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Wyatt Client Update: The IRS Publishes Proposed Regulations Under New Section 501(r)

The IRS Publishes Proposed Regulations Under New Section 501(r)

Detailed Rule Covering Financial Assistance and Billing and Collection Policies

     On June 22, 2012, the IRS issued proposed regulations interpreting some of the new requirements imposed under Section 501(r) of the Internal Revenue Code upon Section 501(c)(3) hospitals.  The regulations address the new statutory requirements relating to financial assistance policies, emergency medical care policies, limitations on charges, and billing and collection policies. The regulations do not address the details of the community healthcare needs assessment that a hospital must conduct every three years under Section 501(r)(3) of the Internal Revenue Code.  The health needs assessment requirements are to be addressed in future guidance.

Financial Assistance Policies.

     A covered hospital must have a written financial assistance policy that includes: (1) eligibility for financial assistance; (2) the basis for calculating amounts charged to patients; (3) the method for applying for financial assistance; (4) in the case of an organization that does not have a separate billing and collections policy, the actions the organization may take in the event of nonpayment; and (5) measures to widely publicize the policy.

     The proposed regulations spell out in detail what must be contained in a hospital’s financial assistance policy, noting that neither the statute nor the regulations require any particular eligibility requirement or any minimum level of discount or free care.  Rather, the mandate provides that, whatever financial assistance policy the charitable hospital has in place, that policy must be in writing, with clear guidelines, and available to the public.  It also must contain a host of other details, and must be implemented in accordance with fairly exacting standards.

     The “AGB” Limit.  One of the Section 501(r) requirements is that if the hospital defines someone as a financial assistance patient under its financial assistance policy, then it cannot charge them more than “amounts generally billed to individuals who have insurance covering such care (AGB).”  The regulations state that the written policy must itself state which of the permitted methods (discussed below) the hospital has used for calculating AGB.  The policy must also state the actual percentage of gross charges that the hospital applies to determine AGB or how these percentages were calculated.  Accordingly, a general statement that the hospital will not charge financial assistance patients more than the AGB will not be sufficient.  (Some may find it ironic that the AGB requirements may cause some hospitals to more narrowly define who are financial assistance patients.)

     How to Apply.  The statute requires a hospital to describe in its financial assistance policy the method for applying for financial assistance.  The regulations state that the application form (or accompanying instructions) must itself describe the information or documentation that the hospital may require and must provide contact information that the applicant can use to obtain assistance.  Financial assistance cannot be denied based on the omission of information or documentation if it is not requested in the application form or instructions.

     Actions to Collect on a Bill.  Either the financial assistance policy or a separate billing and collections policy must state the actions (including “extraordinary collection actions”) that a hospital may take in the event of nonpayment of a bill.  The financial assistance policy must describe the process and time frames the hospital will use in taking these actions.  Also to be described is the office, department, committee or other body with final authority for determining whether the hospital has made “reasonable efforts” to ascertain whether an individual is eligible for financial assistance and may therefore engage in “extraordinary collections activity.”  Even if all of this information is in a separate billing and collections policy, the financial assistance policy must still state the actions the hospital may take in the event of nonpayment and explain how members of the public may obtain a free copy of the billing and collections policy on the hospital’s website and upon request.

     Wide Publication of the Policy.  The financial assistance policy must include measures to widely publicize the policy.  That is, it is not enough that the policy be widely publicized, the policy itself must state how such publication is to be achieved.  The proposed regulations require that a financial assistance policy include four types of measures that the hospital will take to widely publicize the policy.  The measures may be summarized in the financial assistance policy itself or the policy may explain how the public can obtain a free summary of these measures.  These measures are as follows:

   1.  The policy must include measures the hospital will take to make paper copies of the policy, the application form, and a plain language summary of the policy available upon request and without charge, both for distribution within the hospital and by mail.

   2.  The policy must include measures the hospital will take to inform visitors about the policy through a conspicuous display.

