By Laura J. Lowenstein, Esq.                                   

ADVISOR ALERT: New Financial, Billing and Collection Requirements for Tax-Exempt Hospitals

Final regulations for IRC §501(r), first introduced under the Affordable Care Act, apply to all tax-exempt hospital’s taxable years beginning after December 29, 2015. Entitled “Additional Requirements for Charitable Hospitals; Community Needs Assessments for Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return,” these final regulations provide a much-needed roadmap for every tax-exempt hospital’s readiness assessment.

In short, all advisors should be aware that IRC §501(r) imposes the following four new requirements on tax-exempt hospital facilities:

  1. Community Health Needs Assessment – IRC §501(r)(3);
  2. Financial Assistance Policy – IRC §501(r)(4);
  3. Limitations on amounts charged for emergency or other medically necessary care to individuals eligible under the hospital’s financial assistance policy – IRC §501(r)(5); and
  4. Billing and Collection practices – IRC §501(r)(6).


Given that my firm handles a significant amount of medical debt, the focus of this advisory is on requirement #4. According to IRC §501(r)(6), a tax-exempt hospital facility may not engage in extraordinary collection actions (termed “ECAs”) against an individual to obtain payment for emergency or other medically necessary care before making reasonable efforts to determine whether the individual is eligible for assistance under its Financial Assistance Policy (“FAP”). ECAs being defined as actions taken by a hospital facility against an individual related to obtaining payment of a bill for care covered under the hospital’s FAP that require a legal or judicial process, involve selling an individual’s debt to another party, or involve reporting adverse information about an individual to a consumer credit agency or credit bureau.


While the final regulations make clear that a hospital facility does not need to make reasonable efforts to determine FAP-eligibility before engaging in ECAs against private or public insurers or any other liable third parties that are not individuals, they fail to relieve hospitals from strict liability for the actions of third parties, including debt collectors and debt buyers. Under the 2012 proposed regulations, a hospital will have been considered to have engaged in an ECA against an individual to obtain payment for emergency or other medically necessary care 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 account has engaged in an ECA and this provision remains in the final regulations. Meaning that the Treasury Department and the IRS believe that tax-exempt hospitals are accountable for the ECAs of the debt collection agencies and debt buyers to which they refer or sell debt. The only “good faith” safe harbor to this liability being if the debt collector or debt buyer’s error is not willful or egregious and the hospital facility corrects and discloses the failure in accordance with a delineated revenue procedure (see §1.501(r)-2(c)).

Thus, it is more important than ever that tax-exempt hospitals maintain the following protocol within their billing and collections practice:

  1. Maintain a carefully-defined FAP that, at the hospital’s election, does not need to cover elective procedures that are not medically necessary;
  2. Have clear triggers for when and how FAP-eligibility needs to be determined and safeguard the means and manner in which said determination is made and recorded;
  3. Regardless of FAP-eligibility, pursue non-individual third parties who may be liable for the care without delay;
  4. For accounts not FAP-eligible or accounts where reasonable efforts were made to determine FAP-eligibility, engage in reasonable and compliant in-house collection activity;
  5. Assign accounts in arrears for 60 days or more to a collection agency or law firm that maintains a clear database delineation for accounts in respect of which it may not engage in ECAs; and
  6. Only sell medical debt accounts to buyers who engage agencies or law firms that comply with no. 5 above. NOTE: Regardless of compliance, I do not recommend that tax-exempt hospitals sell their medical debt to third-party buyers outside of special circumstances where such sales are consistent and aligned with their tax-exempt charitable purpose and intent.


A complete copy of the final regulations can be found at:

For more information on Capital Resource Management, Inc. and how we help physicians and facilities generate revenue through better financial practices and compliant collections, please contact us at 1-844-277-3277 (ARREARS).

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