The IRS has Finalized Regulations for Section 501(r) Providing Guidance to Hospitals on How to Avoid Losing their Tax-Exempt Status

On March 12, 2015, the Internal Revenue Service finalized regulations, which provide correction and disclosure procedures so that hospitals can avoid losing their 501(c)(3) status if they fail to meet certain requirements of IRS Code Section 501(r).  Section 501(r) was enacted  as part of the Patient Protection and Affordable Care Act (otherwise known as “Obamacare”).

This Code Section imposes new requirements on charitable tax-exempt hospitals, which include the following:

1. an obligation to perform a community needs assessment every three years;

2. an obligation to establish written policies on financial assistance; and

3. the imposition of certain limitations on billing and collection activities.

Some of the more significant applications of these new requirements are:

  • The new regulations address how Community Health Needs Assessments should be conducted and the type of information that should be contained in them, as well as timelines for the implementation of the assessments.
  • Hospital-owned physician practices (whether directly owned by the hospital or through a partnership/joint venture) are subject to the Section 501(r) requirements.
  • Financial Assistance Policies (FAP) must list all providers who deliver emergency or medically necessary care in the hospital as well as designate which providers are or are not covered by the FAP.  This is a new concept that only appeared when the final regulations were printed in the Federal Register.  This concept may cause concerns for some hospitals.
  • If an emergency department is determined to be run by “outsourced” providers, the IRS may determine that the department is not an open emergency room within the meaning of Revenue Ruling 69-545 (the community benefit standard).  If so, hospitals should require all hospital-based providers to contractually abide by the hospital’s FAP.
  • The new regulations also impose limits and rules on charges and how amounts generally billed are calculated.  The term Extraordinary Collection Actions (ECA) is defined and requires that a plain-language written notice of the intent to engage in an ECA be provided to the patient 30 days prior to engaging in an ECA.

These final regulations are set forth on sixty-two pages of the Federal Register, which require careful scrutiny.  Although the statute has been effective for several years and hospitals should already be in compliance with its current provisions, the new final regulations shall be effective as of December 29, 2015.  To protect their tax-exempt status, hospitals should diligently ensure their operations meet the standards of the current statute and incorporate the provisions of the final regulations into their policies and procedures.

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