   3.  The policy must also include measures to reach out to the community and make the policy known to members of the community most likely to require financial assistance.

   4.  Finally, the financial assistance policy must include measures the hospital will take to make the policy available on the hospital’s website or on another community website.  An individual with access to a computer must be able to access the information and view, download and print a copy “without requiring special computer hardware or software other than software that is readily available without cost.”

      EMTALA Policy.  The regulations confirm that a written EMTALA policy will comply with the requirements of Section 501(r)(4)(B) that a hospital must have a written policy that requires the hospital to provide, without discrimination, care of emergency medical conditions to individuals without regard to whether they are eligible for financial assistance. 

     Approval Requirements.  The regulations state that, in order for a hospital to “establish” a financial assistance policy (or a separate billing and collections policy, or an emergency medical care policy), an “authorized body” of the hospital must adopt the policy and implement the policy.  An “authorized body” means (1) the hospital’s governing body, (2) a committee of the governing body that is authorized under state law to act on behalf of the governing body, or (3) other parties authorized by the governing body of the hospital to act on its behalf (such as, for example, one or more executives of the hospital), to the extent permitted under state law.

     Implementation.  The policy must also be “implemented,” a requirement that will be satisfied if the policy is “consistently carried out.”  If a system has multiple hospitals, the regulations require that each hospital separately establish its own policy. Although all policies may contain the same operative terms, different circumstances may mandate differing terms. 

Billing Standards.

     Two Methods to Satisfy the AGB Limit.  Section 501(r)(5) contains a provision stating that a financial assistance patient cannot be charged more than the AGB (see above) for medically necessary or emergency care.  The statute also prohibits the use of “gross charges.”  The proposed regulations establish two ways to calculate AGB.  One, which the IRS describes as the “look-back” method, is to be based on actual past claims paid to the hospital facility by either Medicare fee-for-service only or Medicare fee-for service together with all private health insurance paying claims to the hospital.  The second method is the “prospective Medicare method,” which requires the hospital to estimate what Medicare would pay for the care if the individual were a fee-for-service beneficiary.  The two methods are mutually exclusive; the hospital must use one or the other for all covered patients.  The IRS will continue to accept comments on the best way of calculating AGB.

     The Look-Back Method.  Under the “look-back method,” the hospital must determine AGB by multiplying gross charges by one or more percentages of gross charges, called AGB percentages.  The alternative formulas are complex, but generally require either a percentage produced by dividing Medicare payments (consisting of “all claims that have been paid in full”) by gross charges or, alternatively, by dividing Medicare and all private health insurers combined (consisting of “all claims that have been paid in full”) by gross charges.  These percentages must be calculated no less frequently than annually.  The hospital must begin applying its AGB percentage by the 45th day after the end of the twelve-month period the hospital used in calculating the AGB percentage.  The IRS notes that the look-back method allows the hospital either to apply one percentage to all charges or to use multiple percentages for separate categories of care.  The IRS requested comments on this approach.

      Under the prospective Medicare method, the hospital may determine AGB for any emergency or other medically necessary care for financial assistance patients by using the same billing and coding process the hospital facility uses for Medicare fee-for-service beneficiaries. 

      Prohibition on Gross Charges.  Section 501(r)(5)(B) prohibits the use of gross charges, and the regulations define a gross charge (also known as the “chargemaster rate”) as the hospital’s full, established price for medical care that the hospital “consistently and uniformly” charges all patients before contractual allowances, discounts or deductions.  The regulations cleared up a couple of troubling issues in this regard.  First, gross charges can be used as the starting point for calculating the discounted amount that a financial assistance patient is billed, and can be shown on the bill as an explanation of how that bill was determined.  Early on, there were murmurings from Senator Grassley that a hospital couldn’t use gross charges in any way.  The regulations cleared that up in a favorable way.  The regulations also clarified that the prohibition on billing gross charges applies only to financial assistance patients, and while all policies may contain the same operative terms, different circumstances may mandate differing terms although the IRS perhaps broadened that mandate to cover all medical services to such patients, not just emergency and other medically necessary care.  It should be noted that most hospitals have self-pay discounts that apply to all patients and, even though those are not mandated by the regulations, it is here suggested that hospitals should continue that practice for a variety of reasons.

