The proposed regulations regarding Section 501(r) of the Internal Revenue Code provide important insight into the compliance challenges that may confront tax-exempt hospitals.
At a Glance
- Proposed regulations set forth detailed rules for implementing the new tax-exemption requirements of Section 501(r) of the Internal Revenue Code for not-for-profit organizations operating hospital facilities.
- The proposed regulations provide guidance on the written financial assistance policies (FAPs) that hospital facilities are required to establish.
- The regulations propose methodologies for determining the amounts that a hospital facility can charge FAP-eligible individuals for emergency and other medically necessary care.
- They prescribe procedures that hospital facilities would be required to follow before engaging in extraordinary collection actions against an individual.
Just as the furor leading up the U.S. Supreme Court’s decision regarding the Affordable Care Act (ACA) of 2010 was reaching its peak, the U.S. Treasury Department and the IRS quietly issued proposed regulations providing interim guidance regarding the requirements of Section 501(r) of the Internal Revenue Code, which the ACA had added to the code (“Additional Requirements for Charitable Hospitals,” June 22, 2012). The proposed regulations would have been moot had the Court thrown out the ACA. But the Court upheld the act, and results of the November elections quieted any lingering thoughts of a legislative challenge. So Section 501(r) remains in effect and the proposed regulations retain their validity.
Section 501(r): General Provisions
Section 501(r) generally provides that a hospital organization will not be treated as a tax-exempt organization described in Section 501(c)(3) with respect to any hospital facility operated by the hospital organization that does not meet the requirement of Section 501(r). The proposed regulations provide guidance relating to:
- The definition of a hospital organization and hospital facility
- The requirements concerning financial assistance policies
- Limitations on charges for care provided to individuals eligible for financial assistance
- Billing and collections
IRS Notice 2011-52, 2011-30 I.R.B. 60, issued July 8, 2011, describes the requirements that the Treasury Department and the IRS anticipate will be included in regulations concerning community health needs assessments (CHNAs). These requirements are not addressed in the proposed regulations and therefore are beyond the scope of this article.
Hospital Organizations and Hospital Facilities
The proposed regulations offer the following definitions of a hospital organization and hospital facility.
Hospital organization. A hospital organization is defined as “an organization that operates a facility required by a State to be licensed, registered, or similarly recognized as a hospital,” and “any other organization that the Secretary determines has the provision of hospital care as its principal function or purpose constituting the basis for its exemption under Section 501(c)(3).”
The preamble to the proposed regulations states that, until further guidance is issued, only organizations operating a facility required by a state to be licensed, registered, or similarly recognized as a hospital will be regarded as hospital organizations subject to the requirements of Section 501(r).
Notice 2011-52 states that the Treasury Department and the IRS intend to include within the definition of hospital organization any organization described in section 501(c)(3) that operates a hospital facility through a disregarded entity (i.e., a single-member limited liability company that does not elect to be treated as separate from its owner for federal tax purposes) or through a joint venture, limited liability company, or other entity treated as a partnership for federal income tax purposes. The proposed regulations provide that a hospital organization includes any organization that operates a hospital facility through a disregarded entity. The preamble states that the Treasury Department and the IRS are considering the comments received in response to Notice 2011-52 regarding the operation of hospital facilities through partnerships and will address this issue in separate guidance.
The proposed regulations do not contain any exceptions or special rules for government hospital organizations and are intended to apply to any government hospital organization recognized as described in section 501(c)(3). The IRS has indicated that it will issue determination letters to government entities that wish to terminate IRS recognition of their section 501(c)(3) status (Revenue Procedure 2013-4, 2013-1 I.R.B. 126, Jan. 2, 2013).
Hospital facility. A hospital facility is defined as any facility that is required by a state to be licensed, registered, or similarly recognized as a hospital. (Within this definition, state refers only to the 50 states and the District of Columbia, and not any U.S. territory or foreign country.) A single hospital facility may comprise multiple buildings operated under a single state license. The preamble to the proposed regulations asserts that references to hospital facilities taking certain actions are intended to include instances where the hospital organization operating the hospital facility takes action through, or on behalf of, the hospital facility.
The proposal provides that a hospital organization will not be treated as described in Section 501(c)(3) with respect to any hospital facility that does not separately meet the requirements of Section 501(r). Although the statute suggests that a hospital organization that owns and operates multiple hospital facilities will not necessarily lose its exempt status if one of these hospital facilities does not meet the requirements of Section 501(r), the proposed regulations do not provide any insight on this critical matter.
