IRS has begun its review of tax-exempt hospitals, as required by the Patient Protection and Affordable Care Act (111 Pub. L.148 § 9007(c)).

Section 9007 of the Patient Protection and Affordable Care Act (PPACA) is now affecting patient access operations and policy.(1)

A greater focus is now driving revenue cycle executives to ensure they comply with Section 9007 of the PPACA and address new requirements to qualify as a 501(c)(3) hospital. For those facilities who do not comply, a penalty in the form of an excise tax of $50,000 can be assessed as detailed in section 4959.

In order to comply with the new requirements, prior to or at the point of service, patient access personnel must take steps to identify patients who may meet their financial assistance policy thresholds and have the information to back up their assessment. These new requirements highlight the necessity of early identification of patient assistance qualification.

Section 9007 of the PPACA has direct ramifications for patient access; and requires all areas of the hospital to engage in the application of this new legislation.

New Requirements for Charitable Hospitals
While continuing to meet the general requirements applicable to all section 501(c)(3) hospital organizations (2) must also meet four new qualification requirements, summarized in new section 501(r).(3) If a hospital organization operates more than one hospital facility, each hospital facility must separately meet the new requirements; a hospital organization will not be exempt with respect to any facility that fails to meet these requirements.(4)The four new qualification requirements for the PPACA are as follows:

– Community Health Needs Assessment

– Financial Assistance Policy

– Limitations on Charges for Medical Care

– Billing and Collection Requirements

Hospitals which operate as not for profit must comply with Form 990; a publicly disclosed information return most tax-exempt organizations described in section 501(c) must file annually with the IRS. A key component for tax filing under the new rules is the proper filing of Schedule H. The 2010 Schedule H contains significant revisions to capture information regarding compliance with the new requirements of section 501(r).

Community Needs Assessment
Section 501(r)(3) requires hospital organizations to conduct a community health needs assessment (CHNA) no less than once every three years. The CHNA must take into account input from persons who represent expansive interests of the community served by the hospital and must be made widely available to the public. Moreover, hospitals must adopt an implementation strategy to meet the community health needs identified in the assessment.

Financial Assistance Policy
Section 501(r)(4) requires a hospital organization to establish a written financial assistance policy that includes eligibility criteria for financial assistance and whether such assistance includes free or discounted care; the basis for calculating amounts charged to patients; the method for applying for financial assistance; and measures to widely publicize the policy.

Charges for Medical Care
Section 501(r)(5) requires hospital organizations to limit the amounts they charge for emergency or other medically necessary care provided to individuals eligible for assistance under the hospital’s financial assistance policy to not more than amounts generally billed to individuals who have insurance covering such care. The hospital organization must also prohibit the use of gross charges when billing individuals who qualify for financial assistance.

Billing and Collections
Section 501(r)(4)(A)(iii) requires the hospital facility’s financial assistance policy, if the facility does not have a separate billing and collections policy, to explain the actions it may take in the event of nonpayment. Schedule H monitors compliance with this requirement in the “Billing and Collections” subsection in Part V, Section B, line 14. Section 501(r)(6) requires hospital organizations to engage in reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions.(6)

Compliance Reminder: Failing to comply with Section 9007 of the PPACA has connotations beyond the financial penalties and potential loss of tax-exempt status. Should patient access or the financial services department miss the opportunity to identify patients who may qualify for financial assistance at registration, it could have wide reaching financial consequences for the entire hospital. The failure to engage in consistent and defensible charity assessment practices at pre-registration and registration can put a hospital in a financial quandary, particularly with the new Section 9007 requirements.

Suggestion for Compliance: In today’s economy where some hospitals are experiencing double digit increases in their self pay patient population, it is imperative to institute an automated charity validation tool into the registration workflow. Patient participation increases exponentially when they are interviewed at pre-registration or registration and identified as possible financial assistance candidates. The new accepted practice is to run patients through an automated charity validation tool in real time to identify them for potential charity care or discounted services based on the hospital’s sliding scale. Patient participation for charity care and self pay collections decreases at a rate of 20% per month for the first three months and then drops to less than 2% after six months.(7)

Solving Charity Care Identification Dilemma
Many patients who may qualify for charity care do not bother to go through the extra steps required to meet a hospital’s charity policy. If patients were proactively identified as charity enabled at the point of service, charity compliance would increase significantly and the cost to process a charity application would decrease similarly. Once the patient leaves the facility, it is nearly impossible to encourage them to comply.

One way to solve the charity identification dilemma is to choose an automated charity care modeling tool. When selecting a modeling tool, it is imperative it offers several key features. Charity modeling which includes integrated attributes from a credit financial profile has been proven to be the most accurate in assessing a patient’s financial situation. Unfortunately, the patient or guarantor’s financial situation is not the only criteria which must be measured or estimated. The Federal Poverty Guideline (FPG) requires a comparison between a household’s total income and the number of household members in order to match the FPG guidelines. Since there is so much at stake with the new requirements of the PPACA, it is important for any charity modeling tool to estimate the “true household” income and not just produce an income estimate of the patient or guarantor.

