Requirements for Tax-Exempt Hospital Billing and Collection Practices Under the ACA

Requirements for Tax-Exempt Hospital Billing and Collection Practices Under the ACA Member Briefing, October 2016 Sponsored by the Tax and Finance Practice Group. Co-sponsored by the Academic Medical Centers and Teaching Hospitals; Business Law and Governance; Health Care Liability and Litigation; Hospitals and Health Systems; In-House Counsel; Physician Organizations; and Regulation, Accreditation, and Payment Practice Groups; and Children s Hospital Affinity Group; and Health Care Reform Educational Task Force. AUTHORS Debbie Ernsberger PYA Knoxville, TN Andrew D. Kloeckner Baird Holm LLP Omaha, NE

The Affordable Care Act (ACA) of 2010 provided a number of specific requirements for charitable hospital organizations that were added to the Internal Revenue Code (IRC). These new requirements are found in Section 501(r) 1 and provide specific criteria hospital organizations must satisfy to be recognized as tax-exempt under Section 501(c)(3), including, but not limited to, (1) completion of the Community Health Needs Assessment (CHNA) requirements and adoption of an implementation strategy, (2) the creation of written financial assistance, emergency care, and billing and collection policies, and (3) the institution of limitations on charges. Section 501(r)(6) The billing and collection practices applicable to hospital organizations are contained within Section 501(r)(6). In accordance with Section 501(r)(6), a hospital facility may not engage in extraordinary collection actions (ECAs) against an individual for payment of care until reasonable efforts have been made to determine whether the individual may qualify as eligible for assistance under the hospital s Financial Assistance Policy (FAP). As such, a hospital organization is prohibited from engaging in ECAs until reasonable efforts are made to determine an individual s FAP eligibility and notify the individual about the hospital s FAP. In general, reasonable efforts include notification by the hospital organization of the hospital s FAP and various written and oral communication with the patient specific to FAP eligibility within defined timeframes. Historical Perspective Section 501(r) was enacted March 23, 2010 as part of the ACA. On June 26, 2012, proposed regulations were released specific to Sections 501(r)(4) through 501(r)(6) and addressed FAPs, limitations on charges, and billing and collections practices. This guidance was referred to as the 2012 proposed regulations. Guidance followed on 1 Unless otherwise indicated, all references to Section herein are to the Internal Revenue Code of 1986, as amended (the IRC), and all references to Treas. Reg. are to the Treasury regulations promulgated thereunder. 2

April 5, 2013 specific to the CHNA requirements, related excise tax, and other definitional terms, referred to as the 2013 proposed regulations. In January 2014, the Internal Revenue Service (IRS) published guidance confirming that a hospital organization could rely on both the 2012 and 2013 proposed regulations pending the release of final guidance. Final Regulations It took almost five years to receive the final regulations from the IRS specific to the ACA requirements for hospital organizations. The final regulations were published in the Federal Register on December 31, 2014, and apply to taxable years beginning after December 29, 2015. Extraordinary Collection Actions The ability to collect amounts owed by patients and the cash flow associated therewith is crucial to the ongoing existence of hospital facilities. However, Treas. Reg. 1.501(r)- 6 now regulates when and how hospital facilities may take certain actions to collect on patient accounts. Namely, Treas. Reg. 1.501(r)-6 describes the necessary reasonable efforts hospital facilities must take prior to taking ECAs and determines when and under what circumstances hospital facilities may take ECAs against patients to collect outstanding amounts owed. Accordingly, it is crucial that hospital facilities understand what types of collection activities are and are not ECAs. Definition of ECAs The final regulations define ECAs as: 3