Determining Eligibility.

     Continuing Reasonable Efforts.  The regulations create a difficult dilemma for hospitals by providing that whether an individual is eligible for financial assistance is to be determined without regard to whether the individual has applied for assistance under the hospital’s financial assistance policy.  The regulations create what is referred to as a “safe harbor” under which the hospital will not violate Section 501(r) if it charges more than AGB for covered services to an eligible individual who has not submitted a complete financial assistance application so long as it makes and continues to make “reasonable efforts” to determine whether the individual is eligible.  If the hospital later determines the individual is eligible, the hospital must correct the bill and, if the patient paid more than the financial assistance policy would prescribe, refund the excess.  Comments on this are requested by the IRS on this safe harbor.

     Limitation on Extraordinary Collection Actions.  Section 501(r)(6) prohibits hospitals from engaging in “extraordinary collection activities” prior to making reasonable efforts to determine whether an individual is eligible for financial assistance.  The regulations make it clear that this prohibition extends to collections from an individual other than the patient where such individual has assumed responsibility for the bill and also applies to collection agencies or other parties to which the hospital has referred the debt.  There has been a great deal of discussion and uncertainty regarding what constitutes an “extraordinary collection activity,” and the regulations clear this up by defining such activity as any action related to obtaining payment of a bill that requires a “legal or judicial process or involves selling an individuals’ debt to another party or reporting adverse information about the individual to consumer credit reporting agencies or credit bureaus.”  A legal or judicial process is defined to include (but not be limited to) placing a lien on property, foreclosing on real estate, attaching or seizing a bank account or other personal property, commencing a civil action, causing an individual’s arrest, causing an individual to be subject to a writ of body attachment, and garnishing an individual’s wages.   

     What Are Reasonable Efforts?  A major area of concern revolves around the requirement that a hospital make “reasonable efforts” to ascertain whether an individual is eligible for financial assistance.  The Joint Committee on Taxation made it clear that this included “notification by the hospital of its financial assistance policy upon admission and in written and oral communications with the patient regarding the patient’s bill, including invoices and telephone calls.”  The proposed regs provide that a hospital will be deemed to have made reasonable efforts if it (1) notifies the individual about the policy, (2) where the individual submits an incomplete application, provides such individual with information relevant to completing the application, (3) in the case of an individual who submits a complete application, makes and documents a determination as to whether the individual is eligible.

      Notification Period.  In this connection, the regulations establish what is referred to as a “notification period,” which is the period during which the hospital must notify the individual about the financial assistance policy.  This period begins on the date care is provided and ends 120 days after the hospital provides the individual with the first billing statement.  If the hospital has met all of the notification requirements and the individual fails to submit an application for assistance by the end of the notification period, the hospital may then engage in extraordinary collection activities.  Where an application for financial assistance is submitted during the notification period, then the hospital must accept and process the application during a longer “application period,” which ends 240 days after the date of the first billing statement. 

     What is Notification?  The regulations discuss what is referred to as the “notification component” of the “reasonable efforts” requirement.  Notification requires that the hospital distribute a “plain language summary” of the policy, and offer the application form, to the individual before discharge from the facility.  The hospital must also include a plain language summary of the policy with all billing statements (there must be at least three) and any other written communications to the patient regarding the bill during the notification period.  The hospital must also inform the individual about the financial assistance policy in all oral communications regarding the amount due.  Finally, the hospital must provide the individual with at least one written notice that informs the individual about the extraordinary collection actions the hospital may take if the individual does not submit the application or pay the amount due by a date specified in the notice (note that this latter will apply to all potential financial assistance patients).  The regulations define a “plain language summary,” which must include a brief description of the eligibility requirements and assistance offered under the FAP, a direct website address, URL or physical location where copies of the policy and application form may be accessed, instructions on how an individual can obtain a free copy of the policy and form by mail, contact information for hospital personnel who can provide the individual with information about the policy and application form, as well as of any nonprofit or governmental organizations that might provide the individual with FAP application assistance, a statement of the availability of translations of the relevant documents in other languages (where applicable), and a statement that no financial assistance patient will be charged more for emergency or other medically necessary care than the AGB.

