Section 501(r) was added to the Internal Revenue Code by the Patient Protection and Affordable Care Act, enacted March 23, 2010 and imposes additional requirements on charitable hospital organizations.  Since 2010, the US Department of the Treasury and the Internal Revenue Service (collectively, the “IRS”) have issued notices and solicited comments regarding the requirements of Section 501(r).  On December 31, 2014, the IRS released the regulations finalizing a number of requirements with which charitable hospitals must comply in order to avoid significant fines or the loss of their tax-exempt status (the “Final Regulations”). 

Application to Hospital Organizations and Hospital Facilities

Section 501(r) applies to all hospital organizations that are (or seek to be) recognized as described in Section 501(c)(3) (a “Hospital Organization”)[1].  However, a Hospital Organization does not have to meet the requirements of Section 501(r) with respect to any activity that constitutes an unrelated trade or business with respect to the Hospital Organization.  Whether or not the Section 501(r) requirements apply to hospital-owned physician practices or other entities providing care within a Hospital Facility depends upon how the entities are classified for federal tax purposes.  For example, a Hospital Facility would not be required to meet the Section 501(r) requirements with respect to a wholly or partially owned taxable corporation providing care in the Hospital Facility because the corporation is a separate taxable entity to which 501(r) does not apply.  If, however, a Hospital Organization is the sole member or owner of an entity providing care in one of its Hospital Facilities and that entity is disregarded as separate from the Hospital Organization for federal tax purposes, the care provided by the entity would be considered to be care provided by the Hospital Organization through its Hospital Facility; accordingly the Hospital Organization would be required to meet the Section 501(r) requirements with respect to care provided by the disregarded entity in any Hospital Facility that the Hospital Organization operates.

Community Health Needs Assessment

Similar to the 2012 proposed regulations, the Final Regulations provide that a Hospital Facility must document a community health needs assessment (“CHNA”) in a CHNA report that is adopted by an authorized body of the Hospital Facility and includes: (1) a definition of the community served by the Hospital Facility and a description of how the community was determined; (2) a description of the process and methods used to conduct the CHNA; (3) a description of how the Hospital Facility solicited and took into account input received from persons who represent the broad interests of the community it serves; (4) a prioritized description of the significant health needs of the community identified through the CHNA, along with a description of the process and criteria used in identifying certain health needs as significant and prioritizing those significant health needs; and (5) a description of resources potentially available to address the significant health needs identified through the CHNA.

The Final Regulations expand upon the examples of health needs that a Hospital Facility may consider in its CHNA to include not only the need to address financial and other barriers to care but also the need to prevent illness, to ensure adequate nutrition or to address social, behavioral and environmental factors that influence health in the community.  Hospital Facilities have flexibility to choose how best to prioritize the significant health needs of their particular communities.  However, to ensure transparency the CHNA report must describe the process and criteria used in prioritizing the significant health needs identified.

To prepare the CHNA, a Hospital Facility must obtain input from persons who represent the broad interests of the community.  Several commenters were concerned that despite a Hospital Facility’s best efforts, the Hospital Facility would be unable to actually secure such input.  Therefore, the Final Regulations make it clear that a Hospital Facility must solicit input from the following:  (1) at least one state, local, tribal or regional government public health department with knowledge, information or expertise relevant to the health needs of the community; (2) members of medically underserved, low-income, and minority populations in the community; and (3) written comments received on the Hospital Facility’s most recently conducted CHNA and most recently adopted implementation strategy.  The Hospital Facility must document its reasonable efforts to obtain such input, and the CHNA must describe those efforts. 

The Final Regulations encourage and facilitate collaboration among Hospital Facilities by allowing for joint CHNA reports.  Hospital Facilities are expressly permitted to collaborate on the CHNA and are also allowed to adopt substantively identical CHNA reports to the extent appropriate.

The Final Regulations continue to require Hospital Facilities that are newly acquired or placed into service (or become newly subject to Section 501(r)) to meet the CHNA requirements by the last day of the second taxable year beginning after the later of the date of acquisition, licensure, or recognition of Section 501(c)(3) status.

Financial Assistance Policies

Under Section 501(r)(4), a Hospital Organization must establish a written financial assistance policy (“FAP”) that includes (1) eligibility criteria for financial assistance (and whether such assistance includes free or discounted care), (2) the basis for calculating amounts charged to patients, (3) the method for applying for financial assistance, (4) in the case of an organization that does not have a separate billing and collections policy, the actions the Hospital Organization may take in the event of non-payment, and (5) measures to widely publicize the policy within the community served by the Hospital Organization. 

