Limitation on Charges – Section 501(r)(5)


In addition to the general requirements for tax exemption under Section 501(c)(3) and Revenue Ruling 69-545 PDF, 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:

  1. Community Health Needs Assessment (CHNA) - Section 501(r)(3),
  2. Financial Assistance Policy and Emergency Medical Care Policy - Section 501(r)(4),
  3. Limitation on Charges - Section 501(r)(5), and 
  4. Billing and Collections - Section 501(r)(6).

A hospital organization meets the requirements of Section 501(r)(5) with respect to a hospital facility it operates only if the hospital facility (and any substantially-related entity) limits the amount charged for any emergency or other medically necessary care it provides to a FAP-eligible individual to not more that the amount generally billed (AGB) to individuals who have insurance covering such care.

The amounts charged to FAP-eligible individuals for all other medical care covered under the FAP is limited to less than the gross charges for that care.

Medically Necessary Care

In defining medically necessary care for purposes of its FAP and the AGB limitation, a hospital facility may, but is not required to, use the Medicaid definition used in the hospital facility’s state, other definitions provided by state law, or a definition that refers to the generally accepted standards of medicine in the community or an examining physician’s determination.

Amounts Generally Billed

Hospital facilities can use the look-back method or the prospective method to determine AGB. A hospital facility may use only one of these methods to determine AGB at any one time, but different hospital facilities operated by the same hospital organization may use different methods.

AGB Calculation under the Look-Back Method

Under the look–back method for determining AGB, a hospital facility determines AGB for any emergency or other medically necessary care provided to a FAP-eligible individual by multiplying the hospital facility’s gross charges for that care by one or more percentages of gross charges, called AGB percentages. Hospital facilities must calculate their AGB percentages at least annually by dividing the sum of the amounts of all its claims for emergency or other medically necessary care that have been allowed by the certain health insurers during a prior 12-month period divided by the sum of the associated gross charges for those claims. 

The hospital facility must include the claims allowed during the 12-month period by:

  • Medicare fee-for-service alone,
  • Medicare fee-for-service and all private health insurers paying claims to the hospital facility, or
  • Medicaid, either alone or in combination with Medicare and all private health insurers.

The term “Medicare fee-for-service” includes only health insurance available under Medicare Parts A and B of Title XVIII of the Social Security Act (42 U.S.C. 1395c through 1395w-5) and not health insurance plans administered under Medicare Advantage.

Hospital facilities may include in the calculation of their AGB percentages the total amount of claims for care allowed by primary insurers (including both the amounts paid by primary insurers and the amounts insured individuals are personally responsible for paying in the form of co-payments, co-insurance, and deductibles), regardless of whether secondary insurers end up paying some or all of the insured individual’s portion.

Moreover, if the secondary insurer is of the type that is otherwise being included in the hospital facility’s calculation of the AGB percentage (that is, Medicare, Medicaid, and /or a private health insurer), the amounts allowed by the secondary insurer should be included in the calculation to ensure that the resulting AGB percentage is fully representative of the amounts allowed by the applicable type of insurer(s).

A hospital using the look-back method may calculate one average percentage of gross charges for all emergency or other medically necessary care provided by the hospital facility or may calculate multiple AGB percentages for separate categories of care (such as inpatient and outpatient care or care provided in different departments) or for separate items or services, as long as the hospital facility calculates AGB percentages for all emergency and other medically necessary care provided by the hospital facility.

In general, a hospital organization must calculate AGB percentage(s) separately for each hospital facility it operates. There is one exception: hospital facilities that are covered under the same Medicare provider agreement (as identified by the same CMS Certification Number) are permitted to calculate one AGB percentage (or multiple AGB percentages for separate categories of care or separate items or services) based on the claims and gross charges for all such covered facilities and implement the AGB percentage(s) across all such hospital facilities in the system.

If the amount a health insurer will allow for a claim has not been finally determined as of the last day of the 12-month period used to calculate the AGB percentage(s), a hospital facility should exclude the amount of the claim from that calculation and include it in the subsequent 12-month period during which the amount allowed is finally determined.

The final regulations allow a hospital facility to take up to 120 days after the end of the 12-month period used to calculate the AGB percentage(s) to begin applying its new AGB percentage(s).

AGB Calculation under the Prospective Method

A hospital facility using the prospective method may determine AGB for any emergency or other medically necessary care provided to a FAP-eligible individual by using the billing and coding process the hospital facility would use if the FAP-eligible individual were a Medicare fee-for-service or Medicaid beneficiary. The hospital facility would set the AGB for the care at the amount the hospital facility determines would be the total amount Medicare or Medicaid would allow for the care (including the amount that would be reimbursed by Medicare or Medicaid and the amount the beneficiary would be personally responsible for paying in the form of co-payments, co-insurance, and deductibles).

A hospital facility using the prospective method may base AGB on Medicare fee-for-service or Medicaid or both, provided that, if it uses both, its FAP must describe the circumstances under which it will use Medicare fee-for-service or Medicaid in determining AGB.

AGB Applied to Insured vs. Uninsured Patients

Section 501(r)(5) does not distinguish between insured and uninsured FAP-eligible individuals. The AGB limitation applies to all individuals eligible for assistance under the hospital facility’s FAP, without specific reference to the individual’s insurance status.

Changing AGB Calculation Method

A hospital facility is permitted to change the method it uses to determine AGB at any time. The FAP must describe the method used to determine AGB; therefore, a hospital facility that changes its AGB calculation method must update its FAP to describe the new method before it is implemented.

Gross Charges

A hospital facility must charge a FAP-eligible individual less than the gross charges for any medical care covered under the hospital facility’s FAP.  However, a hospital facility may issue a billing statement to a FAP-eligible individual for medical care covered under the FAP to state the gross charges for such care and apply contractual allowances, discounts, or deductions to the gross charges, provided that the actual amount the individual is personally responsible for paying is less that the gross charges for such care.

Safe Harbor for Certain Charges in Excess of AGB

A hospital facility that charges a FAP-eligible individual more than AGB for emergency or other medically necessary care or gross charges for any other medical care will not fail to meet the requirements of Section 501(r)(4) 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 individuals (for example, an upfront payment the hospital facility requires before providing medically necessary care).
  • As of 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 (whether to the hospital facility or any other party to whom the hospital facility 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 excess amount is less than $5.