Selling an individual's debt to a third party (with the exception of certain debt sales discussed below); Reporting adverse information about an individual to consumer reporting agencies or credit bureaus; Deferring or denying medically necessary care due to an individual s nonpayment of or, under certain circumstances, requiring payment prior to providing, medically necessary care; and Other actions that require legal or judicial process, including, but not limited to: foreclosures, attachments or seizures of bank accounts or other personal property, civil actions, attaching a lien on an individual's real property, and garnishing an individual's wages. 2 In response to the 2012 proposed regulations, industry participants and stakeholders requested detailed guidance from the IRS regarding what specific actions rise to the level of an ECA. The IRS noted, in response, that because of the number of potential actions that do not qualify as ECAs, it was unwilling to provide an exhaustive list of non- ECA collection activities. 3 However, noticeably, the final regulations specifically exclude certain actions from ECA classification, including certain debt sales described below, 4 hospital liens, 5 and bankruptcy claims. 6 Language contained in the preamble to the final regulations clarifies that ECAs do not include actions taken by hospitals to collect amounts from private or public insurers. 7 Likewise, charging interest on patient accounts is not considered an ECA, but, rather, is properly classified as an activity associated with extending credit to patients. 8 Finally, referring accounts to collection agencies, while considered a referral of an account, does not constitute an ECA. 2 See Treas. Reg. 1.501(r)-6(b)(1)(i)-(iv). 3 79 Fed. Reg. 78954, 78,84 (Dec. 31, 2014). 4 See Treas. Reg. 1.501(r)-6(b)(2). 5 See Treas. Reg. 1.501(r)-6(b)(3). 6 See Treas. Reg. 1.501(r)-6(b)(4). 7 79 Fed. Reg. at 78983. 8 See id. at 78985. 4

Contractual Arrangements with Third Parties As was the case under the proposed regulations, referring patient accounts to collection agencies is not considered an ECA under the final regulations. Also retained from the proposed regulations is a strict liability approach regarding the actions of debt collection agencies or other third parties to whom a hospital sells or refers patient debt. The IRS reiterated its strong belief that hospital facilities must be held accountable for the ECAs of the debt collection agencies and debt buyers to which they refer or sell debt. 9 Accordingly, actions taken by purchasers of patient accounts, debt collection agencies, and other third parties, to which a hospital has referred an individual s debt, will be deemed actions taken by the hospital facility. 10 This includes ECAs and actions taken to satisfy the reasonable efforts standard discussed below. Accordingly, because actions taken by these parties could put a hospital facility s tax exemption at risk, hospitals should analyze this risk when determining the extent of its reliance on third parties to perform essential Section 501(r) functions. Under the strict liability standard, in order for a hospital facility to satisfy the reasonable efforts standard, the final regulations require a written and legally binding agreement with any collection agencies that is reasonably designed to ensure that no ECAs are taken until reasonable efforts have been made to determine whether an individual is eligible for financial assistance. 11 The contract must contain the following provisions: If an individual submits a financial assistance application prior to the end of the application period, the collection agency must suspend ECAs; If an individual submits a financial assistance application prior to the end of the application period and is determined by the hospital to be eligible for financial assistance, the collection agency will, in a timely manner, adhere to procedures in the agreement that ensure the individual will not, and has no 9 Id. at 78983. 10 Treas. Reg. 1.501(r)-6(a)(2). 11 See Treas. Reg. 1.501(r)-6(c)(10). 5

obligation to, pay both the collection agency and the hospital more than the amount required under the FAP. The collection agency will take all reasonable available measures to reverse any ECA taken against a FAPeligible individual; and If the collection agency further refers and/or sells the patient account to another third party during the application period, the collection agency will obtain a written agreement from the third party containing all of the elements described above. 12 As a result, hospitals must maintain compliant agreements with collection agencies and other debt collectors in addition to satisfying all of the reasonable efforts standards discussed in below. If a hospital and/or its debt collection agency takes all appropriate steps to notify patients of the potential for financial assistance but does not have a compliant agreement in place, the hospital has not satisfied the requirements of Treas. Reg. 1.501(r)(6). Debt Sales The IRS retained the position from the proposed regulations that debt sales constitute ECAs. However, the final regulations provide an exception to this rule in certain circumstances where the hospital and the purchaser of patient debt enter into a written agreement containing the following provisions: The purchaser must not engage in any ECAs against the patient; The purchaser must not charge interest in excess of the rate in effect under Section 6621(a)(2) at the time the debt is sold (or such other interest rate set by IRS notice or other guidance published by the IRS); The debt must be returnable or recallable by the hospital upon a determination that the patient is FAP-eligible; and 12 See Treas. Reg. 1.501(r)-6(c)(10)(i)-(iii). 6

