IRS and Treasury Finalize Patient Protection Rules for Tax-Exempt Hospitals

The Internal Revenue Service and the Treasury Department have issued final regulations under the Affordable Care Act to protect patients in tax-exempt hospitals from aggressive debt collection practices and to provide other rules for charitable hospitals.

Under the final regulations, each Section 501(c)(3) hospital organization is required to meet four general requirements on a facility-by-facility basis: establish written financial assistance and emergency medical care policies; limit the amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital's financial assistance policy; make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions against the individual; and conduct a community health needs assessment, or CHNA, and adopt an implementation strategy at least once every three years.

The first three requirements are effective for tax years beginning after March 23, 2010 and the CHNA requirements are effective for tax years beginning after March 23, 2012.

The ACA also added a new Section 4959, which imposes an excise tax for failure to meet the CHNA requirements, and added reporting requirements.

These final regulations provide guidance on the entities that must meet these requirements, the reporting obligations relating to these requirements. and the consequences for failing to satisfy the requirements.

“Charitable hospitals represent more than half of the nation’s hospitals and play a key role in improving the health of the communities they serve,” wrote Emily McMahon, Deputy Assistant Secretary for Tax Policy at the U.S. Department of the Treasury, in a blog post Monday explaining the requirements. “But reports that some charitable hospitals have used aggressive debt collection practices, including allowing debt collectors to pursue collections in emergency rooms, have highlighted the need for clear rules to protect patients. For hospitals to be tax-exempt, they should be held to a higher standard. That is why the Affordable Care Act included additional consumer protection requirements for charitable hospitals, so that patients are protected from abusive collections practices and have access to information about financial assistance at all tax-exempt hospitals.”

She noted that as a condition of their tax-exempt status, charitable hospitals must take an active role in improving the health of the communities they serve, establish billing and collections protections for patients eligible for financial assistance, and provide patients with the information they need to apply for such assistance. “These final rules adopt the same framework of proposed regulations but simplify the compliance process for charitable hospitals, while continuing to provide meaningful guidance on protections for patients and requirements to assess community health needs,” she added.

Under the new rules, hospitals cannot charge individuals eligible for financial assistance more for emergency or other medically necessary care than the amounts generally billed to patients with insurance (including Medicare, Medicaid, or private commercial insurance). In addition, every tax-exempt hospital must establish and widely publicize a financial assistance policy that clearly describes to patients the eligibility criteria for obtaining financial assistance and the method for applying for financial assistance.

Charitable hospitals are also prohibited from engaging in certain collection methods (for example, reporting a debt to a credit agency or garnishing wages) until they make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy.

In addition, each charitable hospital need to conduct and publish a community health needs assessment at least once every three years and disclose on the tax form that it files on an annual basis the steps it is taking to address the health needs identified in the assessment.

Many of the requirements have been in place since the Affordable Care Act passed in 2010, but in response to comments on the proposed regulations, the final rules also expand access to translations for patients, by lowering the threshold for having translations of financial assistance policies available from 10 percent of the community served as proposed, to five percent of the community served or population expected to be encountered by the hospital facility, or 1000 persons, whichever is less, according to McMahon.

“The final rules also revise the notification requirements to maintain important protections for patients while making it easier for hospitals to comply with them,” she wrote. “General notifications regarding a hospital’s financial assistance policy must appear on bills and in the hospital. However, individual written and oral notifications of the hospital’s financial assistance policy are now only required when a hospital plans to use extraordinary collections actions, such as reporting a debt to a credit bureau, selling the debt to a third party or garnishing wages.”

While charitable hospitals must continue to make a good-faith effort to comply, the rules provide charitable hospitals with time to fully update their policies and programming to implement the changes. But if a charitable hospital fails to meet the consumer protection provisions required by the law, the hospital could have its tax-exempt status revoked.  If a hospital fails to properly conduct a community health needs assessment or adopt an implementation strategy, an excise tax will apply, McMahon noted. “However, if a hospital fails to meet a requirement, but the failure is neither willful nor egregious, the hospital can correct and publicly disclose the error to have it excused, thus avoiding revocation of tax-exempt status, but the excise tax would still apply,” she wrote.