     Once the hospital receives an application form from an individual, whether or not it is complete, it will be deemed to have met the notification requirement.  However, receipt of an application form triggers other requirements.  If a hospital makes reasonable efforts to notify the patient during the notification period (and documents those efforts) and no application has been submitted, then the hospital may undertake extraordinary collection actions; provided that even after such actions have been commenced, the hospital must still process an application for financial assistance submitted after the end of the notification period. 

     Incomplete Application.  What if an individual submits an incomplete financial assistance application?  In that case, the hospital must take three steps:  1) the hospital must suspend any extraordinary collection actions against such individual; 2) the hospital must provide the individual with written notice describing the additional information that the individual must submit; and 3) the hospital must provide the individual with at least one written notice that informs the individual about the ECAs the hospital may initiate if the individual does not complete the application by the completion deadline.  The hospital can only resume extraordinary collection activities if the individual fails to submit the information within certain defined time periods.  

     Eligibility Determination.  Once an application for financial assistance has been completed, the hospital cannot commence (or must suspend) any extraordinary collection efforts and must make and document its eligibility determination in a timely manner and notify the individual in writing of the determination and the basis for it.  If the hospital makes a determination that the individual is eligible, then it must (1) provide the individual with a billing statement indicating the amount he or she owes (the billing statement must also show (or describe how the individual can get information regarding) the AGB for the care in question), (2) refund any excess payments, and (3) take all reasonably available steps to reverse any extraordinary collection actions taken against the individual to collect the debt. 

     The IRS recognizes that there will be instances where it is clear from the outset that an individual does not qualify for financial assistance.  The IRS requests comments on how such an early determination can be made so as to avoid the reasonable efforts and other subsequent requirements that otherwise would be imposed in such cases. 

     Written Agreement Requirements.  The regulations also require that, if a hospital refers or sells an individual’s debt to a third party, it must enter into a written agreement requiring such third party to abide by the following requirements: 1) the third party must refrain from engaging in extraordinary collection actions until the hospital has satisfied the “reasonable efforts” standards; 2) if the individual submits an application during collection, any ECA must be suspended; and 3) if an application is submitted and the individual qualifies for financial assistance, the parties must adhere to the financial assistance policy standards. 

     Waivers Ineffective.  The regulations give no effect to a signed waiver provided by the patient that he or she waives any benefits of the financial assistance policy, and no such waiver will relieve a hospital of the regulatory requirements that would be imposed absent the waiver. 

Failure to Meet One or More Section 501(r) Requirements. 

     The IRS states that it will continue to consider failure to meet the requirements of Section 501(r) and will address this in separate guidance.  Read literally, a hospital organization could forfeit its Section 501(c)(3) status for failing to meet a written policy requirement or other minor “offenses.”  Most commentators do not believe that the IRS will take such a drastic step except in egregious circumstances, and the government’s continued deliberation in this regard would seem to support that view, although it should not be used as justification for disregarding these rules or taking them lightly.    

Effective Date.

     The regulations applicable to financial assistance policies, limitation on charges and billing and collection will apply for taxable years beginning on or after the date that the regulations are published in the Federal Register as final or temporary regulations.  There will be a ninety-day comment period ending on September 24, 2012.  Hospitals should already have made a good faith effort to comply with the statutory requirements.

Please click here to view the proposed regulation.

For more information about this update please contact Tad Myre at or Daniel Soldato at