If the debt is not returned or recalled after a patient has been determined to be FAP-eligible, the purchaser must adhere to procedures in the agreement to ensure that the patient does not have an obligation to pay (in aggregate, to the hospital and the purchaser) more than allowed under the FAP. 13 If a debt sale does not satisfy the aforementioned criteria, it is considered an ECA and reasonable efforts must be taken prior to completing the sale. Reasonable Efforts The final regulations prohibit hospital organizations from engaging in ECAs until reasonable efforts are made to determine whether the individual is FAP-eligible for assistance under the organization s FAP. A hospital organization is not required to make reasonable efforts to determine FAP-eligibility specific to organizations that are not considered individuals, including private or public insurers or any other liable third parties. The preamble to the final regulations notes that, under the IRC, the term individual does not include a trust, estate, partnership, association, company, corporation, or governmental entity. 14 Section 501(r)(6) provides for certain required actions in order to satisfy the reasonable efforts requirement. A hospital organization takes reasonable efforts with respect to an individual if it (1) provides written notification of the availability of financial assistance, (2) provides a plain language summary of the FAP to the individual, and (3) takes reasonable efforts to orally notify the individual about the FAP. 15 13 Treas. Reg. 1.501(r)-6(b)(2). 14 79 Fed. Reg. 78954, 78983 (Dec. 31, 2014). 15 See Treas. Reg. 1.501(r)-6(c)(4). 7

Required Actions The final regulations provide for several required actions to show reasonable efforts to determine FAP-eligibility. Various required actions are discussed in greater detail below. Notification Period The final regulations appear to have considered many of the comments received related to the burdensome nature of the notification requirements, resulting in more hospital friendly guidelines. The final regulations provide for specific notification requirements to establish the reasonable efforts standard. A hospital organization must notify an individual regarding the hospital s FAP at least 120 days from the date of the first post-discharge billing statement (not the first billing statement). This period is referred to in the proposed regulations as the notification period. For clarification, the final regulations generally define post-discharge as the point the individual has physically left the hospital facilities whether for inpatient or outpatient care. 16 No ECAs may occur for at least 120 days after this date. 17 Application Period The final regulations maintain the same time frame specific to the application period as noted within the proposed regulations. More specifically, a charitable hospital organization is required to process any application submitted by an individual within 240 days from the date on the first post-discharge billing statement provided to the patient. The 240 day timeframe is considered a reasonable period to allow an individual to apply for financial assistance from the hospital organization and for the hospital organization to have made reasonable efforts to determine FAP-eligibility. 18 However, the application 16 Treas. Reg. 1.501(r)-1(b)(7). 17 79 Fed. Reg. at 78987. 18 See id. 8

period may be extended, intentionally or unintentionally, beyond 240 days in the event the hospital has not provided the final notice described in section IV(a) below. Episodes of Care A single individual may receive care from a hospital facility for multiple episodes of need. In such case, a hospital facility may aggregate an individual s outstanding bills for multiple episodes of care. When aggregating multiple episodes of care, the notification requirement is measured from the date at which the hospital facility provides the first post-discharge billing statement for the most recent episode of care within the aggregation. 19 Even with the aggregation, a hospital facility is still required to refrain from ECAs for 120 days after providing the first post-discharge billing statement for the most recent episode of care included in the aggregation. Furthermore, the application period is distinguished by each episode of care within the 240-day timeframe measured as of the first post-discharge bill for the most recent episode of care. 20 Denying or Deferring Care Due to Nonpayment In general, the final regulations include as an ECA, denying or deferring medically necessary care due to an individual s nonpayment for prior care covered under the facility s FAP. 21 To deny or defer care because of an individual s nonpayment for previously provided care, a charitable hospital organization is not required to provide the patient with prior oral or written notice as described above. Instead, the notification requirement for denying or deferring care requires the hospital organization to provide a copy of the FAP application to the patient, notify the patient of the assistance available, and include the deadline for submitting the application which must be at least 30 days 19 See id. at 78987. 20 See id. 21 Treas. Reg. 1.501(r)-6(b)(1)(iii). 9

