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Update: Financial Assistance Policies for Nonprofit Hospitals that Seek Federal Tax-Exempt Status

Posted on July 9, 2012 | No Comments

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Key Developments
Implementation Briefs

By Sara Rosenbaum


On June 22, 2012, the Internal Revenue Service and Treasury Department released for public view a notice of proposed rulemaking (NPRM) regarding the obligations of nonprofit hospitals seeking federal tax-exempt status. The NPRM deals with that portion of the ACA related to the obligation of nonprofit hospitals to maintain financial assistance and emergency medical care policies, as well as certain billing and collection policies, as a condition of federal tax exemption. The NPRM comment period will be for 90 days following Federal Register publication. The agencies have identified certain aspects of the NPRM on which they explicitly seek comment, specifically, on information collection requirements and agency assumptions regarding the burden of information collection in relation to its utility.


The ACA expands the duties of nonprofit hospitals that seek federal tax-exempt status. Hospital organizations (including each hospital facility within a multi-facility organization) must separately satisfy these expanded requirements. Under these expanded duties, hospitals must maintain certain practices:

  • First, hospitals must conduct a community health needs assessment (CHNA) once every three years.[1] In 2011 the agencies issued guidance on hospitals’ CHNA obligations but have not issued formal proposed rules, which are expected later in 2012.
  • Second, hospitals must establish a written financial assistance policy (FAP) and a written policy related to emergency care.[2] The FAP must include (1) financial assistance eligibility criteria and whether the assistance includes free or discounted care; (2) the basis for calculating patient obligations; (3) the method for applying for financial assistance; (4) in the case of an organization without a separate billings and collections policy, the actions that the hospital may take in the event of nonpayment; and (5) measures to widely publicize the FAP within the community served by the hospital. A hospital’s emergency care policy must require the hospital to provide care for emergency medical conditions, within the meaning of the Emergency Medical Treatment and Labor Act (EMTALA) without discrimination.
  • Third, hospitals must limit their charges for emergency or other medically necessary care for individuals eligible for financial assistance to not more than the amounts generally billed (AGB) to persons who are insured for such care.[3]
  • Fourth, hospitals must make reasonable efforts to determine whether individuals are eligible under their FAPs before engaging in extraordinary collection efforts.[4]

The NPRM deals with the second, third, and fourth matters addressed by the ACA, by defining the elements and processes that must be included in hospitals’ FAPs, explaining how hospitals will be expected to demonstrate compliance with EMTALA, interpreting and applying the law’s new limitations on hospital charges, and defining what constitutes “extraordinary” in terms of the collection actions that cannot be undertaken before hospitals assess patient eligibility for financial assistance.

Elements of the NPRM

Written financial assistance and emergency medical care policies (FAPs) (proposed 26 C.F.R. §501(r)-4 and (5))

In order to satisfy the law, hospitals’ FAPs would be required to apply to “all emergency and other medically necessary care” provided by the hospital. The FAP must include (i) eligibility criteria for financial assistance and whether the assistance includes free or discounted care; (ii) the basis for calculating the amount a patient will be charged; (iii) the method for applying for assistance; (iv) for hospitals that do not have separate billing and collections policies, the actions that they will take in the event of nonpayment; and (v) measures to widely publicize the policy.

The agencies emphasize that the law establishes no particular eligibility criteria and instead requires only that hospitals specify their criteria. The agencies note that they are “considering” the possibility of linking hospitals’ FAP obligations to their CHNA obligations, meaning that the design of the FAP would be expected to be responsive to the needs identified in a hospital’s most recent CHNA.[5] The agencies also emphasize that once an individual is determined eligible for financial assistance, a hospital is limited to billing the individual only the AGB (i.e., the amount generally billed the insurer).

The proposed regulation contains no specifications regarding the application process (i.e., whether the application must be in writing; whether an application prior to the receipt of care must be allowed; whether an application must be permitted before any bill is generated; whether assistance will be provided in completing the application; whether the individual must be given a copy of the application). Instead, the FAP must specify the financial assistance that is available, including both discounts and free care, and must specify “all of the eligibility criteria that an individual must satisfy to receive . . . such discount, free, care, or other level of assistance.”[6]

In setting eligibility criteria and the basis for calculating the amounts that can be charged to eligible patients, the NPRM provides that the FAP must specify what types of financial assistance that will be available to eligible patients, how an application is to be made,[7] and the eligibility criteria that must be satisfied for whatever assistance is made available. In so doing, the NPRM implies, but does not explicitly require, a written application form, but the rule does specify that a hospital cannot deny assistance “based on an applicant’s failure to provide information or documentation that the hospital facility’s FAP or FAP application form does not require an individual to submit as part of an application.”[8]

The FAP also must explain how the hospital calculates the AGB, using one of two permissible methodologies allowed under the NPRM (either a look-back methodology that calculates the AGB in relation to what the hospital was paid for such care by insurers over the past year, or a methodology that uses Medicare payments or Medicare payments in combination with insurance payments).[9] The NPRM does not specify that charges for FAP-eligible persons must be limited to the lowest charge and does not discuss the role, if any, that Medicaid payments (which generally are far lower) play in calculating the AGB.

