United States: Implications Of Final Regulations Under Internal Revenue Code Section 501(r)

Last Updated: February 18 2015
Article by Mark Miller and Dinetia Newman

The Internal Revenue Service replaced proposed regulations under Section 501(r) of the Internal Revenue Code (the "Code") with final regulations in late 2014 (the "Final Regulations"). As enacted in the Patient Protection and Affordable Care Act, Code Section 501(r) mandates the implementation of specific policies and procedures for each hospital facility of an organization that is tax-exempt pursuant to Code Section 501(c)(3) (a "Hospital"). Compliance with Section 501(r) has been required since its enactment in 2010. The Final Regulations contain many proposed regulation provisions which have served as guidance for Code Section 501(r) compliance, but also change some of those provisions and add more detail and clarification to others. As the Final Regulations apply to tax years beginning after December 29, 2015, Hospitals may in the interim comply with the Final Regulations or choose to continue reliance on the proposed regulations.

By way of overview, Code Section 501(r) contains the following four primary requirements that a Hospital must follow for each of its hospital facilities:

  1. the creation and periodic conduction of a "community health needs assessment" ("CHNA");
  2. implementation of a financial assistance policy ("FAP") and emergency care policy;
  3. limitations on charges for emergency or other medically necessary care to not more than the amounts generally billed to individuals who have insurance covering such care, and prohibition against using "gross charges" (i.e., the full, undiscounted charge for the services); and
  4. proscription against the use of extraordinary collection actions before making reasonable efforts to determine whether the patient is eligible for assistance under the FAP.

Note that requirements (ii), (iii), and (iv) above apply only to lower-income patients. A Hospital that fails to meet all Section 501(r) requirements can be subject to a $50,000 excise tax or even have its Section 501(c)(3) exemption revoked.

Community Health Needs Assessment

One of the most significant obligations imposed on a Hospital by Code Section 501(r) is the requirement to conduct a CHNA. A Hospital meets the CHNA requirement with respect to a hospital facility it operates only if the facility has conducted a CHNA in such taxable year or in either of the two immediately preceding taxable years and an authorized body of the hospital facility has adopted an implementation strategy to meet the community health needs identified in the CHNA. The Final Regulations make the following changes and clarifications:

  • Requiring a Hospital to "solicit" input from persons knowledgeable about the community when developing a CHNA and take into account and report the input received, rather than to "obtain" input, giving a Hospital some flexibility in case input cannot be obtained;
  • Adding examples of health care needs that a CHNA might consider, including prevention of illness, ensuring adequate nutrition, and addressing social, behavioral, and environmental factors;
  • Requiring annual reporting on Form 990 about how needs identified in the CHNA are being addressed;
  • Eliminating the requirement to identify potential "measures" available to address the significant health needs of the community, while retaining the requirement that the hospital identify "resources" that address significant health needs;
  • Clarifying and elaborating on provisions allowing a hospital to conduct its CHNA in collaboration with other organizations and facilities, including production of a joint CHNA; and
  • Allowing Hospitals an additional four-and-a-half-month period after the close of the taxable year in which a CHNA is conducted to adopt an implementation strategy, while no longer requiring adoption by year end.

Financial Assistance Policy

Code Section 501(r) requires a Hospital's FAP to include eligibility criteria for financial assistance and to indicate whether such assistance includes free or discounted care, the basis for calculating amounts charged to patients, the method for applying for financial assistance, the actions the organization may take in the event of non-payment, and measures to widely publicize the policy. A Hospital also must have a written policy requiring it to provide emergency medical care to individuals without regard to their eligibility under the FAP. With regard to FAPs, the Final Regulations include the following items:

  • Extending the FAP requirements to care provided in a hospital facility by certain related entities, and specifying which emergency or other medically necessary care providers in the hospital facility are covered by the FAP and which are not;
  • Eliminating the requirement to list the measures taken to widely publicize the FAP (although a Hospital still must implement such measures);
  • Deleting the requirement that the plain language summary of the FAP be included with billing statements. The requirement is that the billing statements include only a conspicuous written notice and directions on how to obtain further information about the FAP. Each patient must, however, be offered a copy of the plain language summary of the FAP; and
  • Increasing situations in which a FAP and related documents must be translated into a non-US language.

