What nonprofit healthcare providers need to know about 501(r) requirements

Nonprofit hospitals need to do more than ever to keep their tax-exempt status, as Section 501(r) of the Internal Revenue Code adds new requirements to any organization operating a licensed hospital to maintain these benefits.

Areas to address

"There are four specific areas that tax-exempt hospitals have to address to keep their TE status," said Eddie Phillips, CPA, a principal at Draffin & Tucker in Atlanta. "Each hospital facility operated by a tax-exempt organization has to establish a Community Health Needs assessment, written financial assistance and emergency care policies, limit the amounts charged to individuals eligible for assistance under these policies, and make reasonable efforts to determine eligibility for assistance prior to engaging in extraordinary collections action."

The financial aid policy requires the hospital put in place written policies defining eligibility for assistance and how those people will be identified. Hospitals can no longer charge eligible patients more for medically necessary or emergency care than what is generally billed to those with insurance and can no longer use gross charges to bill for other services.

Revenue cycle concerns

One of the areas most impacted by the 501(r) requirements will be revenue cycle management. In most cases, a hospital may not know on admission if the patient qualifies for financial assistance. The final regulations contain some traps for the unprepared.

"The rules are such that the hospital facility needs to make sure the patient has an opportunity to apply for assistance for several months following discharge," said Aaron Cohen, a principal for DHG Healthcare in Rockville, Maryland. "Once the patient is qualified, the hospital has to put in place procedures that make sure they aren't overbilled and that the bill complies with the limitations on charges requirement."

Compliance czar

Since keeping with Section 501(r) requirements is an important part of keeping the hospital's tax exemption, it is suggested administrators pick a specific individual to have responsibility over compliance.

"Hospitals already deal with many different regulatory issues on a daily basis and this is yet another set of rules that needs to be followed," said Cohen. "While updating the relevant hospital policies to meet the requirements of Section 501(r) may be time-consuming, this up-front process should not pose significant difficulty for most hospitals."

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The real challenge, he thinks, is ensuring compliance with the policies in all of the different situations arising within a very complex business like health care. Making sure that specific key individuals at the organization are responsible for monitoring compliance with Section 501(r) not just now, but one, two, three years in the future, should lead to better results.

IRS not policing

To this point, there hasn't been enforcement activity by the IRS with respect to Section 501(r), although they have released guidance on what kinds of enforcement actions are likely under specific circumstances. How the IRS will police hospital compliance is yet to be seen.

"When you look through the rules, you get an appreciation that Congress looks at TE as a privilege," said Mr. Phillips. "Hospitals are expected to earn that privilege if they want to keep it. These regulations define what hospitals will have to do going forward to obtain or maintain exemption."

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