The Final Regulations require a Hospital Facility’s FAP to list the providers, other than the Hospital Facility itself, delivering emergency or other medically necessary care in the Hospital Facility and to specify which providers are covered by the Hospital Facility’s FAP (and which are not).  The IRS notes that if a Hospital Facility outsources the operation of its emergency room to a third party and the care provided by that third party is not covered under the Hospital Facility’s FAP, the Hospital Facility may not be considered to operate an emergency room for purposes of the factors considered in the community benefit standard test set forth in Revenue Ruling 69-545.

While the IRS intends to require Hospital Facilities to establish a transparent application process under which individuals may not be denied financial assistance based on a failure to provide information or documentation unless that information or documentation is described in the FAP or FAP application form, they do not intend to restrict Hospital Facilities’ ability to grant financial assistance to an applicant who has failed to provide such information or documentation.  Accordingly, the Final Regulations expressly state that a Hospital Facility may grant financial assistance under its FAP notwithstanding an applicant’s failure to provide such information.  The Final Regulations do not prescribe or restrict the information or documentation a Hospital Facility may request, but do require that a Hospital Facility describe such information or documentation in its FAP or FAP application form.

A Hospital Facility must make its FAP widely available.  The Final Regulations make it clear that, at a minimum, this means placing the FAP on the Hospital Facility’s website and providing written copies of the FAP to persons upon their request.  In addition, the FAP must be displayed in the Hospital Facility’s emergency room (if any) and admissions area and the Hospital Facility’s billing statement must include a conspicuous written notice informing the recipient about the availability of financial assistance under the FAP and including the telephone number of the Hospital Facility office or department that can provide information about the FAP and FAP application process and the direct Web site address (or URL) where the copies of the FAP documents may be obtained.  The Hospital Facility must also “offer” (rather than “provide”) a plain language summary of the FAP as part of the intake or discharge process.  In response to concerns raised by commenters, the IRS revised the Final Regulations to make it clear that a Hospital Facility will not have failed to widely publicize its FAP because an individual declines to take a plain language summary. 

The FAP must be translated into the primary language of any population with limited English proficiency that constitutes more than five percent of the community served by the Hospital Facility. 

In an effort to enhance collaboration among Hospital Facilities within a Hospital Organization, the Final Regulations make it clear that multiple Hospital Facilities may have identical FAPs, billing and collections policies, and/or emergency medical care policies (or even share one joint policy document), provided that the information in the policy or policies is accurate for all such facilities and any joint policy clearly states that it is applicable to each facility.

Limitation on Charges

If an individual is eligible for assistance under a Hospital Facility’s FAP, the individual may not (1) with respect to emergency or other medically necessary care, pay more than the amount generally billed (“AGB”) to individuals who have insurance covering such care and (2) with respect to all other medical care, pay more than the gross charges for such care. The 2012 proposed regulations offered Hospital Facilities two methods to use in calculating AGB – the prospective method and the look-back method.   Pursuant to the prospective method, a Hospital Facility would estimate the amount it would be paid by Medicare and a Medicare beneficiary for the emergency or other medically necessary care at issue if the FAP-eligible individual were a Medicare fee-for-service beneficiary.  The look-back method, however, required a Hospital Facility to review actual past claims by either Medicare fee-for-service only or Medicare-fee-for-service together with all private health insurers paying claims to the Hospital Facility.  Under the proposed regulations the two methodologies were mutually exclusive and after choosing a method, a Hospital Facility was locked into that methodology. 

In response to the comments received, the Final Regulations provide that a Hospital Facility may change the method it uses to determine AGB at any time. However, because the Final Regulations under Section 501(r)(4) require a Hospital Facility’s FAP to describe the methodology used to determine AGB, a Hospital Facility must update its FAP to describe a new methodology before implementing it.

The Final Regulations allow Hospital Facilities to define the term “medically necessary care” for purposes of their FAPs and the AGB limitation in recognition of the fact that health care providers and health insurers may have reasonable differences in opinion on whether some health care services are medically necessary in particular circumstances. In defining medically necessary care for purposes of their FAPs and the AGB limitation, the Final Regulations clarify that Hospital Facilities may (but are not required to) use the Medicaid definition used in the Hospital Facility's state, other definitions provided by state law, or a definition that refers to the generally accepted standards of medicine in the community or an examining physician’s determination.

