Final IRC §501(r) Regulations Published in Federal Register

Final IRC §501(r) Regulations Published in Federal Register

The final regulations clarify and address various IRC §501(r) provisions including, but not limited to, community health needs assessments (“CHNA”), financial assistance policies (“FAP”), limitation on charges that must be met by tax-exempt hospital organizations and billing and collection policies.

Outlined below are some of the more significant changes and clarifications that exist between the proposed and final regulations as they relate to IRC §501(r)(3), (4), (5) and (6). Hospital facilities should review the final regulations in conjunction with their current policies and procedures to ensure full compliance.

After taking into account all of the comments and information available, the IRS based on the latest available data now estimates that the annual hour burden per record keeper to be 136 hours annually. This estimate represents a significant increase from the IRS’ original estimate of 11.5 hours per year as noted in the proposed regulations (p. 9).

Community Health Needs Assessment – IRC §501(r)(3)

Assessing Community Health Needs

• The final regulations expand the examples of “health needs” that a hospital facility may consider in its CHNA to include the need to prevent illness, to ensure adequate nutrition, or to address social, behavioral, and environmental factors that influence health in the community (p. 39).
• A hospital facility must solicit input from three sources 1) one state, local, tribal or regional governmental health department/agency with knowledge of the community, 2) members of medically underserved, low-income and minority populations in the community and 3) written comments received on the hospital’s most recent CHNA and implementation strategy, representing the broad interests of the community. However, if the hospital facility claims they solicited but were unable to obtain input from one of these categories, they are expected to document that they indeed made reasonable efforts to obtain input (p. 42).

Documentation of a CHNA

• A hospital facility may rely on data collected or created by others in conducting its CHNA and in some cases may simply cite the data sources rather than describe the “methods of collecting” the data (p. 55).

Collaboration on CHNA Reports

• A joint CHNA report must contain all of the same basic information that separate CHNA reports contain but should differ to reflect any material differences in the communities served by those hospital facilities (p. 56).

Making the CHNA Report Widely Available to the Public

• Neither the proposed regulations nor the final regulations provide an interpretation of the term “widely available”, however, the final regulations still require all hospital facilities to conspicuously post their CHNA to their websites. Hospital facilities are not required to publicly display paper copies of the CHNA; they need only make them available to the public upon request (p. 63).

Implementation Strategy

• The proposed regulations required that the implementation strategy describe a plan and evaluate the effectiveness of that plan. However, the final regulations removed this statement and instead require that the CHNA report include an evaluation of the effects of the actions that the hospital facility has taken to address health needs since its immediately preceding CHNA (p. 67).
• Hospital facilities were provided with an additional four and a half months to adopt the implementation strategy. This date now matches the due date (without extensions) of the Federal Form 990 filed for the taxable year in which the CHNA is conducted (p. 70).

New Hospital Facilities

• A new hospital organization must meet the CHNA requirements by the last day of the second taxable year beginning after the later of the effective date of the determination letter or ruling recognizing the organization as described in IRC §501(c)(3) or the first date a facility operated by the organization was licensed, registered, or similarly recognized by its state as a hospital (p. 73-74).

Acquired Hospital Facilities

• In the case of a merger that results in the liquidation of one organization and survival of another, the hospital facilities formerly operated by the liquidated organization will be considered “acquired,” meaning they will have until the last day of the second taxable year beginning after the date of the merger to meet the CHNA requirements. Thus, the final regulations treat mergers similar to acquisitions (p. 73).

Financial Assistance Policy and Emergency Medical Care Policy – IRC §501(r)(4)

Financial Assistance Policy

• The final regulations require a hospital facility’s FAP to list the providers, other than the hospital facility itself, who deliver emergency or other medically necessary care in the hospital facility. The hospital facility must also specify which providers are covered by the hospital facility’s FAP, and which are not (p. 76).
• The hospital facility’s FAP is required to describe discounts “available under the FAP” rather than all discounts offered by the hospital facility. The final regulations add “available under the FAP” after “all discounts” to clarify that discounts may be offered outside of the FAP. The discounts offered outside of the FAP are not subject to amounts generally billed (“AGB”) limitations. Additionally, discounts that are not specified in the FAP will not be considered community benefit activities for purposes of the Affordable Care Act and are not reportable on Form 990, Schedule H (p. 78-79).

