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501(r): IRS Regulations and the Hospital Revenue Cycle

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501(r): IRS Regulations and the Hospital Revenue Cycle

If you operate as a nonprofit health system or hospital, then you’re also required to comply with section 501(r) of the Internal Revenue Code. First enacted as part of the Affordable Care Act in 2010, 501(r) imposes four requirements on nonprofit hospitals and health systems in order to maintain their tax-exempt, nonprofit status. Three of these requirements relate directly to a hospital’s revenue cycle operations. Failure to comply could result in substantial penalties or the loss of nonprofit status, so it’s important to understand what’s required under this law. 

Here’s more information on the three 501(r) requirements that relate to revenue cycle:

1. Establish a written Financial Assistance Policy (FAP).

Section 501(r)(4) requires hospitals to establish a written financial assistance policy and create a “plain language summary” of that policy. The federal government’s definition of plain language is “communication your audience can understand the first time they read or hear it. … Written material is in plain language if your audience can find what they need, understand what they find and use what they find to meet their needs.”

For example, instead of saying, “submission of application,” use the words, “How do I apply?” Instead of saying “involuntarily undomiciled,” say “homeless.”

Creating a plain language summary may sound easy, but don’t be fooled—the Federal Plain Language Guidelines document is 112 pages long.

Section 501(r) also requires hospitals to make these documents widely available—on a website, upon request for free and conspicuously displayed throughout your facility.

2. Set charge limits for FAP-eligible patients.

The second requirement, Section 501(r)(5), sets charge limits for FAP-eligible patients. To comply, charges for emergency and other medically necessary care provided to FAP-eligible individuals can’t be more than amounts generally billed (AGB) to individuals who have insurance covering that same care.

Additionally, charges for all other medical care provided to the FAP-eligible patient must be less than the gross charges, or the chargemaster rate, for that care.

The rule also outlines how—and how often—hospitals are required to calculate their AGB and chargemaster rates.

3. Make reasonable effort to determine FAP eligibility.

Finally, Section 501(r)(6) requires a hospital to make reasonable efforts to determine whether an individual is eligible for financial assistance, as outlined in the FAP, before engaging in “extraordinary collection actions,” which includes taking legal action, selling an individual’s debt to another party and/or credit reporting. "Reasonable efforts" are detailed in this section of the rule to include notifying the individual of the hospital's FAP at least 120 days prior to initiating ECAs as well as an additional notification at least 30 days prior taking ECAs, providing the individual with the "plain language summary" as previously mentioned, and making a reasonable effort to orally notify the individual about the hospital's FAP and how they may obtain assistance with the FAP application process.

It’s important to note that this requirement only applies to self-pay individuals and not to private or public insurers or other liable third parties who are not individuals.

Hospitals contracting with a billing or collection agency will want to ensure the agency is familiar with the 501(r) rule and is knowledgeable of the hospital's FAP and application process so as not to run afoul of downstream notification requirements which could jeopardize a hospital's not-for-profit status.

This is a high-level overview of the 501(r) rules impacting revenue cycle operations at nonprofit hospitals and health systems. Dig into the Federal Register Final Rule, which is in surprisingly plain English, to gain a deeper understanding of what’s required.