United States: IRS Releases Proposed Regulations On Requirements For Tax-Exempt Hospitals

On June 22, only days before the Supreme Court is expected to rule on the constitutionality of the Patient Protection and Affordable Care Act ("PPACA"), the Treasury Department released proposed regulations under Internal Revenue Code section 501(r), enacted as part of PPACA. Section 501(r) requires all tax-exempt "hospital organizations" to have certain policies and procedures in place for each "hospital facility" they operate, including having a "financial assistance policy" for low income patients, written policies for the provision of emergency care, limitations on charges and collection activities for individuals eligible for the financial assistance policy, and the creation and implementation of a community health needs assessment.

The proposed regulations are detailed and prescriptive, although they do not address certain key aspects of section 501(r), including the required community health needs assessment and the sanctions for failing to comply with section 501(r).

Key Definitions Clarified

The new requirements put in place by PPACA apply to hospital facilities that are operated by hospital organizations. Hospital facilities are defined in the proposed regulations to include only entities that are required by the laws of the 50 states or the District of Columbia to be registered, licensed, or otherwise formally recognized as a hospital. Under this definition, no foreign hospitals, including those in U.S. territories, are subject to the section 501(r) requirements. While the requirements of section 501(r) apply individually to each hospital facility, including different hospitals owned or managed by the same hospital organization, the proposed regulations permit a hospital organization to treat multiple buildings or divisions as a single facility, as long as they are operated under a single state license.

Hospital organizations are defined as tax-exempt organizations under section 501(c)(3) that operate one or more hospital facilities, including organizations that operate a hospital through a "disregarded entity" – a single member limited liability company. The proposed regulations do not extend to hospital facilities operated through joint ventures or other partnerships, although future guidance in this area is expected. In addition, the preamble to the proposed regulations indicates that section 501(r) is intended to apply to governmental hospitals recognized as described in section 501(c)(3), while suggesting that a governmental hospital's "unique position" may give rise to alternative methods for complying with certain section 501(r) requirements.

Financial Assistance and Emergency Medical Care Policies

Under the proposed regulations, each hospital facility is required to have a financial assistance policy and an emergency medical care policy that are adopted by an "authorized body" of the hospital and that are consistently carried out in practice. An authorized body includes the hospital's governing board, a committee of the governing board, or other parties authorized to act by the governing board.

The emergency medical care policy must require the hospital to provide care for emergency medical conditions to all individuals, without discrimination, whether or not the individual is eligible for assistance under the financial assistance policy. This part of the policy can be met simply by requiring the hospital to comply with its existing obligations under the Emergency Medical Treatment and Labor Act. The policy must also prohibit the hospital from taking any steps that would discourage patients from seeking emergency treatment at the hospital, such as requiring payment prior to treatment for emergency services or allowing debt collection activities inside the hospital that might interfere with access to services.

Except as discussed below concerning the limitations on charges, neither section 501(r) nor the proposed regulations require a hospital to give any particular form of financial assistance to its patients, nor do they dictate any qualifications that a hospital must use in determining whether a particular patient is eligible for financial assistance. Each hospital is required, however, to describe in its financial assistance policy the type of financial assistance that is available, the eligibility criteria, how charges are calculated for eligible patients, and how the limitation on charges to "amounts generally billed," as described below, is calculated for various services. The proposed regulations give hospitals guidance on the more complicated requirements of these policies, such as the need for the financial assistance policy to be widely publicized (and to describe the publication measures in the policy itself).

To meet the requirement that a financial assistance policy be widely publicized, the proposed regulations indicate that a hospital is required to make the policy, as well as a plain language summary of the policy and an application for assistance under the policy, conspicuously available on the hospital's or another party's website. Paper copies of these same documents must also be available at the hospital and by mail, free of charge, upon request. The policy must also be publicized with signs or other displays in the hospital itself and by reaching out to the community served by the hospital in a way that is reasonably calculated to reach those who are likely to need assistance under the policy. If more than 10% of the residents of the hospital's community speak another language and have limited proficiency in English, the hospital is also required to provide the same documents, and take similar publication measures, in that language.

Examples given in the proposed regulations explain that certain elements of the financial assistance policy that are likely to change, such as the details of how amounts generally billed are calculated, can be removed from the financial assistance policy itself. Hospitals are permitted by these examples to describe in the policy the alternate location of this information, as long as the details are freely and widely available. This will permit hospitals to change elements of the policy relatively frequently, without being required to have a new financial assistance policy formally approved.

Limitations on Charges

While hospitals are generally free to determine what form of financial assistance to provide those who are eligible under the hospital's financial assistance policy, section 501(r) prohibits hospitals from charging more to eligible individuals than the "amounts generally billed" (or AGB) to insured patients for emergency or medically necessary care, and requires that charges for any other care be less than the gross charges (the full, undiscounted charge for services) for that care.