The 2012 proposed regulations applied the AGB limitation only to charges to FAP-eligible individuals for emergency or other medically necessary care, while the prohibition on charging FAP-eligible individuals gross charges would also apply to “all other medical care.” A few commenters interpreted this language to mean that the prohibition on gross charges applies even to elective procedures not covered under the FAP. In response, the Final Regulations clarify that this limitation applies only to charges for care covered under a Hospital Facility’s FAP, which may, but need not, cover care that is neither emergency nor medically necessary care.

Changes to the Look-Back Methodology

To eliminate the uncertainty created by the phrase “paid in full,” the Final Regulations provide that, when calculating its AGB percentage(s) under the look-back method, a Hospital Facility should include in the numerator the full amount of all of the Hospital Facility’s claims for emergency and other medically necessary care that have been “allowed” (rather than “paid”) by health insurers during the prior 12-month period. For these purposes, the full amount allowed by a health insurer should include both the amount to be reimbursed by the insurer and the amount (if any) the individual is personally responsible for paying (in the form of co-payments, co-insurance, or deductibles), regardless of whether and when the individual actually pays all or any of his or her portion and disregarding any discounts applied to the individual’s portion (under the FAP or otherwise). 

Hospital Facilities that are covered under the same Medicare provider agreement (as identified by the same CMS Certification Number) are permitted to calculate one AGB percentage (or multiple AGB percentages for separate categories of care or separate items or services) based on the claims and gross charges for all such Hospital Facilities and implement the AGB percentage(s) across all such Hospital Facilities. In addition, the Final Regulations allow a Hospital Facility to take up to 120 days after the end of the 12-month period used in calculating the AGB percentage(s) to begin applying its new AGB percentage(s).

Changes to the Prospective Methodology

The Final Regulations allow Hospital Facilities to determine AGB under the prospective method based on Medicaid, either alone or in combination with Medicare fee-for service.  More specifically, the Final Regulations provide that a Hospital Facility using the prospective method may base AGB on either Medicare fee-for-service or Medicaid or both, provided that, if it uses both, its FAP describes the circumstances under which it will use Medicare fee-for-service or Medicaid in determining AGB.

Billing and Collection Requirements 

Section 501(r)(6) prohibits a Hospital Organization from engaging in extraordinary collection activities (“ECAs”) before it has made reasonable efforts to determine whether the individual is eligible for assistance under the FAP.  Consistent with the statute, the Final Regulations provide that a Hospital Organization meets the requirements of Section 501(r)(6) with respect to a Hospital Facility it operates only if the Hospital Facility does not engage in ECAs against an individual to obtain payment for care before making reasonable efforts to determine whether the individual is FAP-eligible for the care. For these purposes, and consistent with the 2012 proposed regulations, a Hospital Facility will be considered to have engaged in ECAs against an individual to obtain payment for care if the Hospital Facility engages in such ECAs against any other individual who has accepted or is required to accept responsibility for the first individual’s hospital bill.  This provision does not require a Hospital Facility to make reasonable efforts to determine FAP-eligibility before engaging in ECAs against private or public insurers or any other liable third parties that are not individuals. 

Extraordinary Collection Activities

The Final Regulations contain a great deal of discussion regarding ECAs and the activities which constitute ECAs.  ECAs include reporting to credit agencies but will not include filing a claim in a bankruptcy proceeding.  If a Hospital Facility defers or denies, or requires a payment before providing, medically necessary care because of an individual’s nonpayment of one or more bills for previously provided care, such actions constitute actions to collect the unpaid bills and may constitute ECAs by the Hospital Facility.  The Final Regulations provide that the proceeds of settlements, judgments, or compromises arising from a patient’s suit against a third party who caused the patient’s injuries come from the third party, not from the injured patient, and thus hospital liens to obtain such proceeds should not be treated as collection actions against the patient and are not deemed ECAs.

The 2012 proposed regulations provided that a Hospital Facility will be engaging in ECAs if it sells a patient’s debt to a third party.  In response to several comments on this point, the Final Regulations provide that the sale of an individual’s debt will not be deemed an ECA if, prior to the sale, the Hospital Facility enters into a legally binding written agreement with the purchaser of the debt which contains the following four conditions:  (1) the purchaser must agree not to engage in any ECAs to obtain payment of the debt; (2) the purchaser must agree not to charge interest on the debt in excess of the rate in effect under Section 6621(a)(2) of the Internal Revenue Code at the time the debt is sold; (3) the debt must be returnable to or recallable by the Hospital Facility upon a determination by the Hospital Facility or the purchaser that the individual is FAP eligible; and (4) if the individual is determined to be FAP eligible and the debt is not returned to or recalled by the Hospital Facility, the purchaser must adhere to the procedures specified in the agreement that ensure that the individual does not pay, and has no obligation to pay, the purchaser and the Hospital Facility more than he or she is personally responsible for paying as a FAP-eligible individual. 

