In addition to the general requirements for tax exemption under Section 501(c)(3) and Revenue Ruling 69-545 , hospital organizations must meet the requirements imposed by Section 501(r) on a facility-by-facility basis in order to be treated as an organization described in Section 501(c)(3). These additional requirements are:
- Community Health Needs Assessment (CHNA) - Section 501(r)(3),
- Financial Assistance Policy and Emergency Medical Care Policy - Section 501(r)(4),
- Limitation on Charges - Section 501(r)(5), and
- Billing and Collections - Section 501(r)(6).
Section 501(r)(6) requires a hospital organization to make reasonable efforts to determine whether an individual is eligible for assistance under the hospital organization’s financial assistance policy (FAP) before engaging in extraordinary collection actions (ECAs) against that individual.
For these purposes, a hospital facility is considered to have engaged in ECAs against an individual to obtain payment for care if the hospital facility engages in such ECAs against any other individual who has accepted or is required to accept responsibility for the first individual’s hospital bill for the care.
A hospital facility is held accountable for the ECAs of third parties collecting debt on its behalf or to which it sells debt. The hospital facility is deemed to have engaged in an ECA against the individual to obtain payment for the care, or to have taken one or more steps necessary to have made reasonable efforts to determine whether an individual is FAP-eligible for the care, if any purchaser of the individual’s debt, any debt collection agency or other party to which the hospital facility has referred the individual’s debt, or any substantially-related entity has engaged in such an ECA or taken steps (whichever is applicable).
Hospital facilities are accountable for the ECAs of the debt collection agencies and debt buyers to which they refer or sell debt. If a hospital facility acts reasonably and in good faith to supervise and enforce the Section 501(r)(6) obligations of its contractual agreements with debt collectors or purchasers and corrects any contractual violations it discovers,
- an error on the part of the debt collectors or purchasers is not considered willful, and
- provided that it is not egregious,
- could be excused if the hospital facility corrects and discloses the failure using the procedures outlined in the Rev. Proc. 2015-21.
Extraordinary Collection Actions
ECAs are defined as actions taken by a hospital facility against an individual related to obtaining payment of a bill for care covered under the hospital facility’s FAP that
- involve selling an individual’s debt to another party,
- involve reporting adverse information about an individual to consumer credit reporting agencies or credit bureaus (collectively, “credit agencies”),
- involve deferring or denying, or requiring a payment before providing, medically necessary care because of an individual’s non-payment of one or more bills for previously provided care covered under the hospital facility’s FAP, or
- require a legal or judicial process.
Examples of actions that may require a legal or judicial process include, but are not limited to:
- Placing a lien on an individual’s property
- Foreclosing on an individual’s real property
- Attaching or seizing an individual’s bank account or any other personal property
- Commencing a civil action against an individual
- Causing an individual’s arrest
- Causing an individual to be subject to a writ of body attachment
- Garnishing an individual’s wages
A claim filed by a hospital facility in any bankruptcy proceeding is not an ECA. Also, a lien placed on the proceeds of a judgment, settlement, or compromise owed to an individual (or his or her representative) as a result of personal injuries caused by a third party for which the hospital facility provided care is not an ECA.
Section 501(r)(6) does not prohibit debt sales; however, debt sales generally are considered ECAs because hospital facilities have less control over a debt once it’s been sold and the debt buyers generally will have less information regarding an individual and the debt and more incentive to engage in ECAs before making reasonable efforts to determine whether an individual is FAP-eligible.
The sale of an individual’s debt is not an ECA if, prior to the sale, the hospital facility enters into a legally binding written agreement with the purchaser of the debt containing four conditions:
- The purchaser must agree not to engage in any ECAs to obtain payment of the debt.
- The purchaser must agree not to charge interest on the debt in excess of the rate in effect under Section 6621(a)(2) at the time the debt is sold (or such other interest rate set by notice or other guidance published in the Internal Revenue Bulletin).
- The debt must be returnable to or recallable by the hospital facility upon a determination by the hospital facility or the purchaser that the individual is FAP-eligible.
- If the individual is determined to be FAP-eligible and the debt is not returned to or recalled by the hospital facility, the purchaser must adhere to procedures specified in the agreement. The agreement must ensure that the individual does not pay, and has no obligation to pay, the debt purchaser and the hospital facility together more than he or she is personally responsible for paying as a FAP-eligible individual.
Because debt sales subject to these four conditions are not considered to be ECAs, a hospital facility may make these debt sales without first having made reasonable efforts to determine FAP-eligibility. Debt sales that do not satisfy these four conditions are ECAs and may not be made until after a hospital facility has made reasonable efforts to determine FAP-eligibility.
Including Additional Actions as ECAs
If a hospital facility defers or denies, or requires a payment before providing medically necessary care because of an individual’s nonpayment of one or more bills for previously provided care under the hospital facility’s FAP, such actions constitute actions to collect the unpaid bills. These collection actions can properly be viewed as extraordinary, given that such actions can potentially jeopardize the health of the debtor.
Requiring deposits can be tantamount to denying care for medically indigent people. Thus, requiring payment before providing medically necessary care because of nonpayment of past bills is also an ECA with respect to those past bills.