The proposed regulations require that a hospital use one of two calculation methods to determine the amounts generally billed for particular care. The simpler method allows the hospital to calculate charges as if the patient were eligible for Medicare Part A or B. A hospital applying this calculation method would use its normal coding procedures for Medicare to determine the amount that would be paid by Medicare, as well as the amount that would be paid by the Medicare beneficiary out-of-pocket. The total amount the hospital would receive from both Medicare and the beneficiary directly for the particular service is then treated as the amount generally billed for that service, and is the maximum amount the hospital is permitted to charge an individual eligible under its financial assistance policy.

Under an alternate calculation method in the proposed regulations, the hospital can take into account the amounts normally billed to patients who are insured by both Medicare and private insurers. This method requires the hospital to multiply the gross charges for its services by an "AGB percentage" which the hospital must update at least annually. The AGB percentage is the amount the hospital has received in satisfaction of certain claims that have been paid in full over the prior 12 months, divided by the total gross charges for those same claims. The claims used in the calculation can either be those paid by Medicare Part A and B, or those paid by both Medicare Part A and B and all private health insurers who are primary payers. As with the Medicare billing method described above, the hospital can include in the calculation both the fees received directly from insurers and the amounts paid by the insured individuals in the form of co-pays, co-insurance, or deductibles. If the hospital chooses to use this method, it can calculate one ABG percentage for all services, or calculate separate percentages for different categories of services, such as a percentage for each department of the hospital. Note that the proposed regulations do not allow for an amounts generally billed calculation method based exclusively on claims paid by private health insurers, although comments have been requested on whether such a calculation method should be permitted.

When providing treatment to individuals eligible under the financial assistance policy that are not emergency or medically necessary services, the hospital is not required to limit its charges to amounts generally billed. The amount charged must nevertheless be less than the gross charges for the services.

The proposed regulations include a safe harbor for hospitals that charge more than amounts generally billed to individuals who are later determined to be eligible under the financial assistance policy. As long as the individual has not submitted an application for financial assistance at the time of the charge, and the hospital is making the reasonable efforts to determine eligibility discussed below, the hospital will not be considered to have violated the requirements under the regulations. If the individual is determined to be eligible for financial assistance after charges that exceed amounts generally billed have been issued, the hospital will be required to correct the amount charged, and issue a refund for any payment in excess of these amounts.

Billing and Collections

Section 501(r) limits the billing and collections efforts that a hospital is permitted to undertake until it has determined that a patient is not eligible for assistance under the hospital's financial assistance policy. According to the proposed regulations, these prohibited activities, referred to as "extraordinary collection actions," include measures such as selling the debt to a third party, garnishing wages, foreclosing on property or seizing accounts, filing a civil suit for collection of the debt, or making an adverse report to credit reporting agencies.

Before extraordinary collection actions can be taken, the hospital must make "reasonable efforts" to determine whether or not the patient is eligible under its financial assistance policy. Meeting the reasonable efforts standard requires the hospital to provide a plain language summary of the financial assistance policy to the patient prior to discharge and with all billing statements, to discuss the policy with the individual in any oral communications about the charges, and give at least one written notice of the types of extraordinary collection actions the hospital may take and the deadline, no earlier than 30 days from the date of the notice, after which these actions may begin. If the patient at any time submits an application for financial assistance under the policy, the hospital is no longer required to undertake these notification efforts, although certain similar requirements may apply in the case of incomplete applications for assistance.

If no application for financial assistance is submitted to the hospital after the hospital has met all of the notification requirements discussed above, the hospital can begin taking extraordinary collection actions 120 days after the first bill was sent, as long as three separate billing statements have been issued during that period. However, the patient has an additional 120 days (for a total of 240 days following the first billing statement for the care at issue) to submit the application for assistance. Once an application is received, all extraordinary collection actions must be suspended pending the hospital's determination of the individual's eligibility. If the individual is later found to be eligible under the policy, the hospital must take steps to reverse extraordinary collection actions that have begun, even if the actions were permissible when taken. The proposed regulations do permit hospitals to use third party billing and collections agencies, including sale of the debt after the 120-day notification period has ended, as long as the hospital has a written agreement with the third parties that they will not take actions that the hospital is prohibited from taking under the proposed regulations, and that any individual eligible for financial assistance will not be required to pay more than he or she would have been required to pay if the hospital still controlled the debt.

A hospital is permitted to avoid the notification requirements if it determines that the patient is eligible for the most generous amount of assistance available under its financial assistance policy based on information provided outside of the normal assistance application process. The hospital cannot, however, make a negative determination of the patient's eligibility based on any information it believes may be unreliable, or that was obtained from the patient under duress (such as requiring the patient to give the information prior to obtaining emergency medical care). Finally, hospitals are not permitted to meet these requirements by asking patients to waive their rights to apply for financial assistance.

Further Regulations Expected

The comment period for the proposed regulations ends on September 24, 2012 and the new rules will apply to taxable years beginning on or after the regulations become final. The proposed regulations do not contain any additional information on the requirement for hospitals to perform a community health needs assessment. While waiting for these regulations, hospitals are advised to continue to rely on Notice 2011-52, which describes in broad terms the community health needs assessment. Additional regulations are also expected to explain the consequences of failing to meet the requirements of section 501(r) and the associated regulations.


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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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