501(r) Final Regulations: Requirements for Hospitals

The Patient Protection and Affordable Care Act (ACA) introduced new obligations for nonprofit hospitals. Codified in Section 501(r) of the Internal Revenue Code, these regulations establish requirements that organizations operating one or more hospital facilities must meet to maintain their 501(c)(3) tax-exempt status. The law aims to ensure that charitable hospitals demonstrate a clear community benefit. These rules create a uniform standard for how these institutions must engage with their communities, provide financial assistance, and manage billing and collections to justify their tax exemption.

Community Health Needs Assessment Requirements

The 501(r) regulations require hospital facilities to conduct a Community Health Needs Assessment (CHNA) at least once every three years. This process mandates that a hospital define the community it serves and identify significant health needs within that population. The assessment must actively solicit and incorporate input from individuals with special knowledge of or expertise in public health. It also requires input from state, local, or regional governmental public health departments and from members of medically underserved, low-income, and minority populations in the community.

A detailed, written CHNA report must be formally adopted by an authorized body of the hospital facility. This report must be made widely available to the public, typically by posting it on the hospital’s website. The regulations specify the content of the report, which includes a description of the community served, the process and methods used, and a prioritized description of the significant health needs identified. The report must also describe the existing healthcare facilities and other resources within the community available to meet those needs.

Following the adoption of the CHNA report, the hospital organization is required to develop a corresponding implementation strategy. This written plan must address each of the significant health needs identified in the assessment. The strategy must detail what actions the hospital intends to take to meet a specific need and identify the anticipated impact of these actions. If the hospital decides not to address a particular health need, it must provide an explanation, such as a lack of financial resources or the presence of other facilities better suited to address the issue.

This implementation strategy must also be adopted by an authorized body of the hospital. The hospital reports its compliance with 501(r), including the CHNA process, on Schedule H, which is filed with its annual IRS Form 990 return. This process of assessment, reporting, and implementation ensures the hospital aligns its charitable activities with documented local health priorities.

Financial Assistance and Emergency Care Policies

The 501(r) regulations mandate the establishment of two distinct written policies: a Financial Assistance Policy (FAP) and an Emergency Medical Care Policy. The FAP outlines the hospital’s program for providing free or discounted care to eligible patients. It must specify the eligibility criteria for all available assistance, including the income levels used to determine who qualifies. The policy must also describe the basis for calculating the amounts charged to patients.

The policy must clearly explain the application process and provide information on how individuals can obtain a free copy of the FAP application form. The FAP must list the providers, both within the hospital and other entities delivering care at the facility, and specify which are covered by the hospital’s FAP. To ensure accessibility, hospitals must also create a plain language summary of the FAP, which provides a simplified, easy-to-understand overview of the policy for patients.

The Emergency Medical Care Policy must affirm that the hospital provides, without discrimination, care for emergency medical conditions to individuals regardless of their eligibility for financial assistance under the FAP. This policy reinforces the hospital’s obligation under the Emergency Medical Treatment and Labor Act (EMTALA). The policy must clarify how the hospital ensures that all individuals who present with a potential emergency medical condition are screened, stabilized, and treated appropriately.

Hospitals must make these policies widely available to the public. They must post the FAP, its application form, and the plain language summary on their websites. Physical copies must be available in public areas of the hospital, including the emergency room and admissions areas. The hospital must also make reasonable efforts to notify and inform members of the community about the FAP.

Limitations on Charges and Billing Practices

The regulations impose limitations on the amounts that tax-exempt hospitals can charge certain patients. A hospital cannot charge an individual who is eligible for assistance under its FAP more for emergency or other medically necessary care than the “Amounts Generally Billed” (AGB) to individuals who have insurance for such care.

To comply, a hospital must calculate its AGB using one of two methods permitted by the IRS. The “look-back” method involves calculating the AGB percentage based on the actual amounts the hospital has allowed for all private health insurers and Medicare for medical care provided during a prior 12-month period. The “prospective” method allows a hospital to use the billing and coding process to determine the amount it would expect to be paid by Medicare for the specific care.

Section 501(r) also establishes rules governing billing and collection practices. A hospital facility is prohibited from engaging in “Extraordinary Collection Actions” (ECAs) to collect a debt related to medical care until it has made reasonable efforts to determine whether the individual is eligible for financial assistance. ECAs include actions such as selling an individual’s debt to a third party, reporting adverse information to credit bureaus, or deferring or denying care based on a prior unpaid bill.

A hospital may not initiate ECAs until at least 120 days after it provides the individual with the first post-discharge billing statement for the care. During this period, the hospital must notify the individual about the FAP in written notices and oral communications. If an individual submits a complete FAP application during this notification period, the hospital must suspend any ECAs while it determines the patient’s eligibility.

Consequences of Non-Compliance

Failure to meet the requirements of Section 501(r) can have consequences for a hospital organization, as the IRS distinguishes between minor, inadvertent errors and more substantial, willful failures.

If a hospital facility fails to meet the CHNA requirements for any taxable year, the organization is subject to a $50,000 excise tax. This tax applies for each year the CHNA requirements are not met and is a direct financial consequence that does not immediately affect the hospital’s tax-exempt status.

Other failures can lead to the revocation of the 501(c)(3) tax-exempt status of the hospital facility if the IRS determines they are willful or egregious. A failure is considered willful if it is due to gross negligence, reckless disregard, or willful neglect. The loss of tax-exempt status affects federal income tax and potentially state and local property, sales, and corporate income tax exemptions.

The IRS has established procedures for hospitals to correct and disclose failures to satisfy the 501(r) requirements, which can mitigate the risk of these penalties. If a hospital facility discovers an error, prompt correction and disclosure to the IRS can prevent the failure from being considered willful or egregious.