Method for Applying for Financial Assistance

• A hospital facility may grant financial assistance based on evidence other than that described in a FAP or FAP application form or based on an attestation by the applicant, even if the FAP or FAP application form does not describe such evidence or attestations (p. 80).
• A hospital facility is required to describe in its FAP any information obtained from sources other than individuals seeking assistance that the hospital facility uses, and whether and under what circumstances it uses prior FAP-eligibility determinations (p. 82).

Actions That May Be Taken in the Event of Nonpayment

• An authorized body of the hospital facility must adopt the hospital facility’s FAP and, if applicable, billing and collections policy in order for it to be considered “established” (p. 85).
• The final regulations eliminated the requirement that the FAP actually list the measures taken to “widely publicize” the FAP, and instead hospital facilities are only required to actually implement those measures in the community (p. 87).

Making Paper Copies Available Upon Request

• The final regulations specify that “public locations” in a hospital facility where paper copies must be provided upon request include, at a minimum, the emergency room (if any) and the admissions areas (p. 87).

Notifying and Informing Hospital Facility Patients

• The final regulations amend certain requirements in regards to certain notifications necessary for hospital facility patients. These amendments include the following:
  • Rather than require a full plain language summary with billing statements, the final regulations require only that a hospital facility’s billing statement include a conspicuous written notice that notifies and informs the recipient about the availability of financial assistance under the hospital facility’s FAP and includes the telephone number of the hospital facility office or department that can provide information about the FAP and FAP application process and the direct website address (or URL) where the copies of the FAP documents may be obtained (p. 91).
  • The regulations require facilities to make “reasonable efforts” to determine FAP eligibility before engaging in ECA’s.
• The requirement to provide a plain language summary of the FAP as part of discharge or intake process is now included in IRC §501(r)(4) rather than IRC §501(r)(6) of the final regulations.

Notifying and Informing the Broader Community

• The plain language summary must include the contact information of a source of assistance with FAP applications, whether this source be the hospital facility or a different organization. It must include the contact information of either the hospital facility office or department that can provide assistance with (rather than just “information about”) the FAP application process or, if the hospital facility does not provide assistance with the FAP application process, at least one nonprofit organization or government agency that the hospital facility has identified as an available source of such assistance (p. 95).

Translating the FAP Documents

• A hospital facility must translate its full FAP into the primary language that constitutes more than 5% of the members of the community served by the hospital facility or 1,000 limited English proficiency (“LEP”) individuals, whichever is less. This is consistent with HHS Guidance safe harbor thresholds (p. 99).
• If there are fewer than 50 persons in a language group that reaches the 5-percent trigger, the recipient of federal financial assistance does not have to translate vital written materials to satisfy the safe harbor but rather may provide written notice in the primary language of the LEP language group of the right to receive competent oral interpretation of those written materials, free of cost (p. 98).
• A hospital facility may use any reasonable method to determine the LEP populations (p. 100).

Establishing FAP and Other Policies

• Multiple hospital facilities may have identical FAPs, billing and collections policies, and/or emergency medical care policies established for them (or even share one joint policy document); provided that the information in the policy or policies is accurate for all such facilities and any joint policy clearly states that it is applicable to each facility (p. 104).

Limitation on Charges – IRC §501(r)(5)

Amounts Generally Billed (“AGB”)

