17 Things You Should Know About… The IRS Proposed Section 501(r) Regulations
The IRS just released proposed regulations regarding the new hospital tax-exemption requirements under Section 501(r) of the Internal Revenue Code (the “Code”). Although these are only proposed regulations, taxpayers may rely on them until final or temporary regulations are issued. The following is an overview of some of the new guidance/insights from the proposed regulations and accompanying commentary.
1) One State License Equals One Hospital Facility. Except as may be provided in future published guidance, multiple hospital buildings operating under a single state license are treated as one hospital facility for purposes of Section 501(r) compliance. Future guidance will also address treatment of operations in a single building with more than one state license.
2) Applicability Not Expanded Beyond Licensed Hospitals. Section 501(r) is applicable to state-licensed hospitals but has not yet been expanded to other organizations that have the “provision of hospital care as their principal exempt function or purpose” (e.g., outpatient medical clinics that are not part of licensed hospitals).1 Any future expansion of applicability will apply prospectively.
3) Operation Of Hospitals Through Disregarded Entities. The regulations make clear that the Section 501(r) requirements apply to organizations operating hospitals through disregarded entities (e.g., for a single member LLC operating a hospital, the requirements would apply to the member). Future guidance will address operation of hospitals through partnerships.
4) Policies Must Be Adopted By Hospital Organizations. Required policies must be adopted with respect to each hospital facility individually by an authorized body (e.g., board of directors, committee, etc.) of the legal entity operating the hospital(s). Adoption of system-wide policies by parent entities appears insufficient.
5) No Interference With Provision Of Emergency Care. The hospital’s emergency medical care policy must prohibit actions that “discourage individuals from seeking emergency medical care, such as by demanding that . . . patients pay before receiving [emergency] treatment . . . or by permitting debt collection activities in the emergency department . . . .”
6) Hospitals Without Emergency Departments. Hospitals without emergency departments can generally comply with the emergency medical care policy requirements under Section 501(r) through, among other things, compliance with applicable EMTALA requirements.
7) Expansion Of Publication Requirements. The financial assistance policy must be made widely available through all of the following methods: (i) publication of the policy, application and a summary online; (ii) availability of hard copies of the policy, application and summary upon request and without charge both on-site and by mail; (iii) notification of hospital visitors about the policy with conspicuous public displays or similar measures; and (iv) notification of the community about the policy targeting those likely to require assistance.2
8) Gross Charges Prohibition Applies To All Care. Amounts charged to a patient eligible for financial assistance must be less than gross charges (i.e., chargemaster rates) with respect to any care provided (i.e., not limited to emergency and other medically necessary care).
9) Financial Assistance Policies Must Contain Additional Provisions. Financial assistance policies must state that if a patient is determined eligible for financial assistance, he or she will not be charged more than amounts generally billed to individuals who have insurance, with respect to emergency or other medically necessary care. The policy must also note the method the hospital uses for determining these charge limits and provide additional details about the types of charity care discounts available, application/determination process, eligibility criteria, and how, specifically, discounts are calculated/applied.
10) Two Methods To Determine Amounts Generally Billed. Two calculation methods are available in meeting the requirement that charges for emergency/medically necessary care to patients eligible for financial assistance be limited to no more than amounts generally billed to individuals with insurance covering such care:
A) Look-Back Method – Develop a ratio of all claims paid in full (including deductibles, co-pays and co-insurance paid) for emergency/medically necessary care in the last 12 months over the sum of associated gross charges for such care. Include either Medicare Part A/B claims only (as primary payer) or Medicare Part A/B claims and all private insurer/Medicare Advantage claims (as primary payers). Multiply this ratio by the hospital’s gross charges to determine the upper limit for the specific items/services in question.3
B) Prospective Method – Determine upper limit as the total amount expected to be paid by Medicare and a Medicare beneficiary together for the specific items/services in question using the hospital’s billing and coding process for Medicare Part A/B beneficiaries.
