Unclear areas of IRS regulations include how far hospitals must go to meet the requirement to “widely publicize” their financial assistance policies.


Sept. 30—Nearly a quarter of hospitals that the Internal Revenue Service (IRS) audited under new Affordable Care Act (ACA) charity care requirements appeared noncompliant.

The rules, known as 501(r), require 501(c)(3) hospitals to take steps, including:

  • Adding measures, such as written financial assistance policies and emergency medical care policies, that limit the amounts charged for emergency or other medically necessary care to patients eligible for assistance under a hospital's financial assistance policy
  • Undertaking reasonable efforts to determine whether individuals are eligible for assistance under a hospital's financial assistance policy before engaging in extraordinary collection actions (ECAs)

The IRS is required by the ACA to audit hospitals at least every three years to ensure 501(c)(3) hospitals comply with section 501(r).

By June 30, the IRS had completed 692 reviews and referred 166 for field examination due to suspected noncompliance, according to an agency report.

“It’s not clear what triggered the field examinations, but something led them to conclude that the hospitals may not be in compliance,” Mark Rukavina, principal at Community Health Advisors, said in an interview. “It’s a cautionary tale for all nonprofit hospitals that the IRS is investigating and looking.”

The areas of possible noncompliance included an apparent lack of a Community Health Needs Assessment (CHNA), which hospitals are required to create. Flags also may have been raised by the lack of financial assistance or emergency medical care policies or by issues related to the rule’s billing and collection requirements.

Rukavina noted the rules require the CHNA and financial assistance policies to be posted on hospitals’ websites and “pretty conspicuously displayed.” Instructions also need to be provided on how patients can obtain hard copies of the CHNA.

“Most of the websites I’ve seen do a pretty good job of making it quite easy to access the CHNA or financial assistance policies right from the hospital’s homepage,” Rukavina said.

The rules require websites to post the financial assistance policy, a plain-language summary, and a financial assistance application.

Challenges Identified

Continuing vagueness around certain 501(r) requirements may complicate hospital compliance.

“Some part of the regulations may be a little less than clear, so there are some challenges in terms of complying with financial assistance and the billing and collection requirements,” Rukavina said.

The vagueness of the requirements have led to divergent hospital efforts to meet them. For instance, one hospital client of Ellen Stewart, an attorney for Berenbaum Weinshienk, posted its financial assistance policies on its website in six different languages, while other clients post it only in the two principle languages spoken in their communities.

“There are a lot of gray areas, and people are doing a lot of things differently,” Stewart said in an interview.

As another example, some—but not all—hospitals collect and make available to patients financial information on non-employed physicians who might treat the hospital’s patients.

Another unclear aspect of the rule is the amount of effort that hospitals need to devote to qualify as “widely publicizing” their charity care policies. For instance, some Ohio hospitals go to churches in inner cities on a weekly basis to notify community members in person about policies.

“The reg itself really encouraged you to do much, but it never defined what that was,” Don Paulson, vice president and CFO at the Revenue Group, an accounts receivable management company, said in an interview. “So their concern is, ‘Are we going to get hammered just on the community benefit, and are they going to come back later and say we didn’t do enough?’”

Some of the biggest challenges with 501(r) compliance are faced by small and rural hospitals, Stewart said.

“They may not have the money to bring someone in, and the team is already stretched,” Stewart said. “But everybody is doing everything they can to comply; I’m not seeing anyone say, ‘I’m ignoring this and maybe it will go away.’”

Among key 501(r) compliance steps Stewart recommends to clients is that they audit their own compliance after they finish their implementation steps.

“Look at accounts to see if you communicated with patients who are eligible for financial assistance before you started the extraordinary collection measures—or turned it over to a collection agency,” Stewart said.

Unexpected Role

The new charity care requirements also have had some unexpected effects on hospital billing and collections.

One health system decided to include all medical bills—including those of its primary competitor—in the required calculations of patients’ ability to pay bills as part of the determination of whether they qualify for charity care, Paulson noted.

The requirements also have pushed some hospitals away from the practice of requiring payment up front for elective procedures. That is because it appears hospitals would run afoul of the IRS rule if the amount collected from a patient later determined eligible for financial assistance was more than the “amount generally billed.”

“Even if you pay the money back, you still have a noncompliant policy,” Paulson said.

Instead, more hospitals are focusing efforts on trying to provide a reasonable estimate of the actual patient costs and then providing financial counseling based on that.

The new requirements also have arisen in unexpected situations, including lawsuits. Stewart said attorneys for some patients who were sued to collect outstanding bills have raised the question of whether the hospital is compliant with 501(r) requirements.

“It’s a way to say, ‘You sued my client for a $4,000 balance, and you didn’t comply with 501(r) and they might otherwise be eligible for financial assistance,’” Stewart said

Hospitals not yet reviewed may see coming scrutiny.

“We will continue to include the review of tax-exempt hospitals’ compliance with requirements under IRC 501(r),” the IRS report stated.


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Friday, September 30, 2016