Complying with 501(r)


The IRS continues to review hospitals for compliance with Internal Revenue Code (IRC) Section 501(r) as required by the Patient Protection and Affordable Care Act (ACA).  According to the September 28, 2016, Tax Exempt and Government Entities FY 2017 Work Plan, the IRS completed 692 reviews of hospitals, and 166 were referred for field examination for the 2016 fiscal year.  Referrals were made for these issues:

  • Lack of a community health needs assessment (CHNA) within IRC §501(r)(3)
  • No financial assistance and/or emergency medical care policies within IRC §501(r)(4)
  • Billing and collection requirements within IRC §501(r)(6)

Many hospital organizations recently completed their second CHNA, as required by ACA.  Hospitals should note that not only does the current CHNA need to be posted on a website, but it must remain posted until the hospital facility has made two subsequent CHNA reports widely available.  Hospitals should verify prior CHNA reports haven’t been removed from the hospital’s website.

Although many hospital organizations updated their financial assistance policy (FAP) in the past two years to comply with final regulations under §501(r)(4), certain FAP components must be regularly updated:

  • A hospital using the look-back method must calculate its amounts generally billed (AGB) percentage at least annually
  • Provider listings indicating which physicians are and aren’t covered in a hospital’s FAP must be updated at least quarterly for new information, errors and omissions to be considered reasonable steps to ensure the list is accurate and avoid failures in meeting the §501(r) requirements, as clarified with IRS Notice 2015-46

Hospitals should continue to reassess their FAP policy to make sure it addresses changes in patient mix, hospital services, how those services are delivered and changes with providers.

Planning Tip

While hospitals update provider listings and AGB calculations, they may consider whether to add additional clarification regarding which accounts may be eligible for financial assistance.  This clarification may help hospitals avoid unintended 501(r) consequences.

  • Are there specific services ineligible for financial assistance, e.g., cosmetic surgery, surgical weight-loss procedures, fertility treatment or other elective procedures?
  • Do you require patients to fully cooperate with providing financial information and other documents as part of the application process for financial assistance?
  • Are accounts with zero balances eligible for financial assistance?
  • How does your FAP apply to high-deductible health plans?

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