Financial Assistance Policy
Under the statute and the proposed regulations, each hospital facility would be required to establish a written financial assistance policy (FAP) that applies to all emergency and other medically necessary care delivered by the hospital facility. Such a policy must include the following.
Eligibility criteria for financial assistance, and whether such assistance includes free or discounted care. The FAP must specify the types of financial assistance it makes available, including all discounts and free care, and describe all specific eligibility criteria that a candidate for financial assistance must satisfy. Neither the Internal Revenue Code nor the proposed regulations establish specific eligibility criteria that a policy must contain, or the amounts or kinds of financial assistance that it must provide. However, the proposed regulations require the FAP to state that individuals deemed eligible for financial assistance under the FAP will not be charged more than the amounts generally billed to individuals who have insurance for emergency or other medically necessary care. (For additional detail regarding this point, see “Limitation on Charges” below.)
The basis for calculating amounts charged to patients. Under the proposed regulations, the FAP must specify the amounts, such as gross charges, to which any discount percentages specified in the policy will be applied. The FAP also must state which of the permitted methods (described below) the hospital facility uses to determine the amounts generally billed to individuals who have insurance. The FAP must either state the percentages of gross charges the hospital facility applies to determine such amounts and how such percentages were calculated, or explain how an individual can obtain this information in writing free of charge.
The method for applying for financial assistance. Either the FAP or the FAP application form (including instructions) must describe the information or documentation an applicant must submit with the FAP application and provide contact information for obtaining assistance with the FAP application process.
Actions the facility may take in the event of nonpayment. Either the FAP or a separate written billing and collections policy must describe the actions that the hospital facility (or other authorized party) may take to obtain payment of a bill for medical care, including any extraordinary collection actions. The FAP or billing and collections policy also must describe the process and timeframes the hospital facility (or other authorized party) will use in taking these actions, including any reasonable efforts to determine whether an individual is FAP-eligible. It further must describe the office, department, committee, or other body with the final authority or responsibility for determining that the hospital facility has made reasonable efforts to determine whether an individual is FAP-eligible.
If these points are addressed in a separate written billing and collections policy, the FAP must reference the billing and collections policy and explain how individuals may obtain a free copy of the policy.
Measures to publicize the FAP within the community served by the hospital facility. The proposed regulations require the hospital facility to use four types of measures to publicize the FAP widely, and to either summarize these measures in the FAP itself or explain in the FAP how individuals may obtain a free written summary of such measures. These four types of measures involve the following actions.
First, the hospital facility must make paper copies of the FAP, the FAP application form, and a plain-language summary of the FAP available upon request and without charge, for distribution both in public locations in the hospital facility and by mail. The hospital facility must make each of these documents available in English and in the primary language of any populations with limited English proficiency that constitute more than 10 percent of the residents of the community the hospital facility serves.
Second, the hospital facility must take steps to notify and inform visitors to the hospital facility about the FAP through a conspicuous display or other measure, or measures, reasonably calculated to attract the visitors’ attention. Examples include conspicuously posting signs and displaying brochures that provide basic information about the FAP in public locations in the hospital facility.
Third, the hospital must make an effort to notify and inform members of the community it serves about the FAP in a way that is reasonably calculated to reach individuals in the community who are most likely to require financial assistance. For example, the facility could distribute information sheets summarizing the FAP to local public agencies and not-for-profit organizations that address the health needs of the community’s low-income populations.
Fourth, the hospital facility must make the FAP, FAP application form, and a plain-language summary of the FAP widely available on its website or on that of the hospital organization or other entity. The hospital facility must conspicuously post complete and current versions of these documents, both in English and in the primary language of any populations with limited proficiency in English that constitute more than 10 percent of the residents of the hospital facility community serves. The hospital facility or hospital organization also must provide the URL where the FAP, FAP application form, and plain-language summary of the FAP can be accessed online to anyone who requests this information.
Emergency Medical Care Policy
The statute and proposed regulations require that a hospital facility establish an emergency medical care policy (EMCP) under which the facility must provide, without discrimination, care for emergency medical conditions (as defined by the Emergency Medical Treatment and Labor Act [EMTALA]) to individuals regardless of their eligibility under the organization’s FAP. In general, to satisfy this requirement, an EMCP’s provisions with respect to delivery of care for any emergency medical condition must conform with those outlined under EMTALA regulations and Title 42 of the Code of Federal Regulations, Chapter IV, Subchapter G—Standards and Certification.
The proposed regulations also require that a hospital facility’s EMCP prohibit debt collection activities in emergency departments (EDs) or in other hospital venues where such activities could interfere with the nondiscriminatory treatment of emergency medical conditions.
