IRS Hearing on Charitable Hospitals’ Billing and Collection Practices (Reg. – 130266-11)

December 19, 2012

Under Section 501(r) of the Internal Revenue Code, the proposed rules issued in June 2012 require exempt hospitals to implement a financial assistance policy. The financial assistance policy requires hospitals to limit amounts charged to individuals who qualify for financial assistance and to refrain from certain collection actions prior to making “reasonable” efforts to ascertain an individual’s financial assistance status.

A number of major hospital associations have raised questions regarding the limits on collection activities and the standards IRS will apply to define “reasonable efforts” in deciding if patients qualify for financial assistance or if they can pay for health services. Under the proposed rules, hospitals have to determine within 120 days of the first billing statement whether they can secure payment using extraordinary collection activities, such as selling the debt. Hospitals claim that the new rules result in making every patient subject to this process, a process that the hospitals claim could take months. Hospital associations have requested that the effective date of any rules be no sooner than Jan. 1, 2014.

University Hospitals Health System, Inc. suggested that the financial assistance should be determined on either a presumptive eligibility standard or a presumptive noneligibility standard, looking at whether the patient is from out of the state or the country or if the patient had received a payment from an insurance company.

A number of issues need to be resolved before the regulation can be finalized, not the least of which are conflicts between state and federal regulations in determining eligibility for financial assistance. In addition to establishing standards for application of a reasonable efforts criterion to decide a patient’s eligibility for financial assistance, the IRS has under review more than 3,000 tax-exempt hospitals to determine whether they meet the “community benefit” standard. Under the healthcare reform law, IRS is required to review the community benefit provided by a tax-exempt hospital every three years and report back to Congress.

Officials at the IRS have indicated that they are unlikely to provide further guidance on any sanctions for violations of Section 501(r) until after the proposed rules of Section 501(r) are finalized. The finalization of the 501(r) regulations are on the Department of Treasury Priority Guidance items for 2013.

McGuireWoods Nonprofit & Tax-Exempt Organizations Group

Our nonprofit and tax-exempt services lawyers provide advice and guidance that enable charities and other nonprofits to operate efficiently and effectively in today’s increasingly complicated, regulated and competitive environment

McGuireWoods LLP Healthcare Group

McGuireWoods offers an experienced team of more than 50 lawyers well-versed in serving the needs of the healthcare, pharmaceutical, life sciences and medical device sectors. We understand the daunting array of legal and business issues our clients face, and we work tirelessly to find effective solutions to their daily challenges.