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Tax-Exempt Hospitals: Final Financial Assistance and Billing and Collection Regulations Published

on Tuesday, 10 February 2015 in Health Law Alert: Erin E. Busch, Editor


Section 9007 of the Patient Protection and Affordable Care Act created and added § 501(r) to the Internal Revenue Code (the “Code”). Section 501(r) put into place a number of significant new requirements that tax-exempt hospitals must satisfy in order to retain tax-exemption, including provisions related to financial assistance, limitation on charges and a prohibition on taking extraordinary collection actions (“ECAs”) against patients prior to making reasonable efforts to determine if they are eligible for financial assistance.

Proposed regulations interpreting the financial assistance, limitation on charges, and billing and collection provisions of § 501(r) were issued by the Internal Revenue Service (“IRS”) on June 26, 2012. The proposed regulations were complex, and many hoped that the regulations would be more straightforward once finalized.

On December 29, 2014, the IRS issued final § 501(r) regulations. As a result, tax-exempt § 501(c)(3) hospitals (including governmental hospitals that also have § 501(c)(3) status) must adopt and implement financial assistance and billing and collection policies that comply with the regulations not later than the start of their first tax year after December 29, 2015. This means, for example, that a calendar year taxpayer must have compliant policies and procedures in place not later than January 1, 2016. For a June 30 yearend taxpayer, compliant policies and procedures must be in place not later than July 1, 2016.

While hospitals have some time to adopt and implement compliant policies, hospitals should begin the process now. The final regulations are complex and contain detailed substantive requirements on the provision of financial assistance and billing and collection activities. These changes will almost certainly require substantial changes to the current processes and methodologies used to bill and collect patient accounts. Below we note some of the more substantial substantive changes in the final regulations.

Wholly-Owned Disregarded Subsidiaries

Both the proposed and the final regulations apply to care provided by a §501(c)(3) hospital within licensed hospital space. That is, a hospital could specify that its financial assistance policy only applies to care provided within the four walls of the licensed hospital. (If a hospital does so, it must have billing and collection systems in place to differentiate between bills for care provided within the licensed hospital and care provided elsewhere). The final regulations, however, also apply to disregarded entities for tax purposes (LLCs/partnerships) that are wholly owned by a hospital organization to the extent that the entity provides services within hospital space and the services are not unrelated business income. For example, if a hospital owns an LLC physician practice entity, the care provided by the LLC physicians within the hospital must also be subject to the financial assistance policy.

List of Providers Subject to Policy

New in the final regulations is a provision that requires the financial assistance policy to name the providers who are and are not subject to the financial assistance policy. The intent behind this provision is to provide patients with full information as to whether the care provided by their treating professionals will also be subject to potential discount. This provision is not limited to physicians, but all types of care that may be independently billed to the patient.

Heightened Translation Requirement

Hospitals have a heightened translation requirement under the final regulations. The policy, application, plain language summary, and any separate billing and collection policies must now be translated into the primary language spoken by a language group constituting the lesser of 1,000 individuals or 5 percent of the community served by the hospital.

Withholding Care Due to Non-Payment

The final regulations state that withholding or denying medically necessary care due to non-payment of past bills is considered an ECA. Although the final regulations provide for a modified notification process in the event that a hospital desires to deny care until payment for past services is received, hospitals should be aware that if they deny medically necessary care on such a basis without taking the additional notification steps, it will be a violation of § 501(r).

Amounts Generally Billed

Section 501(r) prohibits hospitals from charging patients who are eligible for financial assistance more than Amounts Generally Billed (“AGB”) to those who have insurance. The final regulations continue to include Medicare receipts in the AGB calculation. This necessarily will result in larger mandatory discounts to patients who are eligible for financial assistance. The final regulations altered the calculation of AGB, however, in two fundamental ways: (i) the calculation is based on allowed insurance amounts, not cash receipts; and (ii) while the calculation must still be performed every 12 months, hospitals now have 120 days to implement each new calculation.


The final regulations relax certain notification provisions. For example, a plain language summary of the financial assistance policy must only be provided upon admission or discharge and with the final ECA notice. No longer does a plain language summary of a hospital’s financial assistance policy need to be included with every bill. Every billing statement need only include a conspicuous statement describing the availability of financial assistance and providing certain required contact information regarding financial assistance.

Likewise, there is no longer a requirement that the availability of financial assistance be mentioned in every oral conversation with a patient. The IRS requires that the financial assistance policy and application be mentioned orally once the hospital actually intends to pursue ECAs against the patient. Further, although hospitals must be able to prove compliance with 501(r) if ever audited, the final regulations do away with the documentation requirement.

Presumptive Eligibility

The proposed regulations only allowed hospitals to presume eligibility for financial assistance if the hospital gave the patient the best financial assistance available under the policy; that is, free care. The final regulations permit hospitals to engage in presumptive eligibility and provide less than free care so long as they still provide the patient with the required notices and ability to submit a financial assistance application to potentially receive an even greater benefit.

No Written Waivers

Written waivers of financial assistance continue to be disallowed under the regulations. This means that hospitals must adhere to the billing and collection requirements for all patients. The final regulations do provide that a written waiver may be considered a “complete” application upon which a hospital can base a decision to deny eligibility. But, the hospital must still adhere to all the 501(r) provisions until the “application” has been processed.

Notification/Application Period

Although the final regulations do away with the “notification period,” they still prohibit hospitals from taking ECAs against patients for a period of 120 days from the first post-discharge billing statement. The final regulations continue to maintain a period of at least 240 days from the first post-discharge billing statement where hospitals must accept a financial assistance application from a patient. Hospitals must give at least 30 days’ notice prior to taking ECAs, so the application period may be (intentionally or unintentionally) extended beyond 240 days if hospitals are not timely in providing such a notice.

Episodes of Care

Hospitals are permitted to aggregate multiple episodes of care only for purposes of complying with the notification and reasonable efforts standards. However, if a hospital does so it must measure its notification and reasonable efforts compliance with regard to the most recent episode of care. Relying on past financial assistance applications for future episodes of care is considered “presumptive eligibility.” As stated above, if a hospital grants less than free care based upon a past financial assistance application, it must comply with specific notice requirements for future episodes of care and allow the patient to apply for additional financial assistance.

The above review only scratches the surface of the various requirements the final § 501(r) regulations impose upon tax-exempt hospitals. While it may appear that hospitals have ample time to adopt compliant financial assistance and billing and collection policies and procedures, one can see from the above that the new regulations necessarily will result in a substantial shift and overhaul in billing and collection practices and procedures. We encourage tax-exempt hospitals to develop and adopt compliant financial assistance and billing and collection policies as soon as possible so that any procedural issues may be rectified prior to the required implementation date.

Andrew D. Kloeckner


1 It must also be noted that until such time as policies and procedures that are compliant with the final regulations are adopted, current hospital policies must comply with a good faith reasonable interpretation of the statutory language.


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