after receiving the notice. 22 Certainly, no care may be denied within the meaning of the Emergency Medical Treatment and Labor Act (EMTALA). Operational Issues Coordination of the billing and collection practice guidelines of Section 501(r)(6) requires the combination of multiple departments working together. Departments impacted might include accounting, corporate compliance, admitting, billing, patient and financial services, and marketing along with those treating patients who might be asked questions by the patient or patient s relatives related to billing. Identification of a team to implement and oversee the provisions of the reasonable efforts requirements will be critical to an organization s success as well as compliance. Organizations must also take into account the potential impact of ECAs and any denial of care on the community s perception of the hospital. Presumptive Eligibility Guidelines Reasonable efforts to determine FAP-eligibility will be satisfied if a hospital facility makes a presumptive eligibility determination that an individual qualifies for financial assistance based on other information not specifically provided by the individual or prior FAP eligibility. Examples of available information a hospital organization may utilize to determine presumptive eligibility include homelessness, unemployment, death without a known estate, or information contained within a previous FAP application. In response to comments received regarding the proposed regulations, the IRS provided greater flexibility in the final regulations regarding presumptive eligibility. Presumptive FAP-eligible individuals could receive the most generous assistance (free care) under a hospital s FAP or qualify for assistance less than the most generous 22 Treas. Reg. 1.501(r)-6(c)(4)(iii). 10

assistance. If less than the most generous assistance is provided, the hospital must provide the following to the patient: Notification of how to apply for more generous assistance as defined in the FAP; Reasonable time for completion of the FAP application prior to initiation of any ECAs; and Compliance with the reasonable time requirements if a FAP application is submitted for processing. 23 Oral Notification The final regulations greatly reduced the burden arising from oral notification requirements placed on hospital organizations under the 2012 proposed regulations, which required notification regarding the FAP in every oral communication. 24 In response to many of the comments received, the final regulations clarify that the oral notification requirements apply only to those individuals for which a hospital organization intends to initiate ECAs. As a result, the final regulations continue to require hospital organizations to make reasonable efforts to orally notify an individual regarding the hospital s FAP and the FAP application process at least 30 days prior to the initiation of any ECAs against the individual. 25 Likewise, it is important hospitals recognize that the standard is not actual and successful oral notification, but, rather, that a reasonable effort be made to orally notify the patient. Thus, a patient refusing to speak with a financial counselor or giving inaccurate contact information, on its own, will not constitute a violation of the rule. While a proposed requirement that hospitals document notification efforts has been 23 Treas. Reg. 1.501(r)-6(c)(2). 24 79 Fed. Reg. 78954, 78989 (Dec. 31, 2014). 25 Treas. Reg. 1.501(r)-6(c)(4). 11

removed, the IRS stresses that hospitals are responsible for maintaining records to substantiate any information required by the Form 990. 26 Initiation of ECAs Prior to initiating ECAs, and in addition to other notification requirements discussed above, hospitals must provide certain additional notices to patients. Requirements Unless a hospital elects to consolidate patient accounts arising from multiple episodes of care, or denies or delays medically necessary care, hospitals must provide patients with written notice that: Contains a statement that financial assistance is available to eligible individuals; Identifies the ECAs that the hospital facility intends to initiate against the patient; States a deadline after which ECAs may be initiated if an application for financial assistance is not submitted. The deadline must be 30 days after the date the written notice is provided or later; and Includes a compliant plain language summary of the hospital's FAP. In addition, the hospital must make reasonable efforts to orally notify the individual about the FAP and how the individual may obtain assistance with the FAP process. 27 Noticeably, the final regulations vary from the proposed regulations in that plain language summaries and FAPs are no longer required in each and every billing 26 79 Fed. Reg. at 78989. 27 Treas. Reg. 1.501(r)-6(c)(4)(i). 12