11) Extraordinary Collection Efforts Defined. Extraordinary collection efforts (which may not be taken before a reasonable effort is made to determine financial assistance eligibility) include any measures that require a legal or judicial process (e.g., liens, foreclosure, seizure/attachment, civil action, garnishment, arrest, etc.) or that involve selling debt or making reports to credit agencies, whether engaged in directly by the hospital or through a purchaser of the debt, debt collection agency, etc. Extraordinary collection efforts do not include referral to collection agencies where debt is not sold.
12) Reasonable Efforts/Notification Standard Established. During an initial 120-day notification period (measured from the first billing statement), unless or until a financial assistance application is submitted, the hospital must: (i) provide a summary of the financial assistance policy and offer a financial assistance application before discharge; (ii) include a summary of such policy with all billing statements (at least three total) and related written communications; (iii) inform the individual of the financial assistance policy in all oral communications regarding amounts due; and (iv) provide written notice at least 30 days before the end of the period describing the extraordinary collection actions that may be taken if an application is not timely submitted or the amount due is not timely paid.
13) 240-Day Financial Assistance Application Period. Hospitals must generally allow patients to submit and complete financial assistance applications during a 240-day application period (measured from the first billing statement) and must suspend any extraordinary collection efforts while processing submitted applications.4
14) Reversal of Actions For Subsequent Eligibility Determination. Once a patient is determined eligible for financial assistance, hospitals must provide a billing statement showing the amount owed, how the discount was determined/applied and how the “amounts generally billed” limitation was met. The hospital must also seek to reverse/undo any extraordinary collection efforts (except sale of debt) and provide a refund for any excess payments made.
15) Patient Waivers Not Sufficient. A signed waiver from a patient stating that the patient does not want to apply for financial assistance or does not want to receive notification is not alone sufficient to meet the reasonable efforts standard and does not constitute an eligibility determination; the above requirements must still be met.
16) Restrictions On Sale/Referral Of Debt. A hospital referring or selling debt to another party must obtain a written agreement containing the following provisions:
A) For debt referrals, the party will not engage in extraordinary collection efforts until the hospital meets and documents its reasonable efforts requirements;
B) The party will suspend any extraordinary collection efforts if a financial assistance application is timely submitted;
C) If an individual is determined eligible for financial assistance, the party will make efforts to reverse any extraordinary collection efforts (except sale of debt) and ensure that the patient does not pay any more than required under the financial assistance policy; and
D) If debt is subsequently referred/sold during the application period, a written agreement must be obtained binding that subsequent party to the above provisions.
17) Needs Assessment Requirement And Consequences Not Addressed. The IRS intends to issue additional proposed regulations concerning the community health needs assessment/implementation strategy requirements and consequences for one or more hospital facilities’ failure to meet the requirements of Section 501(r) of the Code. Organizations can continue to rely on IRS Notice 2011-52 with respect to needs assessment and related requirements (e.g., contents of written report, determination of community served, details on implementation strategy, etc.) until six months after such further guidance is issued.
The IRS has solicited specific comments on the efficacy, feasibility and/or appropriateness of nearly every aspect of the proposed regulations. Please note that comments are due by September 24, 2012. If you have any questions, please contact Charles M. Honart at 610.205.6017 or Daniel J. Hennessey at 610.205.6011.
1 An example in the proposed regulations suggests that these requirements apply to rehabilitation hospitals.
2 The proposed regulations contain additional details on meeting the above publication requirements, including requirements to publish documents in other languages under specified circumstances.
3 Hospitals can calculate one ratio for all care or multiple ratios for separate categories of care or for separate items/services. Ratios must be calculated annually and put into use within 45 days of the end of the 12-month period used in the calculation. In addition, the IRS has specifically requested comments regarding how to address its concern that hospitals could circumvent this limitation by simply increasing gross charges.
4 Compliance with this standard also requires hospitals to specifically respond to incomplete applications (with specified explanations and follow up requests), process completed applications, notify patients of the determination and document all aspects of the notification and eligibility determination processes.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.