The NPRM also specifies that the FAP must also make clear that once a patient is determined eligible for financial assistance, the hospital is precluded from charging more than the AGB.[10]

The NPRM also must specify that the FAP also must specify the actions (including “extraordinary” actions) that the hospital may take in the event of nonpayment, and the “process and time frames the hospital facility (or other authorized party) uses in taking [extraordinary] collection actions, including . . . the reasonable efforts it will make to determine whether an individual is FAP-eligible before engaging in any extraordinary collection actions.” The hospital’s FAP also must identify “the office. . . or other body with the final authority or responsibility for determining that the hospital . . . has made reasonable efforts to determine whether an individual is FAP eligible and may therefore engage in extraordinary collection actions.”[11]

In sum, the NPRM allows hospitals considerable discretion in fashioning their FAPs while barring the use of extraordinary collection actions, as defined in the rule, prior to making a reasonable effort to determine whether the patient may be FAP eligible. As a general matter, the NPRM extensively addresses what is meant by “widely available” in terms of dissemination of an FAP; its requirements focus on broad dissemination of information regarding the existence of an FAP (e.g., websites and postings), as well as an explanation that the concept of wide availability means in availability in manner that can reach the public, including members of the community most likely to need financial assistance.[12]

Furthermore, the NPRM requires that hospitals provide information about their FAP during a “notification period”, which is defined as beginning on the first day that care is provided and ending on the 120th day after the hospital facility provides the notification with the first billing statement for care.[13] Thus, the rule allows hospitals to bill at their full charge rates prior to applying their FAPs; however, the first bill must be accompanied by the FAP, which in turn must explain not only the FAP that is available and the process of applying, but also the hospital’s obligation to adjust the bill to the allowed AGB in the event that the individual is found eligible. A hospital is considered to have made reasonable efforts to notify individuals of its FAP if the hospital “[d]istributes a plain language summary of the FAP and offers a FAP application . . . before discharge…”[14] The hospital also must inform the individual about the FAP in “all oral communications with the individual regarding the amount due for the care” that has been furnished during the notification period and provides “at least one written notice” about the FAP prior to the end of the hospital’s deadline for completing an application (which may be the end of the notification period or another period (up to 30 days following the written notice).[15]

If no application is forthcoming during the remainder of the application period (i.e., the time period between the first day of care and the 120th day following the first billing statement with its notice), hospitals may proceed with an extraordinary collection action (defined below).

With respect to hospitals’ obligation to establish an emergency care policy, the NPRM requires that a hospital “establish a written policy that requires the hospital facility to provide, without discrimination, care for emergency medical conditions to individuals regardless of whether they are FAP eligible” (emphasis added).[16] The rule further prohibits a hospital “from engaging in actions that discourage individuals from seeking emergency medical care, such as by demanding that emergency department patients pay before receiving treatment for emergency medical conditions or by permitting debt collection activities in the emergency department or in other areas of the hospital facility where such activities could interfere with the provision, without discrimination, of emergency medical care.”[17] A hospital’s policy is deemed to comply with the NPRM if it requires “the hospital facility to provide the care for emergency medical conditions that the hospital facility is required to provide under [HHS EMTALA regulations].”[18]

The NPRM provides that the FAP is not considered established unless adopted by the hospital’s authorized body and “implemented.”[19]

Extraordinary collection efforts (26 C.F.R. §1.501(r)-6)

The NPRM provides that hospitals are not considered compliant with the law if they undertake extraordinary collection actions (ECAs) “before the hospital. . . has made reasonable efforts to determine whether the individual is eligible for assistance under its. . . FAP.[20] An ECA against the individual includes ECAs against “any other individual who has accepted or is required to accept responsibility for the individual’s hospital bills.”[21] A hospital is deemed to have engaged in an ECA if “any purchaser of the individual’s debt or any debt collection agency or other party to which the hospital facility has referred the individual’s debt has engaged in an ECA against the individual.”[22]

