Industry Insights

AHA & HFMA Submit Comments on Section 501(r)

November 2012

Recently, both the American Hospital Association (AHA) and the Healthcare Financial Management Association (HFMA) sent comment letters to the IRS and the Office of Management and Budget (OMB) regarding the proposed regulations related to Internal Revenue Code (IRC) Section 501(r). Concern was expressed over the level of detail and resulting potential cost of compliance with the proposed regulations, lack of flexibility for hospitals in meeting the requirements of the statute and potential duplication of effort as hospitals will be forced to implement a second change in policies once the proposed regulations are finalized.

The proposed regulations of Sec. 501(r) are highly detailed, and the AHA expressed concern that the regulations, as currently drafted, will reduce hospitals’ current flexibility to use “the most efficient and effective means to meet the requirements of Section 501(r) in their communities.” The AHA is especially concerned the approach taken by the Department of Treasury in developing the proposed regulations sends a presumptive message to the public that hospitals would not provide adequate financial assistance and information about available assistance or engage in efforts to qualify patients for financial assistance without the direction of the Treasury. Further, the burden of time and cost imposed on hospitals under the proposed regulations will greatly increase as hospitals strive to meet the requirements of the proposed regulations. Of particular concern is the potential need to shift resources away from patient care to comply with these regulations.

AHA believes the time commitment and expense associated with compliance is well outside Treasury estimates:
“We believe that the annual commitment of time required to comply with the (cost of implementation) contained in the proposed regulations will vastly exceed the 11.5 hours estimated. Input from AHA members indicates that hospitals will be required to spend anywhere from 250 hours annually to more than 2,000 hours annually to comply with the proposed regulations. These estimates appear entirely commensurate with the procedures detailed in the proposed regulations.”

HFMA’s letter noted similar concerns, but also commented on an alternative method to reduce the burden of complying with the proposed collection requirements:

“Making this determination [if a patient is unable to pay] is an expensive effort. If patients refuse to apply for financial assistance and do not pay for the services rendered, hospitals must assume that they have financial resources available.

Given these considerations, we request that the Treasury make income verification (adjusted gross income) as reported by IRS more readily available to hospital organizations through an automated, online process, such as an EDI 270/271 transaction, to assist hospital organizations in determining patient eligibility for financial assistance. Hospital organizations can get this information today by faxing a Form 4506-T to the IRS or calling for verification. Streamlining that process for health care organizations through an automated process would both minimize the burdens of determining eligibility and provide administrative simplification, one of the original goals of PPACA.”

The AHA suggests that instead of prescribing a uniform approach all hospitals must meet, Treasury should “allow hospitals flexibility for how they meet the requirements with full disclosure of the policies and procedures each hospital will use to carry out the law. This would enable hospitals to continue implementing efficient and effective methods to meet the new tax-exemption requirements, while ensuring that individuals have the information needed to obtain financial assistance."

The proposed changes related to how tax-exempt hospitals address the issue of financial assistance are explored in depth in both letters, with the AHA noting the following:

“The practical effect of the definition of ‘FAP-eligible individual’ and the limitation on waivers is that every patient would have to submit a FAP application.   ...  To ensure compliance, hospitals would be effectively required to presume every individual is eligible for financial assistance until proven otherwise via the FAP application and the ‘reasonable efforts’ process. That is an unnecessarily time-consuming and costly requirement. To save hospitals the time and cost of overhauling current systems in order to engage in the FAP application process with every patient, we urge the Treasury to revise the definition of a ‘FAP-eligible individual’ as well as the restriction on waivers."

The content of the proposed regulations is not the only point of concern. The AHA raises two significant issues it believes Treasury should address before the Sec. 501(r) rules are finalized. The first relates to the timing of the regulations taking effect in relation to the implementation of two other provisions of the ACA affecting hospitals:  the expansion of coverage for uninsured individuals through Medicaid and Health Insurance Exchanges. The AHA recommends the proposed regulations of 501(r) not take effect until the January 1, 2014, deadline for the non-501(r) provisions of the ACA to be implemented. This would allow hospitals to postpone their compliance with 501(r) until they also have received information regarding what changes to policies, procedures and systems would be required under these additional ACA provisions. AHA also recommended Treasury issue a notice advising hospitals that compliance with 501(r) would continue to be judged based on good faith interpretations of the provisions of the statute until after January 1, 2014.

In addition, AHA questioned the lack of enforcement guidance for failure to comply with the new law. The AHA notes “there is no guidance on how the IRS will use its enforcement authority to address failures to comply with the law. Without that guidance, hospitals are caught between the statute’s prescription that a hospital’s 501(c)(3) status is conditioned on its compliance with Sec. 501(r), and the Treasury’s approach to regulations, whereby every instruction on what must be done, and every detail on how it must be done, is a potential trip-wire for a finding of noncompliance.” In addition, large hospital systems run the risk that a single facility’s noncompliance could affect the entire system. For these reasons, the AHA recommends that final Sec. 501(r) regulations not be issued until meaningful enforcement guidance has been put in place. AHA recommends Treasury issue guidance that includes:

  • A transition period for hospitals to operationalize requirements
  • A “substantiality” standard for determining whether a violation has occurred
  • A reasonable “cure period” to attain compliance
  • An intermediate sanctions framework to match penalties with the significance of the violation and to reduce the likelihood of loss of tax-exempt status

The AHA also recognizes the application of the proposed Sec. 501(r) regulations to government hospitals that have 501(c)(3) status will be a major shift in how these dual-status organizations are treated under the tax code. The AHA urges a public hearing on how the requirements might be adapted for governmental 501(c)(3) hospitals allowing for an exchange between governmental hospitals and Treasury that would discuss the implications of applying all of the requirements to government hospitals and recommends these hospitals be allowed to continue with their current policies in the interim.

All of these points illustrate the complexity of implementing the far-reaching regulations of Sec. 501(r) and the impact they will have on hospitals and administrators—as well as patient care—as resources are diverted away from the mission and objective of treating patients and toward dealing with administrative issues and complex regulations.

If you have additional questions, contact your BKD advisor.