By now, most collection agencies working in the health care space are aware of Section 501(r) financial assistance policy requirements for tax-exempt charitable hospitals organized under section 501(c)(3) of the U.S. Code.

While these regulations have been in place for some time and have not been amended since their enactment, it’s always beneficial to review your compliance procedures to ensure there are no gaps or potential blind spots. Likewise, for those thinking of entering the health care accounts receivable market, it can be crucial to understand these requirements in order to attract potential clients and reassure them about your operations.

The Affordable Care Act, enacted in 2010, added section 501(r) to the Internal Revenue Code with the intent of encouraging hospitals to devote more resources to charity care. In 2014, the IRS and the U.S. Treasury issued final regulations implementing the provisions of section 501(r).

Section 501(r) applies to charitable “hospital organizations” that assert the provision of hospital care as the basis for their tax-exempt status under section 501(c)(3). The IRS’s implementing regulations impose four requirements on these hospital organizations: (1) a community health needs assessment; (2) a written financial assistance and emergency medical care policy; (3) a limitation on charges; and (4) a limitation on certain collection actions.

Collection agencies and debt buyers need to pay attention to the billing and collection requirements imposed by the regulations, as well as the notification requirements relating to the hospital’s’ financial assistance policies (FAP).

Under the billing and collection requirements, hospitals must make “reasonable efforts” to determine a patient’s eligibility under the FAP before engaging in “extraordinary collection actions” (ECAs) against that individual. This prohibition extends not only to the ECAs against the patient, but also against “any other individual who has accepted or is required to accept responsibility for the [patient’s] care.”

Under the regulations, a hospital will be deemed to have engaged in an ECA if any purchaser of the individual’s debt, any debt collection agency, any other party to which the hospital facility has referred the individual’s debt, or any substantially related entity has engaged in such an ECA.

ECAs include activities that require a legal or judicial process. For example:

• Placing a lien on an individual’s property;
• Foreclosing on an individual’s real property;
• Attaching or seizing an individual’s bank account or other personal property;
• Commencing a civil action against an individual;
• Causing an individual’s arrest;
• Causing an individual to be subject to a writ of body attachment, and Garnishing an individual’s wages.

As set forth in 26 CFR Section 1.501(r)-6, ECAs do not include: (1) certain debt sales; (2) liens on certain judgments, settlements, or compromises; and (3) claims filed in a bankruptcy proceeding.

Before pursuing an ECA, a hospital must make “reasonable efforts” to notify the individual about the hospital’s FAP. Additionally, a hospital must wait 120 days before initiating an ECA against a patient whose FAP-eligibility is undetermined.

The regulations also provide a 240day period, during which a hospital facility is required to process any application submitted by the individual. While the requirements to notify patients of the FAP prior to taking an ECA ultimately apply to the hospital, collection agencies that contract with hospitals may have an obligation to meet these regulatory requirements.

And while neither the statute nor the regulations provides for a private right of action for violations, a failure to comply can jeopardize the tax-exempt status of the hospital, potentially raise liability related to the loss of that tax-exempt status, and spoil the debt collector or debt purchaser’s relationship with the hospital. As a result, both hospitals and their agents must understand the regulations.

Fortunately, ACA International members have access to SearchPoint document #6248, “501(r) Final Regulations for Charitable Hospitals,” which our compliance analysts have recently updated with new case law. It’s always beneficial to work with your charitable hospital clients to periodically review any collection and billing policies to ensure procedures are being followed by the hospital and agency.