An ECA is defined as “actions taken by a hospital . . . that require a legal or judicial process or involve selling an individual’s debt to another party or reporting adverse information about the individual to consumer credit reporting agencies or credit bureaus.”[23] Legal and judicial processes include liens, foreclosures, attachments or seizures of property or bank accounts, commencement of a civil action, arrest, subjecting an individual to a writ of body attachment, and garnishment.[24]

In the case of individuals who apply within the application period, a hospital is considered to have acted reasonably only if it suspends ECAs, makes and documents its FAP determination, provides a written notification, corrects its billing statement to the AGB amount along with an explanation of how much the individual owes, and refunds any excess payments that may have been made.[25] The hospital also must take “all reasonably available measures to reverse any ECA (with the exception of a sale of debt)”[26] including vacating any judgment, lifting a lien or levy, or removing adverse information from any credit report.[27]

The rule further specifies that a hospital’s efforts to determine FAP eligibility will not be considered reasonable if the hospital bases a determination on information that it “has reason to believe is unreliable or incorrect or on information obtained from the individual under duress or through the use of coercive practices.”[28]

Finally, the NPRM provides that the reasonable effort standard also requires a hospital to suspend an ECA while an application is pending or in the completion stages. The hospital may resume ECAs once it has made a determination of ineligibility or the individual fails to complete the application.[29] Waivers of the right to apply for assistance do not allow the hospital to be treated as having made a reasonable effort to apply its FAP and to proceed with an ECA.

The NPRM does not address the question of what process is due in cases in which an individual is found ineligible for assistance or is erroneously found to have filed an incomplete or untimely application, or in any case in which the FAP decision is adverse to the individual. Nor does the NPRM address the question of private remedies in cases in which a hospital fails to adhere to the reasonable conduct standards outlined in the rule and/or attempts an erroneous ECA.

Implementation Issues

Time limits. Hospitals are given the power to establish a reasonable time limit for the FAP process, after which ECAs are permissible. Should the rule be modified to allow the individual to apply for assistance at any time following initiation of the ECA, at least in certain hardship instances?

Fair process. The NPRM does not provide for any process for appealing an adverse determination or the hospital’s failure to make a FAP determination. Should an appeals process be added to the rule?

Emergency and other medically necessary care. The FAP applies under the NPRM to all emergency and “medically necessary care.” How is the determination of what constitutes medically necessary care to be made? On what evidence will such a determination rest? Is this determination reviewable?

CHNA. The agencies are considering linking the FAP development phase to the CHNA process, thereby making FAP policy development effectively part of the CHNA process. Since FAPs effectively commit the hospital to use resources to underwrite the cost of care and have implications for other potential community health needs, should the development of the FAP be considered part of the CHNA process?

[1] 26 U.S.C. §501(r)(3), as added by PPACA §9007.
[2] 26 U.S.C. §501(r)(4), as added by PPACA §9007.
[3] 26 U.S.C. §501(r)(5)(A), as added by PPACA §9007.
[4] 26 U.S.C. §501(r)(6), as added by PPACA §9007.
[5] Preamble, Public View version, p. 17.
[6] Proposed 1.501(r)-4(b)(2).
[7] Proposed 1.501(r)-4(b)(3).
[8] Id.
[9] Proposed 1.501(r)-5.
[10] Proposed 1.501(r)-4(b)(2).
[11] Proposed 1.501(r)-4(b)(4).
[12] Proposed 1.501(r)-4(b)(5).
[13] Proposed 1.501(r)-1(18).
[14] Proposed 1.501(r)-6(c).
[15] Id.
[16] Proposed 1.501(r)-4(c).
[17] Id.
[18] Id.
[19] Proposed 1.501(4)-4(d).
[20] Proposed 1.501(r)-6.
[21] Id.
[22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id.
26 U.S.C. §501(r)(3), as added by PPACA §9007.
26 U.S.C. §501(r)(4), as added by PPACA §9007.
26 U.S.C. §501(r)(5)(A), as added by PPACA §9007.
26 U.S.C. §501(r)(6), as added by PPACA §9007.
Preamble, Public View version, p. 17.
Proposed 1.501(r)-4(b)(2).
Proposed 1.501(r)-4(b)(3).
Proposed 1.501(r)-5.
Proposed 1.501(r)-4(b)(2).
Proposed 1.501(r)-4(b)(4)
Proposed 1.501(r)-4(b)(5).
Proposed 1.501(r)-1(18).
Proposed 1.501(r)-6(c).
Proposed 1.501(r)-4(c).
Proposed 1.501(4)-4(d).
Proposed 1.501(r)-6.

No Comments

Public comments are closed.

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