Practice Tip: A Hospital should make an effort to thoroughly review its FAP in light of the issuance of the Final Regulations, even if the FAP was written with the proposed regulations in mind, and should train its staff on the requirements regarding publicizing and translating the FAPs.

Limitation on Charges

The limitation on charges requirement of Code Section 501(r) necessitates a calculation of "amounts generally billed," requiring selection of either the "look-back" method or the "prospective" method for making such calculation.

The calculation of "amounts generally billed" as required under the Final Regulations includes the following changes:

  • The amounts generally billed can be based on Medicaid rates, either alone or in combination with Medicare and other private payor rates;
  • The method that is used may be changed at any time, provided that the related FAP is first updated with the new method;
  • The calculation is not limited to claims for emergency and other medically necessary care, and may utilize all claims for medical care at the relevant hospital facility; and
  • If a Hospital's FAP covers medical care beyond emergency and medically necessary care, then amounts charged for the other medical care must be less than gross charges for such care.

Practice Tip: A Hospital does not have to use the same method for calculating "amounts generally billed" for each of its hospital facilities, and so should evaluate the methodology with respect to each hospital facility. For example, a hospital facility with a high Medicaid population could utilize a different methodology than a hospital facility with a high private payor population.

Collections

Collection restrictions under Code Section 501(r) involve two key definitional determinations: (i) deciding what constitutes an "extraordinary collection action," and (ii) comprehending the "reasonable efforts" required to determine FAP eligibility.

The Final Regulations refine the definition of "extraordinary collection action" as follows:

  • While a Hospital is generally responsible for the actions of debt collection agencies that it utilizes, the sale of an individual's debt to a collection agency is not an "extraordinary collection action" if prior to the sale the Hospital enters into a written agreement with the agency containing certain safeguards to protect the debtor;
  • The imposition of liens on certain personal injury recoveries from a third party is not an "extraordinary collection action;"
  • A Hospital does commit an "extraordinary collection action" if it defers or denies a patient, or requires payment from the patient, before providing medically necessary care to such patient because of nonpayment of prior bills for care covered under the FAP.

The Final Regulations' revisions as to "reasonable efforts" must be scrutinized to ensure compliance, and include the following changes:

  • A Hospital may presumptively determine that an individual is eligible for less than the most generous assistance available under the FAP based on information provided by third parties or a prior FAP determination, rather than only being able to rely on information from the individual; and
  • The exact time period that must lapse before an "extraordinary collection action" may be undertaken is defined as (i) at least 120 days from the date the Hospital provided the first post-discharge billing statement for the care; and (ii) no less than 30 days after provision of written notice to the patient containing certain information, including the "extraordinary collection actions" intended to be utilized, as well as notification of the FAP.

Allowances for Minor or Undisclosed Errors in Compliance

In addition to providing revisions to the four primary elements of Code Section 501(r), the Final Regulations add more allowances for certain minor or undisclosed errors in attempts to comply with the requirements, including the following:

  • Errors that are minor and either inadvertent "or" (replacing "and" under the proposed regulations) due to reasonable cause may be corrected without disclosure;
  • Guidance is included on how to interpret "minor," "inadvertent," and "reasonable cause;" and
  • A Hospital that fails to meet the CHNA requirements "will" (replacing "may, in the discretion of the IRS" under the proposed regulations) be subject to the excise tax (unless meeting the exception for minor errors).

Guidance for Hospitals in Joint Ventures or Partnership-Type Arrangements

The Final Regulations clarify that a hospital facility is generally subject to Code Section 501(r) if it is owned by a pass-through type entity such as a limited liability company or partnership in which a Hospital holds a capital or profits interest, unless the Hospital treats its ownership in such entity as being subject to the unrelated business income tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions