With the Affordable Healthcare Act (ACA) still the law of the land, tax-exempt hospitals are wise to take -- and keep -- stock of any work aimed at complying with Section 501(r) of the Internal Revenue Code.

Maybe your organization has already worked hard to comply with 501(r), and if so, that’s great. Still, it can only be a benefit to regularly assess the situation:  

  • Are your practices and procedures sufficient? Are they documented?
  • Are you well positioned to avoid or at least reduce the severity of any violations that may pop up despite your best efforts?
  • Do you routinely audit the hospital and its vendors with an eye toward recent enforcement actions that other hospitals have suffered?

Given the complexities of today’s revenue cycle operations, a solid, ongoing plan to comply with 501(r) is essential. It’s not going to happen without planned effort, and it’s not something that can be checked off a list and forgotten. 

What’s 501(r) Again?

501(r) governs the financial assistance policies, billing, and collection practices of hospitals exempt from taxation under IRC § 501(c)(3), including government hospitals with dual tax-exempt status. These regulations not only require specific policies and procedures, but also require hospital organizations to identify, correct and in many cases publicly disclose their own implementation errors in order to avoid penalties. And, the rules apply even to revenue cycle vendors and subvendors that service healthcare provider organizations.

Who’s Keeping Track of the Strictest Legal Requirements?

IRC 501(r) is one of many regulations tax-exempt hospitals must unpack and operationalize. Rather than displace other federal laws like the Fair Debt Collection Practices Act (FDCPA) or preempt existing state laws, such as California's Hospital Fair Pricing Policies and New York's Patient's Financial Aid Law, hospitals must layer 501(r) and develop policies and procedures that comply with the strictest applicable legal requirements of state and federal requirements.

Notably, hospital reviews to check up on compliance can be triggered by a consumer complaint through the IRS's established process for submission of complaints about tax-exempt organizations. In February 2016, the IRS noted that it would take into consideration any complaints it receives in connection with its decision to refer hospitals for field examinations.

Is There a Routine for Evaluating Compliance Practices?

The 501(r) regulations make clear that, in addition to helping prevent violations, strong compliance practices and procedures are essential to reducing the legal impact of violations that will inevitably occur in complex revenue cycle operations. Under the 501(r) framework, there are three types of violations:

  1. minor omissions or errors requiring correction, but not disclosure;
  2. excusable failures that must be corrected and disclosed to the IRS; and
  3. inexcusable failures that must be corrected and disclosed but also threaten a hospital organization's tax-exempt status.

In the absence of intentionally wrongful conduct, the crucial distinction between minor and serious 501(r) these violation types depends largely on the organization's compliance practices and procedures.

In fact, of the nine factors that the IRS has stated that it will consider when deciding whether a failure to meet 501(r) requirements justifies revocation of a hospital organization's tax exemption, eight either expressly require a hospital organization to maintain an established compliance program or involve examination of the functions of such program (e.g., early detection and correction of violations, measures to prevent recurrence of compliance errors).

Who’s Combing for Violations?

Failure to comply may result in audits, investigation, required corrections, public disclosure of violations and even loss of a hospital's tax-exempt status. To get credit for correcting and disclosing a violation (which can reduce its seriousness), it must be identified, disclosed and corrected before the IRS itself discovers the violation.

For inexcusable failures, the IRS may revoke a hospital or hospital organization's tax-exempt status. Even for excusable failures (i.e., those failures that are not willful or egregious), a hospital organization will be required to correct and publicly disclose such failure to the IRS, which may review, conduct intensive field examinations (during which the IRS may investigate any compliance errors, even if unrelated to the 501(r) failure at issue), and require further corrective actions. Additionally, the scrutiny on a hospital that arises from disclosure may lead to media inquiries, government investigations and, potentially, litigation from consumer attorneys.

Prevent, Limit, Detect, Disclose & Cure

Given the extensive regulatory framework, a significant ramp-up in enforcement activity, and the work required to establish a legally sufficient compliance program, tax-exempt hospitals need to implement and continually monitor a robust compliance program. A sound program will have procedures in place designed to limit violations, identify them when they do occur, and dedicate resources to appropriately correct and disclose the violations. Last but not least, hospitals must also ensure that their contracts with billing and collection vendors include essential terms prescribed by 501(r) regulations, and that those vendor’s activities are routinely audited with 501(r) and other relevant medical collections best practices in mind.

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