who has submitted an incomplete FAP with relevant information to fully complete it; and (3) upon receipt of a properly completed FAP application, makes and documents a determination as to whether the individual is FAP-eligible.⁵

Incomplete FAP applications require hospitals not only to suspend immediately any ECA that may have been initiated, but also to provide written notice to the individual patient of the additional information required to complete the FAP application. Upon receipt of a completed FAP application, a hospital then must provide the individual with a billing statement that shows the AGB for the care provided and how the hospital calculated the amount the individual owes as an FAP-eligible patient. To the extent that the patient already has made excess payments, those payments must be refunded. If the hospital has commenced an ECA, the hospital must take all available measures to reverse any ECA taken against the individual to collect the debt.

Specific Rules Concerning Penalties Will be Forthcoming

While 501(r) specifically states that hospital organizations shall not be treated as 501(c)(3) entities if they do not comply with the requirements of 501(r), the proposed rules issued this June do not articulate penalties against charitable hospitals for failing to do so. The preamble to the proposed rules, however, makes it quite clear that the Department and the IRS intend to issue additional proposed regulations addressing the consequences for failing to satisfy Section 501(r) requirements.⁶ Thus, hospitals should pay attention to the requirements under the proposed regulations.

Governing Bodies’ Participation in the Establishment of the FAP and other Policies

The Department’s proposed regulations require that an authorized body of a hospital organization adopt the FAP for the hospital and the hospital implements the policy. Thus, the governing body of a hospital must be a part of the establishment of the FAP as well as other required policies under the proposed regulations.

Effective Date of the Proposed Rules

While the Department and the IRS have solicited comments to the proposed regulations, charitable hospitals should rely on these proposals until final regulations are issued. Comments to the IRS must be received by September 24, 2012. Because the threat of loss of a charitable hospital’s treatment as a 501(c) (3) organization is a serious matter, charitable hospitals should examine these rules and begin the process of implementing them. Section 501(r) applies to taxable years beginning after March 23, 2010, and the effective date of the rule will be the date the final rules are published in the Federal Register.

¹26 U.S.C.S. §501(r)(2).
²77 Federal Register (“Fed. Reg.”) 38147, June 26, 2010.
³26 U.S.C.S. §501(r)(1).
⁴IRS Notice 2011-52, available at http://www.irs.gov/pub/irs-drop/n-11-52.pdf. The Department and the IRS currently are evaluating comments received in response to Notice 2011-52.
⁵77 Fed. Reg. 38156.
⁶77 Fed. Reg. 38150-38151.