“Reasonable Efforts”

The Final Regulations provide that a Hospital Facility cannot initiate ECAs against an individual whose FAP-eligibility has not been determined before 120 days after the first post-discharge billing statement.  A billing statement for care is considered “post-discharge” if it is provided to an individual after the care (whether inpatient or outpatient) is provided and the individual has left the Hospital Facility.  The Hospital Facility may continue to accept and process FAP applications at any time.  If a Hospital Facility aggregates an individual’s outstanding bills for multiple episodes of care before initiating one or more ECAs to obtain payment for those bills, it may not initiate the ECA until 120 days after it provided the first post-discharge bill for the most recent episode of care included in the aggregation. 

If a Hospital Facility receives a complete FAP application from an individual during the 240-day application period, the Hospital Facility will have made reasonable efforts to determine whether the individual is FAP-eligible only if it suspends any ECAs taken against the individual to obtain payment for the care, makes and documents an eligibility determination in a timely manner, and notifies the individual in writing of the determination and the basis for the determination.  The reasonableness of the time period required to make an eligibility determination will vary depending upon the particular facts and circumstances.  If a Hospital Facility believes an individual who has submitted a complete FAP application may qualify for Medicaid, the Final Regulations clarify that a Hospital Facility may postpone making a FAP-eligibility determination until after the individual’s Medicaid application has been completed and submitted and a determination as to Medicaid eligibility has been made. 


The Final Regulations provide that a Hospital Facility must provide a plain language summary of the FAP to an individual only if and when it sends that individual the written notice about potential ECAs.  The IRS reasons that this change from the 2012 proposed regulations will cut down on the amount of people that a Hospital Facility must notify and the administrative burden on the Hospital Facility.  A Hospital Facility must make a reasonable effort to orally notify an individual about the Hospital Facility’s FAP and about how the individual may obtain assistance with the FAP application process at least 30 days before the initiation of ECAs against the individual.  This allows a Hospital Facility to target its oral notifications to those individuals against whom they actually intend to engage in ECAs.  The notice must state the ECAs the Hospital Facility actually intends to take rather than requiring a description of every ECA a Hospital Facility “may” take in the future. 

Requirements when an Individual is Deemed FAP Eligible

The Final Regulations require written notification that an individual is determined to be eligible for free care but do not require a billing statement indicating that nothing is owed for the care.  The Hospital Facility is only required to refund payments for the care at issue or the episode of care to which an individual’s FAP application relates.  However, a Hospital Facility is not required to refund any amount a FAP-eligible individual has paid for care that exceeds the discounted amount if such excess amount is less than $5.00. 

A Hospital Facility may presumptively determine that an individual is eligible for less than the most generous assistance available under the FAP based on information other than that provided by the individual or based on a prior FAP-eligibility determination.  A presumptive determination that an individual is eligible for less than the most generous assistance available under a FAP only constitutes reasonable efforts to determine FAP eligibility if three conditions are met:  (1) a Hospital Facility must notify the individual regarding the basis for the presumptive FAP-eligibility determination and the way he or she may apply for more generous assistance under the FAP; (2) the Hospital Facility must give the individual a reasonable period of time to apply for more generous assistance before initiating ECAs to obtain the discounted amount owed for the care; and (3) the Hospital Facility must process any complete FAP application that the individual submits by the end of the application period or, if later, by the end of the reasonable time period given to apply for more generous assistance.


The Final Regulations apply to a Hospital Facility’s taxable years beginning after December 29, 2015, thereby providing all Hospital Facilities with at least a year to come into compliance with the Final Regulations.  With the exception of certain minor errors and omissions, failure to comply with Section 501(r) can result in the imposition of a $50,000 fine per hospital and/or loss of tax-exempt status. 

Click here for a copy of the Final Regulations. 

[1] A Hospital Organization is an organization recognized (or seeking to be recognized) as described in Section 501(c)(3) that operates one or more hospital facilities.  A Hospital Facility is a facility that is required by a state to be licensed, registered, or similarly recognized as a hospital (a “Hospital Facility”).