Important Note: Leveraging a non-compliant modeling tool raises questions about the eligibility criteria for financial assistance and the method for applying for financial assistance.

Reasons to Integrate a Successful Tool
Failure to integrate an automated tool into the revenue cycle workflow for the identification of patients who may be eligible for financial assistance could have ramifications which include:

– Potential risk of not making reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy
– Potential risk of engaging in extraordinary collection efforts for charity qualified patients
– Absorbing the cost to collect from a charity qualified patient
– Inaccurate allocation of charity care and bad debt reserves
– Increased days in accounts receivable and decreased cash reserves

Integrating Financial Assistance into Operations: A significant risk for hospital executives is that tax exempt hospitals cannot take “extraordinary collection actions” (lawsuits, arrests, liens, or other similar actions) until it has made “reasonable efforts” to determine whether a patient is eligible for financial assistance. The term “reasonable efforts” has not been defined by the Act. “Organizations are challenged with defining these efforts and incorporating them with/mapping them to the financial assistance policy. Operationalizing the financial assistance practices and ensuring compliance with this 501(r) provision requires transparency and documentation due diligence”.(8)

Documentation Compliance: Creating documentation which complies with 501(r) is no easy task as many of the rules have not been clearly defined yet. The IRS has indicated that further guidance on the requirements is forthcoming. It is advisable for executive leadership to ensure that processes and controls are in place to maintain compliance and tax exemption status. Now is the time to evaluate your organization’s compliance of tax exemption requirements, protect your tax exempt status, and avoid penalties. Insuring compliance in the areas of financial assistance and collections and billing policies are a great place to start.

Ensuring Current Policies Address New Regulations
Although hospital revenue cycle executives typically have financial assistance policies in place, with the implementation of Section 9007 it is important those policies are carried out as actionable processes adhered to as stated in the policy. Some health care organizations may need to update their financial assistance policies and adjust workflow actions to comply with Section 9007 and improve the management of patient accounts. Some of the adjustments to current processes may include:

– Identify at pre-registration and registration patients who may qualify for financial assistance utilizing an automated charity identification tool which estimates “true household” income and the number of dependents as required by the Federal Poverty Guideline
– Document and clearly define for patients the policy and responsibility of the hospital and the patient to provide documentation of eligibility. This documentation should be provided to patients at or prior to registration and offer the patient the ability to electronically sign the application during the registration process
– Ensure your patient access staff has the tools such as automated systems to immediately qualify patients for financial assistance
– Have a system in place which automates the calculation of any sliding scale discounts you offer patients who do not qualify for full charity
– Have an automated tool which integrates with eligibility verification systems and allows for estimating and collecting prior balances, deductibles, co-payments, and coinsurance at the point of service
– Leverage automated registration systems which alert the registrar of registration errors immediately
– Utilize the newest real time technology which accesses cell phone provider’s data to gain the most accurate address verification available which will improve collections and eliminate returned mail

There is uncertainty about how the IRS will further define the key elements to Section 9007 and the PPACA. It is crucial for revenue cycle executives to take action to mitigate any issues which may result from the new regulations. To ensure compliance, hospitals should opt for automated technology systems to help them comply with Section 9007 and the PPACA’s new requirements. In order for hospitals to consistently verify patients who qualify for financial assistance at the point of service, they can no longer rely on manual systems. Technology solutions such as the ones outlined in this document can reduce costs and improve patient throughput while protecting the hospital and minimizing the risk of non-compliance, costly tax ramifications and revenue loss.


1. Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (“PPACA”).
2. The requirement for a community health needs assessment generally takes effect for tax years beginning after March 23, 2012.
3. Section 501(r)(2) defines a hospital organization as an organization that operates a facility that state law requires to be licensed, registered, or similarly recognized as a hospital or any other organization that the Secretary of the Treasury determines has the provision of hospital care as its principal function or purpose constituting the basis for its exemption under section 501(c)(3), without regard to section 501(r).
4. Section 9007 of PPACA.
5. Section 501(r)(2)(B)(ii).
6. The legislative history to the PPACA indicates that “extraordinary collection actions” include lawsuits, liens on residences, arrests, body attachments, or other similar collection processes.
7. Accounts receivable management best practices By John G. Salek. All rights reserved. John Wiley & Sons Publisher, 2005.
8. New 501(r) Requirements for Tax Exempt Hospitals – Compliance Implications, Huron Healthcare. Http://

The information contained in this document is not to be relied upon as legal or tax advice. It represents the opinion of the author. For further information, check with an attorney, accountant or the Internal Revenue Service.

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