The safest approach to comply with extraordinary collection action rules is to wait until after the 240-day period before implementation, but doing so would increase hospitals’ days in A/R.

Regulations on financial assistance for patients took effect this year, and most hospitals are well on the way to compliance. However, experts caution against complacency because not only is one’s tax-exempt status at risk but there is potential liability under other statutes as well, such as the Fair Credit Reporting Act.

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The Affordable Care Act added section 501(r) to the Internal Revenue Code in 2010. In summary, this section requires exempt hospitals to take the following measures.

  • Conduct a community health needs assessment (a requirement that actually began in 2013).
  • Adopt written policies on financial assistance to patients in need and the provision of emergency care regardless of the patient’s eligibility under the financial assistance policy (FAP).
  • Limit the amounts they charge FAP-eligible patients to not more than the amounts generally billed (AGB) to insured patients for the same services.
  • Prohibit the use of gross charges in making AGB calculations.
  • Refrain from engaging in “extraordinary collection actions” before determining FAP eligibility.

See related tool: 26 U.S.C. Section 501(r): Additional Requirements for Certain Hospitals

Regulations implementing these requirements were published in late 2014 and took effect for fiscal years beginning on or after Jan. 1 of this year. Thus “the vast majority of hospitals have been working on these issues for some time,” says Steve Warner, vice president of patient responsibility at Adreima in Raleigh, N.C. But he adds that the field still needs to focus on some key potential problem areas because compliance with all the requirements is necessary to qualify for tax-exempt status.

The Policy

“The first problem area relates to the FAP itself,” Warner says. “The policy must explain the eligibility criteria for financial assistance, whether that assistance includes free or discounted care, the basis for calculating the amounts charged, how to apply for assistance, and similar details.” And he adds that after the policy has been adopted by the governing board, “it must be translated into numerous foreign languages and widely publicized, but there is no guidance on what ‘widely publicized’ means.”

“The financial assistance policy must be easy for patients to find and understand,” says Jonathan Wiik, a board member of HFMA’s Colorado chapter and Principal at Trans Union Healthcare. Compliance officers and finance leaders should be asking the following questions, Wiik says, adding that they should be guided by the purpose and philosophy of HFMA’s Patient Friendly Billing project.

  • Is the policy written in plain language?
  • Is a plain language summary of the policy readily available?
  • Is the policy on the hospital’s website?
  • Is there signage in patient registration areas calling attention to the policy?
  • Are the signage and the FAP itself consistent with the hospital’s community health needs assessment and policies under the Emergency Medical Treatment and Labor Act (EMTALA)?

See related tool: Financial Assistance Policy Plain Language Summary

See related tool: 501(r) Toolkit


A second challenge is determining AGB, which is a calculation that must be made every year based on the selection of one of two methodologies. The regulations provide for two methods—look-back and prospective—to determine AGB, and most hospitals use the former method, according to both Wiik and Warner.

Look-back is based on the average reimbursement received from a combination of Medicare, Medicaid, and/or private insurance for the previous twelve month time period. The prospective calculation, which is based on either current Medicare or Medicaid or a combination of both and is an estimated amount that the hospital would be paid by governmental payers, ―typically results in a lower average generally billed charge amount, according to Warner. “Whichever method is used to determine AGB, section 501(r) prohibits using gross charges in the calculation. Instead, it must be computed based on allowed charges,” says Warner.

Revenue Cycle Processes

The third and perhaps most critical problem is the effect 501(r) has on revenue cycle operations. “For example, you should be sure to present FAP information early in the registration process and to document the findings, and you should do it for every patient encounter,” says Warner.

Wiik agrees and stresses the point about documentation. He cites a case in which a patient had qualified for financial assistance on a previous visit. When the patient returned another time he was again given the required FAP information, but he did not indicate that he had qualified before. The facility’s employees failed to notice that he was FAP eligible, and he was billed and paid full charges.

“The takeaway from this example is that the determination should be documented and flagged in both the financial and clinical records systems,” says Wiik. He adds, “If you determine the patient’s FAP eligibility early in the process, you can in effect triage them along one of several pathways: insured, self-pay (with or without a payment schedule), charity discount, or bad debt.”

Collection Actions

Finally, Warner and Wiik emphasize that a hospital may not engage in extraordinary collection actions (ECAs) without first making “reasonable efforts” to determine whether the patient is FAP eligible. ECAs include selling the debt to a collection agency; reporting adverse information to credit agencies; deferring or denying care because of nonpayment of a previous bill that was FAP eligible; and pursuing liens, garnishments, and similar legal actions.

The rules about ECAs and reasonable efforts can have a significant impact on billing because they establish strict timetables for when certain actions can take place, Warner says. “Hospitals may take no ECAs for 120 days after the first post-discharge billing statement, and patients have as long as 240 days to apply for financial assistance. Once the patient applies for financial assistance, all ECA activity must be suspended pending a determination, and the effect of any ECAs taken during the 121-240 day timeframe must be reversed if it is decided that the patient is FAP eligible,” Warner says.

It is notable that hospitals are liable for their business associates’ violations of 501(r). If an account was turned over to a collection agency, the hospital must follow up to stop collection efforts when necessary. “But it’s not at all clear how you can reverse the impact of a negative mark on a patient’s credit report, and there is little if any legal or regulatory guidance on how the rules about ECA and reasonable efforts will be interpreted,” Warner says.

The IRS provides some ECA guidance in its Bulletin No. 2015-5, and the full 501(r) regulations can be found in the Federal Register , but these materials leave many questions unanswered. This lack of clarity is significant because mistakes might amount not only to a violation of section 501(r) but could also expose the hospital to liability under the Fair Credit Reporting Act (FCRA) or other statutes implicated by collection activities.

The safest approach might be to wait until after the 240-day period before implementing ECAs, but doing so would increase hospitals’ days in accounts receivable. In any event, both Warner and Wiik advise using ECAs sparingly until there is more clarity on how courts and regulators will treat hospitals’ interpretation and application of the rules.

Section 501(r) is more than a mere compliance issue, Wiik and Warner stress. It has implications for both financial and clinical operations, and the governing board has ultimate responsibility. For these reasons an institution-wide effort is recommended.

See related video: Critical Steps Toward 501r Compliance: An interview with Ellen Stewart, Partner, Berenbaum Weinshienk

J. Stuart Showalter, JD, MFS, is a contributing editor for HFMA.

Interviewed for this article:  Steve Warner is vice president, patient responsibility, Adreima, and is a member of HFMA’s North Carolina chapter.

Jonathan Wiik is principal, TransUnion Healthcare, and is a member of HFMA’s Colorado Chapter.

Discussion Starters

Forum members: What do you think? Please share your thoughts in the comments section below.

  • What have been your greatest challenges implementing the 501r regulations?
  • What solutions have you employed to improve compliance with the regulations?

Publication Date: Thursday, October 13, 2016