• The final regulations allow the Treasury Department and the IRS to provide for additional methods to determine AGB in the future due to the fact that Medicare and insurer reimbursement methodologies evolve frequently over time and that additional ways to determine AGB may be identified in the future (p. 106).
• The final regulations allow hospital facilities to base AGB on Medicaid rates, either alone or in combination with Medicare (or, under the look-back method, together with Medicare and all private health insurers); at the hospital facilities discretion (p. 108).
• The final regulations clarify that for purposes of the IRC §501(r)(5) limitation on charges, a FAP-eligible individual is considered to be “charged” only the amount he or she is personally responsible for paying, after all deductions and discounts (including discounts available under the FAP) have been applied and less any amounts reimbursed by insurers (p.109).
• The final regulations provide that a hospital facility may change the method it uses to determine AGB at any time. However, because the final regulations under IRC §501(r)(4) require a hospital facility’s FAP to describe the method used to determine AGB, a hospital facility must update its FAP to describe a new method prior to implementing any changes (p. 110).
• The final regulations allow hospital facilities to define the term “medically necessary care” for purposes of their FAPs and the AGB limitation in recognition of the fact that healthcare providers and health insurers may have reasonable differences in opinion on whether some healthcare services are medically necessary in particular circumstances. In defining medically necessary care for purposes of their FAPs and the AGB limitation, the final regulations clarify that hospital facilities may (but are not required to) use the Medicaid definition used in the hospital facility’s state, other definitions provided by state law, or a definition that refers to the generally accepted standards of medicine in the community or an examining physician’s determination (p. 111).

Look-Back Method

• To eliminate the uncertainty created by the phrase “paid in full,” the final regulations provide that, when calculating its AGB percentage(s) under the look-back method, a hospital facility should include in the numerator the full amount of all of the hospital facility’s claims for emergency and other medically necessary care that have been “allowed” (rather than “paid”) by health insurers during the prior 12-month period. For these purposes, the full amount allowed by a health insurer should include both the amount to be reimbursed by the insurer and the amount (if any) the individual is personally responsible for paying (in the form of co-payments, co-insurance, or deductibles), regardless of whether and when the individual actually pays all or any of his or her portion and disregarding any discounts applied to the individual’s portion (p. 113).
• The final regulations state that, if the amount a health insurer will allow for a claim has not been finally determined as of the last day of the 12-month period used to calculate the AGB percentage(s), a hospital facility should exclude the amount of the claim from that calculation and include it in the subsequent 12-month period during which the amount allowed is finally determined (p. 114).
• A hospital facility may include in the calculation of its AGB percentage(s) claims for all medical care allowed during the prior 12-month period rather than just the claims allowed for emergency and other medically necessary care (p. 114).
• The final regulations do not allow for a system-wide AGB, however, if hospital facilities that are covered under the same Medicare provider agreement (the same CMS Certification Number), they are permitted to calculate one AGB to use for all of its hospital facilities (p. 118).
• A hospital facility is now allowed to use up to 120 days, rather than 45 as reflected in the proposed regulations, after the end of the 12-month period used in calculating the AGB percentage(s) to begin applying its new AGB percentage(s) (p. 118).

Prospective Method

• The final regulations do not permit hospital facilities to determine AGB using the prospective method based on the private health insurers with the lowest rate or the three private health insurers with three lowest rates as they believe that excluding Medicare and basing AGB on the private health insurer with the lowest rate would not accurately capture AGB by facilities (p. 121).
• The final regulations allow hospital facilities to determine AGB under the prospective method based on Medicaid, either alone or in combination with Medicare fee-for service (p. 121).

Gross Charges

• The final regulations clarify that the AGB limitation applies only to charges for care covered under a hospital facility’s FAP, which may, but need not, cover care that is neither emergency nor medically necessary care (p. 122).

Billing and Collection – IRC §501(r)(6)

Billing and Collection – IRC §501(r)(6)

• The final regulations retain the provision holding a hospital facility accountable for extraordinary collection actions (“ECAs”) utilized by third parties collecting debt on its behalf or to which it sells debt. However, if a hospital facility acts reasonably and in good faith to supervise and enforce IRC §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 egregious and could be excused if the hospital facility corrects and discloses the failure (p. 127).

Extraordinary Collection Actions

• The final regulations provide that the sale of an individual’s debt is not an ECA if, prior to the sale, the hospital facility enters into a legally binding written agreement with the purchaser of the debt containing four conditions. The four conditions are as follows:
  • The purchaser must agree not to engage in any ECAs to obtain payment of the debt;
  • The purchaser must agree not to charge interest on the debt in excess of the statutory rates;
  • The debt must be returnable to or recallable by the hospital facility upon a determination by the hospital facility or the purchaser that the individual is FAP-eligible; and
  • If the individual is determined to be FAP-eligible and the debt is not returned to or recalled by the hospital facility, the purchaser must adhere to procedures specified in the agreement that ensure that the individual does not pay, and has no obligation to pay, the purchaser and the hospital facility together more than he or she is personally responsible for paying as a FAP-eligible individual (p. 133).

