The Affordable Care Act (ACA) added several new requirements hospitals must meet to maintain or achieve tax-exempt status under 501(c)(3). Code Section 501(r) mandates the implementation of specific policies and procedures for each hospital facility. The Final Regulations apply to tax years beginning after December 29, 2015. In the interim affected hospitals are complying with the mandated regulations. If a hospital fails to meet Section 501(r) requirements they can be subject to a $50,000 excise tax or even have its Section 501(c)(3) exemption revoked.

Code Section 501(r) contains the following four primary requirements a tax exempt 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 (ECA) before making reasonable efforts to determine whether the patient is eligible for assistance under the FAP.

Extraordinary Collection Actions

The 2012 proposed regulations defined ECAs as actions taken by a hospital facility against an individual related to obtaining payment of a bill for care covered under the hospital facility’s FAP that require a legal or judicial process, involve selling an individual’s debt to another party, or involve reporting adverse information about an individual to consumer credit reporting agencies or credit bureaus (collectively, credit agencies).

The final regulations provide that a hospital meets the requirements of section 501(r)(6) if the hospital facility does not engage in extraordinary collection actions (ECAs) against an individual to obtain payment for care before making reasonable efforts to determine whether the individual is FAP-eligible for the care. However, because there are many possible actions that would not be ECAs, such actions cannot be exhaustively listed in the regulations.

Keith Hearle, president of Verité Healthcare Consulting provides the following suggestions:

“In the context of the 501(r) requirements, tax-exempt hospitals should review whether certain types of legal actions and other possible ECAs should continue. “Ensure that certain procedures or checklists are in place prior to undertaking legal actions to collect outstanding patient bills. Provide patients/guarantors with appropriate notice or warning of potential legal actions if they did not cooperate with the financial assistance policy process or pay bills in a timely fashion. “Hospitals should ensure that contracts clearly state that third-party vendors must follow hospital policies, including those associated with 501(r). Accordingly, contracts with these vendors should include requirements to follow hospital policies. “Review all collection activities in and around emergency departments to ensure they do not ‘prohibit actions that discourage individuals from seeking emergency medical care, such as by demanding patients pay before receiving treatment or by permitting debt collection activities in the emergency department (ED) or other areas where such activities could interfere with the provision of emergency medical care.’”

To help assess compliance with CHNA-related final regulations, read Verité’s 501(r) Updated Checklist at www.veriteconsulting.com. (Mr. Hearle may be reached at keith.hearle@veriteconsulting. com)

The final regulations state that hospital facilities must be held accountable for the ECAs of the debt collection agencies and debt buyers to which they refer or sell debt. Otherwise, hospital facilities could easily avoid their responsibilities under section 501(r)(6) by referring or selling their debt to third parties.

Nonetheless, a hospital facility’s failure to meet the requirements of section 501(r)(6) will be excused if the failure is not willful or egregious and the hospital facility both corrects and discloses the failure in accordance with published guidance. Under this provision, if a hospital facility acts reasonably and in good faith to supervise and enforce the section 501(r)(6) obligations of its contractual agreements with debt collectors or purchasers and corrects any contractual violations it discovers, then an error on the part of the debt collectors or purchasers should not be willful and, provided that it is not egregious, could be excused if the hospital facility corrects and discloses the failure in accordance with the procedures outlined in the revenue procedure described in § 1.501(r)–2(c).

Accordingly, the final regulations retain the provision holding a hospital facility accountable for the ECAs of the third parties collecting debt on its behalf or to which it sells debt. The final regulations under section 501(r)(4) only require a FAP to cover emergency and other medically necessary care. Because a hospital facility has discretion over whether its FAP covers elective procedures that are not medically necessary, it has discretion over whether or not it must meet the section 501(r)(6) requirements with respect to such elective care.

Reports to Credit Agencies

The Treasury Department and the IRS view reporting to credit agencies as a collection action because it is a tool to collect delinquent debts, and bad credit reports can have extraordinarily detrimental consequences for the affected individuals. Moreover, the requirement under section 501(r)(4)(A)(iv) that a hospital facility describe reporting to credit agencies in its FAP or billing and collections policy evidences Congress’s concern regarding such reporting. Because section 501(r)(6) only requires a hospital facility to make reasonable efforts before initiating an ECA, this statement supports the conclusion that reporting to credit agencies is an ECA.

Certain Liens

The 2012 proposed regulations provided a non-exclusive list of examples of actions that require a legal or judicial process, which included the placement of a lien on an individual’s property. The proceeds of settlements, judgments, or compromises arising from a patient’s suit against a third party who caused the patient’s injuries come from the third party, not from the injured patient, and thus hospital liens to obtain such proceeds should not be treated as collection actions against the patient. In addition, the portion of the proceeds of a judgment, settlement, or compromise attributable under state law to care that a hospital facility has provided may appropriately be viewed as compensation for that care. The final regulations expressly provide that these liens are not ECAs.

For rules and Debt Sales under 501r, see www.collectionadvisor.com or http://www. gpo.gov/fdsys/pkg/FR-2014-12-31/ pdf/2014-30525.pdf for the 64-page regulation published in the Federal Register.