Industry Insights

IRS Issues Final Regulations on Limitations on Charges

February 2015
Author:  Kevin Ensminger

Kevin Ensminger



1201 Walnut Street, Suite 1700
Kansas City, MO 64106-2246

Kansas City

Treasury Regulation Section 1.501(r)5 describes the limitations on what 501(c)(3) hospital facilities can charge patients receiving emergency and other medical care who are eligible under the hospital’s financial assistance policy (FAP). Amounts generally billed (AGB) can be determined using two specific methods as outlined in the proposed regulations:  the look-back method and the prospective Medicare or Medicaid method. The IRS released final regulations on December 29, 2014, addressing the limitations on charges for charitable hospitals. Here are some of the key differences between the final regulations and prior IRS issuances:

  • The final regulations retain the look-back and prospective methods in calculating AGB, but the IRS reserved the ability to provide additional AGB determination methods in future published guidance.
  • A hospital facility now may change its method of determining AGB at any point during the year, as long as it updates its FAP to reflect the change before implementation.
  • A hospital facility may use Medicaid rates—alone or in combination with other rates—in calculating AGB (instead of only Medicare and private insurance rate).
  • The term “Medicaid” includes medical assistance provided through a contract between the state and a Medicaid managed care organization or a prepaid inpatient health plan.
  • A hospital facility determining AGB under the look-back method may use claims allowed for all medical care during a prior 12-month period rather than only those allowed for emergency and other medically necessary care.
  • Final regulations provide that, when a hospital facility calculates its AGB percentage under the look-back method, the hospital facility should include in the numerator the full amount of all of the hospital facility’s claims for emergency or other medically necessary care that have been “allowed” (rather than “paid”) by health insurers during the prior 12-month period. 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 when the individual actually pays any or all of his or her portion and disregarding any discounts applied to the individual’s portion.
  • Hospital facilities are required to begin applying the AGB percentage by the 120th day after the end of the 12-month period, instead of the 45th day.
  • 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 have been applied and less amounts reimbursed by insurers. In the case of a FAP-eligible individual who has health insurance coverage, a hospital facility will meet the requirements if the FAP-eligible individual is not personally responsible for paying more than AGB for care after all reimbursements by the health insurer have been applied, even if the total amount paid by the FAP-eligible individual and his or her health insurer together exceeds AGB.
  • Hospital facilities may define the term “medically necessary care” for purposes of determining their FAPs and AGB limitations. Hospital facilities can use a definition of medically necessary care applicable under the laws of the state in which it is licensed, including the Medicaid definition, or a definition that refers to the generally accepted standards of medicine in the community or to an examining physician’s determination.
  • Under the safe harbor, hospital facilities will be deemed to meet the requirements even if they charge more than AGB for emergency or other medically necessary care provided to a FAP-eligible individual if all of the following conditions are met:
    • The charge in excess of AGB was not made or requested as a pre-condition of providing medically necessary care to the FAP-eligible individual, i.e., an upfront payment that a hospital facility requires before providing medically necessary care.
    • At the time of the charge, the FAP-eligible individual has not submitted a complete FAP application to the hospital facility to obtain financial assistance for the care or has not otherwise been determined by the hospital facility to be FAP-eligible for the care.
    • If the individual subsequently submits a complete FAP application and is determined to be FAP-eligible for the care, the hospital facility refunds any amount the individual has paid for the care that exceeds the amount he or she is determined to be personally responsible for paying as a FAP-eligible individual, unless such amount is less than $5.
  • Hospital facilities are required to remedy overcharging when an individual completes a FAP application and is deemed eligible by refunding any excess amounts paid by the individual, if the excess is $5 or more.

To learn more, contact your BKD advisor.

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