statement. 28 The final notice issued by a hospital about a FAP is not required to list all ECAs the hospital facility may take, rather the list must be comprised of the ECAs the hospital actually intends to take against the patient. 29 Timeframe The final regulations do not require hospitals to provide final written notice until such time as the hospital actually intends to take ECAs against a patient. Once a hospital intends to take ECAs against a patient, the aforementioned notices, including oral notification, must be provided to patients at 30 days before initiating an ECA. 30 The method of communication determines the notice's effective date (e.g., postage date for written communications, sent date for electronic communications, and delivery date for hand-delivered communications). 31 Receipt of Financial Assistance Applications Incomplete Applications Hospitals are not required to process incomplete financial assistance applications. However, the submission of an incomplete application does not permit denial. The final regulations require that, upon receipt of an incomplete financial assistance application, the hospital suspend ECAs and provide the patient with notice of the additional information or documentation necessary to complete the application. 32 This notice must include contact information where the patient can obtain further assistance with completing the application. 33 In order for the hospital to continue to pursue ECAs against the patient, the notice should state a reasonable time period within which the 28 79 Fed. Reg. at 78988. 29 See id. 30 Treas. Reg. 1.501(r)-6(c)(4)(i). 31 See 79 Fed. Reg. at 78989. 32 See Treas. Reg. 1.501(r)-6(c)(5)(i). 33 See Treas. Reg. 1.501(r)-6(c)(5)(i)(B). 13

information must be provided. 34 While the hospital may resume ECAs against the patient if the requested information is not submitted within the stated time period, 35 the patient may provide the requested information at any time during the application period. 36 If a patient submits the requested information at any time during the application period, the hospital must treat the application as complete and process the application as described below. 37 Complete Applications Obligations If a hospital receives a completed financial assistance application during the application period, it must take the following steps: Suspend any ECAs taken against the patient; Make a formal determination on the application in a timely manner; and Notify the individual in writing of the hospital s eligibility determination and the basis for the determination, including, if applicable, the financial assistance for which the individual is eligible. 38 Importantly, if a patient submits a completed financial assistance application before a hospital has taken any ECAs against the patient, a hospital will be deemed to have engaged in reasonable efforts regardless of the hospital s actions taken up to that point in time. 39 While no specific guidance was provided by the IRS regarding the timeline necessary for a timely review, hospitals should process applications in a reasonable manner and 34 Treas. Reg. 1.501(r)-6(c)(5)(ii). 35 See Treas. Reg. 1.501(r)-6(c)(8)(ii) (providing that 120 days have elapsed since the provision of the first post-discharge bill for care). 36 See Treas. Reg. 1.501(r)-6(c)(5)(ii). 37 See id. 38 See Treas. Reg. 1.501(r)-6(c)(6)(i)(A)-(B). 39 Treas. Reg. 1.501(r)-6(c)(6)(iii). 14

not unduly delay financial assistance determinations. 40 The IRS believes that a facts and circumstances test is appropriate to determine whether a hospital s review and determination was performed in a timely manner. 41 In addition, if, and to the extent, a hospital believes a patient may qualify for benefits under Medicaid, and to the extent the hospital's FAP so allows, the final regulations expressly permit a delay in processing a completed financial assistance application until a determination regarding Medicaid eligibility has been made. 42 It is important to remember that hospitals are prohibited from denying financial assistance based upon a failure to provide any information that is not requested either in the FAP or in the application or its instructions. 43 Likewise, a hospital will not be deemed to have made reasonable efforts to determine whether an individual is eligible for financial assistance when and if, the hospital relies upon information it has reason to believe is unreliable or incorrect or based upon information extracted from the patient under duress or through the use of coercive practices. 44 Revised Bill/Refund/Reversal of ECAs In the event a hospital determines that a patient is eligible for financial assistance, based upon a completed FAP application, and after providing the notice described above, the hospital must take the following actions: (1) provide an updated bill as appropriate; (2) make applicable refunds; and (3) reverse ECAs as appropriate. If an individual qualifies for free care under a hospital s FAP, the patient will not owe anything further to the hospital for the care provided. In the preamble to the final regulations, the IRS recognized that while patients should still be provided notice that 40 See 79 Fed. Reg. at 78990. 41 See id. 42 Treas. Reg. 1.501(r)-6(c)(6)(iv). 43 Treas. Reg. 1.501(r)-4(b)(3)(i). 44 Treas. Reg. 1.501(r)-6(c)(6)(ii). 15