Establishment of the FAP and Other Policies
Under the proposed regulations, FAPs, separate billing and collections policies, and EMCPs are deemed to have been established only if an authorized body of the hospital organization has adopted the policy for the hospital facility in question and the hospital facility has implemented the policy. For these purposes, an authorized body of a hospital organization may be the hospital organization’s governing body (i.e., board of directors, board of trustees, or equivalent controlling body); a committee of the governing body that is permitted under state law to act on behalf of the governing body; or other parties authorized by the governing body to act on its behalf (e.g., one or more executives of the hospital facility), to the extent permitted under state law.
A hospital facility is deemed to have implemented a policy if it consistently carries out the policy.
The proposed regulations provide that, although hospital organizations operating multiple hospital facilities must separately establish FAPs and EMCPs for each hospital facility they operate, such policies may contain the same operative terms. However, if different hospital facilities have different amounts generally billed to individuals with insurance (discussed below), then the different hospital facilities’ FAPs may be required to contain different information about such amounts. Hospital facilities also may need to make information available in different languages, depending on the unique attributes of the communities they serve.
Limitation on Charges: Amounts Generally Billed
Again, the statute and proposed regulations state that hospital facilities must limit amounts charged for emergency or other medically necessary care provided to FAP-eligible individuals to the amounts generally billed to individuals who have insurance covering such care. Under the proposed regulations, hospital facilities may opt to use one of two methods to determine the amounts generally billed, but whichever method the facility uses initially, it must continue using only that method.
The “look-back” method. Under this method, a hospital facility determines the amounts generally billed in the past for any emergency or other medically necessary care by multiplying the gross charges for that care by one or more percentages of gross charges (AGB percentages). The hospital facility must calculate its AGB percentages at least once annually by dividing the sum of certain claims paid to the facility by the sum of the associated gross charges for those claims.
Certain claims refers to all claims that have been paid in full to the hospital facility for emergency and other medically necessary care by either Medicare fee-for-service alone or by Medicare fee-for-service and all private health insurers as the primary payers of these claims during a prior 12-month period. The calculation includes both the portions of the claims paid by Medicare and the private insurer and the associated portions of the claims paid by Medicare beneficiaries or insured individuals in the form of coinsurance, copayments, or deductibles. (For this purpose, amounts paid under Medicare Advantage are treated as claims paid by a private health insurer.) .
A hospital facility must begin applying its AGB percentages by the 45th day after the end of the 12-month period used in calculating the AGB percentage.
A hospital facility using the look-back method may calculate either one average AGB percentage for all emergency and other medically necessary care that the facility delivers or multiple AGB percentages for separate categories of care or separate items or services delivered. In either case, the calculation must encompass all emergency and other medically necessary care delivered by the facility.
The “prospective method.” This method requires the hospital facility to estimate the amount it would be paid by Medicare and a Medicare beneficiary for the emergency or other medically necessary care at issue if the FAP-eligible individual were a Medicare fee-for-service beneficiary. The hospital facility may use the same billing and coding process it would use if the individual were actually a Medicare fee-for-service beneficiary. The hospital facility would then use the result as a basis for setting its amount generally billed for the care.
Prohibition on the use of gross charges. The statute and the proposed regulations prohibit the use of gross charges with respect to FAP-eligible individuals. The proposed regulations define gross charge (also known as the “chargemaster rate”) as a hospital facility’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 prohibition on the use of gross charges applies to all medical care provided to FAP-eligible individuals.
Safe harbor exception to the amounts generally billed requirement. The proposed regulations provide that an individual need not have applied for assistance under a hospital facility’s FAP to be deemed FAP-eligible. However, the proposed regulations provide a safe harbor for certain circumstances in which a hospital facility’s charges to FAP-eligible individuals for emergency or other medically necessary care exceed the amounts generally billed. The safe harbor applies where an FAP-eligible individual has not applied for financial assistance at the time charges are made and the hospital facility makes reasonable efforts to determine whether the individual is FAP-eligible.
Billing and Collections
The statute and the proposed regulations require a hospital facility to make reasonable efforts to determine whether an individual is FAP-eligible before engaging in extraordinary collection actions (ECAs) against the individual. Under the proposed regulations, a hospital facility will be considered to have engaged in ECAs against an individual if it engages in such action against any representative of the individual who has accepted or is required to accept responsibility for the individual’s hospital bills. The hospital facility also will be considered to have engaged in ECAs against the individual if any purchaser of the individual’s debt, debt collection agency, or other party to which the hospital facility has referred the individual’s debt has engaged in such actions against the individual.
