Implications of Final Regulations Under Internal Revenue Code Section 501(r)

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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:

(i) the creation and periodic conduction of a “community health needs assessment” (“CHNA”);

(ii) implementation of a financial assistance policy (“FAP”) and emergency care policy;

(iii) 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

(iv) 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.


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.

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