they qualify for free care, a new billing statement indicating a zero balance is not required. 45 The notice described above suffices. However, if after applying the FAP, the individual qualifies for less than free care, a hospital must provide the individual with a revised bill indicating the new balance owed for the care after applying financial assistance and a description of how the revised amount owed was determined. 46 Additionally, the revised bill must state or describe how the individual may obtain more information regarding the amount generally billed (AGB) for the care. 47 If, after applying financial assistance to a qualifying patient, the patient has paid more than they owe, the hospital is required to make a refund of any amounts previously paid in excess of the revised amount. 48 However, if the hospital determines that the refund owed is less than $5 (or such other amount that may be set by the IRS from time to time) the hospital is not required to return the overpayment. 49 Importantly, hospitals are only required to process refunds for the episode of care for which the patient applied for financial assistance. 50 However, hospital facilities should beware if their FAPs provide for presumptive eligibility for future care based upon prior FAP applications or if their policies in any way could be construed as applying to prior episodes of care. Furthermore, hospitals need only account for amounts paid by the patient and not third party payers when determining whether a refund is owed. 51 Hospitals are also required to take all reasonably available measures to reverse any ECAs taken against an individual who qualifies for financial assistance. 52 If, for example, a hospital engaged in a civil lawsuit against a patient after undertaking reasonable efforts to determine the patient s eligibility for financial assistance, and the patient later submits a financial assistance application and qualifies for financial 45 See 79 Fed. Reg. at 78991. 46 See Treas. Reg. 1.501(r)-6(c)(6)(i)(C)(1). 47 See id. 48 Treas. Reg. 1.501(r)-6(c)(6)(i)(C)(2). 49 See id. 50 See 79 Fed. Reg. at 78991. 51 See id. 52 Treas. Reg. 1.501(r)-6(c)(6)(i)(C)(3). 16

assistance, the hospital must dismiss any suit or vacate any judgment entered against the patient. 53 The IRS has also stated that if a balance remains even after applying financial assistance to a patient account, the hospital must reverse current ECAs and start over with new ECAs. 54 Thus, in the example above, the hospital would still be required to dismiss the civil suit and commence a new action against the patient seeking payment of the new amount owed after the application of financial assistance to the account. The IRS intends to encourage hospitals to wait for the full application period to elapse before engaging in ECAs against a patient. If the hospital sold the patient account to a third party, the debt is not required to be returned since the hospital should have entered into an agreement with the debt purchaser that complies with Treas. Reg. 1.501(r)-6(c)(10). Similarly, if the ECA taken involved the denial or delay of care, there is no action required to reverse the ECA, other than for the hospital to resume providing medically necessary care to the patient. Conclusion Hospital organizations are faced with a multitude of compliance requirements associated with Section 501(r)(6) that impact various departments within a hospital environment and internal operations. Compliance requires coordination between all to make sure successful adherence to the guidelines as established by the IRS. Ultimately, failure to adhere to the requirements of Section 501(r) could result in loss of tax-exempt status. 53 See id. 54 See 79 Fed. Reg. at 78991. 17

Requirements for Tax-Exempt Hospital Billing and Collection Practices Under the ACA 2016 is published by the American Health Lawyers Association. All rights reserved. No part of this publication may be reproduced in any form except by prior written permission from the publisher. Printed in the United States of America. Any views or advice offered in this publication are those of its authors and should not be construed as the position of the American Health Lawyers Association. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought from a declaration of the American Bar Association 18