ECAs are defined in the proposed regulations as any actions taken by a hospital facility against an individual related to obtaining payment of a bill for care covered under the hospital facility’s FAP that require a legal or judicial process. Examples include the following:
- Placing a lien on an individual’s property
- Foreclosing an individual’s real property
- Attaching or seizing an individual’s bank account or any other personal property
- Commencing a civil action against an individual
- Causing an individual’s arrest
- Causing an individual to be subject to a writ of body attachment
- Garnishing an individual’s wages
Reporting adverse information about an individual to a credit bureau and selling an individual’s debt to another party are also deemed to be ECAs.
Before engaging in ECAs, a hospital facility must engage in reasonable efforts to determine whether an individual is FAP-eligible. A facility will be considered to have considered to have met this requirement if it:
- Notifies the individual about its FAP
- Provides the individual with information relevant to completing an incomplete FAP application, as necessary
- Makes and documents a determination as to whether the individual is FAP-eligible
A hospital facility must notify an individual about the FAP during the “notification period,” which begins on the date the individual receives the care in question and ends on the 120th day after the hospital facility provides the individual with the first billing statement for the care. If the individual has not submitted an FAP application by the close of the notification period, a hospital facility generally may undertake ECAs. However, even if the notification period passes and the hospital facility has still not determined whether an individual is FAP-eligible, the hospital facility must afford the individual an additional 120-day period during which the facility will accept and process the individual’s FAP application. This period, beginning on the date care is provided to the individual and ending on the 240th day after the hospital facility submits the first billing statement for the care to the individual, is referred to as the “application period.”
Special rules apply under the proposed regulations if a hospital facility receives an FAP application after the notification period but still within the application period, depending upon whether the FAP application is complete or incomplete. If an individual does not submit a complete FAP application by the end of the application period, or if the individual is determined not to be FAP-eligible, a hospital facility generally may undertake ECAs—as long as it also is compliant with all requirements of the proposed regulations.
To satisfy the notification component of the reasonable efforts requirement, a hospital facility must distribute a plain-language summary of the FAP and offer an FAP application form to the individual before discharge from the facility. A plain-language summary also must be included with all (and at least three) billing statements and all other written communications regarding the bill during the notification period, or until an FAP application is submitted, whichever is earlier. The hospital facility must inform the individual about the FAP in all oral communications regarding the amount due for care during the notification period. Finally, the hospital facility must inform the individual at least once in writing about any ECAs it may take if the individual does not submit an FAP application or pay the amount due by a specified date, which must not fall before the last day of the notification period.
If a hospital facility refers or sells an individual’s debt to another party during the application period, it must obtain a legally binding agreement from the third party that it will act in a manner consistent with the requirements placed on the hospital facility.
A Road Map for Future Compliance
The proposed regulations will apply to tax years beginning on or after the date they are published as final regulations in the Federal Register. The Treasury Department and the IRS are considering comments on the proposed regulations, which must have been submitted by Sept. 24, 2012, as they work to develop final regulations. Meanwhile, the preamble to the proposed regulations indicates that the proposed regulations can be relied upon until final or temporary regulations are issued.
The proposed regulations, together with Notice 2011-52 (regarding CHNAs), provide substantial detail regarding compliance with Section 501(r). Many requirements of the proposed regulations have been criticized as overly prescriptive or are otherwise controversial. Nonetheless, even though these are merely proposed regulations, with no force of law, and may be modified before they become final, hospital organizations can use them as a basic road map for planning how they will comply with the requirements of Section 501(r) or, at the very least, to understand the government’s likely position in finalizing its rules in this area.
In addition, as noted previously, they can be relied upon to help protect the organization from being viewed as noncompliant with Section 501(r). To this end, hospital organizations should consider performing a gap analysis to determine where they stand with respect to both the statutory requirements of Section 501(r) and the proposed regulations.
Richard A. Speizman is national partner-in-charge, exempt organizations tax practice, Washington National Tax office, KPMG, LLP, Washington, D.C., and a member of HFMA’s Maryland Chapter (firstname.lastname@example.org).
V.A. Moore is a director, exempt organizations tax practice, Washington National Tax office, KPMG, LLP, Washington, D.C. (email@example.com).
Alexandra O. Mitchell is a senior manager, exempt organizations tax practice, Washington National Tax office, KPMG,LLP, Washington D.C. (firstname.lastname@example.org).
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
Read HFMA’s Response to the Proposed Regs
HFMA submitted a comment letter to the IRS in response to the proposed regulations with respect to Section 501(r) of the Internal Revenue Code. To read HFMA’s comment letter, go to hfma.org and search IRS comment letter.
Publication Date: Friday, March 01, 2013