Reasonable Efforts

• The final regulations provide that the applicable 120- and 240-day periods start on the date that the first “post-discharge” billing statement is provided, rather than just the first billing statement (p. 138).
• An individual’s application period will remain open until at least 30 days after the hospital facility provides the individual with a written notice that sets a deadline after which ECAs may be initiated (p. 143).
• If a hospital facility aggregates an individual’s outstanding bills for multiple episodes of care before initiating one or more ECAs to obtain payment for those bills, it may not initiate the ECA(s) until 120 days after it provided the first post-discharge bill for the most recent episode of care included in the aggregation (p. 144).

Notification Requirements

• The notification component of reasonable efforts under the final regulations requires a hospital facility to provide a plain language summary of the FAP to an individual only if and when it sends that individual the written notice about potential ECAs (p. 147).
• The final regulations replace the oral notification requirement in the proposed regulations with a requirement that a hospital facility make a reasonable effort to orally notify an individual about the hospital facility’s FAP and about how the individual may obtain assistance with the FAP application process at least 30 days before the initiation of ECAs against the individual (p. 149).
• The final regulations amend the requirement regarding the written notice about ECAs to require that the notice state the ECA(s) that the hospital facility (or other authorized party) actually “intends to take,” rather than requiring a description of every ECA a hospital “may” take in the future (p. 150).

Incomplete FAP Applications

• The final regulations provide that a hospital facility must suspend ECAs against the individual until either the individual completes the FAP application or the hospital facility determines whether the individual is FAP eligible or until the individual has failed to respond to requests for additional information and/or documentation within a “reasonable period of time” (p. 153).

Denying Care Based on Past Non-Payment

• In certain instances, the final regulations also provide an exception to the general rule that reasonable efforts to determine FAP-eligibility ordinarily will require a hospital to wait at least 120 days after the first post-discharge bill before initiating ECAs. Under the exception, a hospital facility may defer or deny (or require payment before providing) medically necessary care because of an individual’s nonpayment of one or more bills for previously provided care even though such deferral or denial (or payment requirement) is within 120 days of the first post-discharge bill for the previously provided care (p. 168).

Partnerships and Joint Ventures

Operating a Hospital Facility

• The final regulations delete the specific reference to joint ventures and limited liability companies when referring to operating a hospital facility. The final regulations clarify that an organization is considered to own a capital or profits interest in an entity treated as a partnership for federal tax purposes if it owns such an interest directly or indirectly through one or more lower-tier entities that are treated as partnerships for federal tax purposes. Additionally, the final regulations also provide that a hospital organization is not required to meet the requirements of IRC §501(r) respect to any activities that constitute an unrelated trade or business (p. 21).
• The final regulations have also included a new term, “substantially-related entity”, which refers to an entity that is treated as a partnership for federal tax purposes in which a hospital organization owns a capital or profits interest and that provides, in a hospital facility operated by the hospital organization, emergency or other medically necessary care that is not an unrelated trade or business with respect to the hospital organization (p. 24).

Conclusion

The final regulations provide additional guidance regarding factors that will be considered in determining whether an omission or error is minor and either inadvertent or due to reasonable cause. Additionally, the regulations include many examples to help assist hospital facilities in implementing and complying with the provisions included in the final regulations.

All tax-exempt hospital facilities should perform an IRC §501(r) readiness assessment and implement changes, if necessary, prior to the effective date for full compliance in conjunction with their respective year end.

The final regulations state that, “For taxable years beginning on or before December 29, 2015, the final regulations provide that a hospital facility may rely on a reasonable, good faith interpretation of section 501(r). A hospital facility will be deemed to have operated in accordance with a reasonable, good faith interpretation of section 501(r) if it has complied with the provisions of the 2012 and/or 2013 proposed regulations of these final regulations”.

Additionally, for prior Withum Weekly Pulse editions relating to IRC §501(r), please refer to the Healthcare Services section of our website for the following previously issued tax tips:

A complete copy of the final regulations can be accessed at https://federalregister.gov/a/2014-30525.

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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.