If a hospital facility requires payment before providing medically necessary care to an individual with one or more outstanding bills, such a payment requirement is presumed to be because of the individual’s nonpayment of the outstanding bill(s) unless the hospital facility can demonstrate that it required the payment from the individual based on factors other than, and without regard to, the nonpayment of past bills.
The final regulations provide a 120-day “notification period” and a 240-day “application period,” both beginning on the date the first “post-discharge” billing statement is provided. A billing statement for care is considered “post-discharge” if it is provided to an individual after the patient received care, whether inpatient or outpatient, and the individual has left the hospital facility.
A hospital facility is considered to have made a reasonable effort to determine if an individual is FAP-eligible if:
- The hospital facility notifies the individual about the FAP before initiating any ECAs to obtain payment for the care and refrains from initiating such ECAs for at least 120 days from the date the hospital facility provides the first post-discharge billing statement for the care.
- In the case of an individual who submits and incomplete FAP application during the 240 day application period, the hospital facility notifies the individual about how to complete the FAP application and gives the individual a reasonable opportunity to do so.
- In the case of an individual who submits a complete FAP application during the 240-day application period, the hospital facility determines whether the individual is FAP-eligible for the care.
- The application period may be longer than 240 days because a hospital facility must notify an individual at least 30-day before initiating one or more ECAs to obtain payment for the care.
A hospital facility may continue to accept and process FAP applications from patients at any time.
Multiple Episodes of Care
An individual may have multiple episodes of care from a hospital facility. If a hospital facility aggregates an individual’s outstanding bills for multiple episodes of care before initiating ECAs to obtain payment for those bills, it may not initiate an ECA until 120 days after it provided the first post-discharge bill for the most recent episode of care included in the aggregation.
Similarly, while a separate application period starts with each episode of care, hospital facilities can measure the 240-day period from the first post-discharge bill for the most recent episode of care.
A hospital facility must provide written notice that indicates that financial assistance is available for eligible individuals, identifies the ECAs that the hospital facility (or other authorized party) intends to initiate to obtain payment for the care, and states a deadline after which such ECA(s) may be initiated that is no earlier than 30 days after the date that the written notice is provided.
A hospital facility must provide a plain language summary of the FAP with the 30-day notice.
Finally, the hospital facility must make a reasonable effort to provide oral notification about the FAP and how the individual may obtain assistance with the FAP application process at least 30 days before first initiating one or more ECAs to obtain payment for the care.
Receipt of Complete FAP Applications
After receipt of a complete FAP application from an individual during the application period, the hospital facility will have made reasonable efforts to determine if the individual is FAP-eligible only if the hospital facility does the following in a timely manner:
- Suspends any ECAs taken against the individual to obtain payment for the care,
- Makes a FAP-eligibility determination, and
- Notifies the individual in writing of the FAP-eligibility determination and the basis for the determination.
If a hospital facility believes an individual who has submitted a complete FAP application may qualify for Medicaid, a hospital facility may postpone making a FAP-eligibility determination until after the individual’s Medicaid application has been completed and submitted and a determination as to Medicaid eligibility has been made.
However, as is generally the case when an individual has submitted a complete FAP application, a hospital facility may not initiate or resume any ECAs to obtain payment for the care at issue until a FAP-eligibility determination has been made.
Requirements When an Individual Is Determined to be FAP Eligible
If an individual qualifies for free care, the hospital facility must provide them with a written notification that nothing more is owed. They are not required to provide a billing statement with a zero balance or describe how to get information regarding the amount generally billed (AGB) for the care.
If a hospital facility determines an individual is FAP-eligible, but qualifies for less than free care, the hospital facility must provide them with a billing statement that indicates the amount the individual owes for the care as a FAP-eligible individual and how that amount was determined. It must also state or describe how the individual can get information regarding the AGB for the care.
In either case, the hospital facility is required to refund any excess payments made by the FAP-eligible individual for the care (whether to the hospital facility or any other party to whom the hospital facility has referred or sold the individual’s debt 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).
Finally, the hospital facility must take all reasonably available measures to reverse any ECA (with the exception of certain debt sales) taken against the individual to obtain payment for the care. Such reasonably available measures generally include, but are not limited to, measures to vacate any judgment against the individual, lift any levy or lien (with certain exceptions) on an individual’s property, and remove from the individual’s credit report any adverse information that was reported to a consumer reporting agency or credit bureau.
Presumptive Eligibility for Financial Assistance
A hospital facility may presumptively determine that an individual is eligible for assistance under the FAP based on information other than that provided by the individual or based on a prior FAP-eligibility determination.
A presumptive determination that an individual is eligible for less than the most generous assistance available under a FAP constitutes reasonable efforts to determine FAP-eligibility if a hospital facility:
- Notifies the individual regarding the basis for the presumptive FAP-eligibility determination and how he or she may apply for more generous assistance available under the FAP,
- Gives the individual a reasonable period of time to apply for more generous assistance before initiating ECAs to obtain the discounted amount owed for the care, and
- Processes any complete FAP application the individual submits by the end of the application period or, if later, by the end of the reasonable time period given to apply for more generous assistance.
A presumptive determination of FAP ineligibility does not constitute reasonable efforts to determine FAP-eligibility. However, a hospital facility is not prohibited from using third-party information sources and prior FAP eligibility determinations to try to predict which of its patients are unlikely to be FAP-eligible.