This article discusses compliance with Section 501(r) requirements for charitable hospitals. It provides an overview of the four main 501(r) requirements: conducting a community health needs assessment and adopting an implementation strategy every three years; establishing written financial assistance and emergency medical care policies; limiting charges for individuals eligible for financial assistance; and making reasonable efforts to determine FAP eligibility before collection actions. It emphasizes that hospitals must comply with final 501(r) Treasury Regulations for tax years after December 29, 2015. It also provides practical compliance tips for hospitals, such as defining service communities and collaborating with other organizations.

1. 25
Practical
Section 501(r)
compliance tips for
charitable hospitals
John F. Crawford
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Adjusting to
changing patterns
of technology use
an interview with Donna J. Thiel
Chief Compliance Officer
Fortis Management Group, LLC
See page 16
Adjusting to
changing patterns
of technology use
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Chief Compliance Officer
Fortis Management Group, LLC
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2. 888-580-8373 www.hcca-info.org 25
ComplianceToday July2016
FEATURE
Crawford
B
y now, charitable hospitals and their
administrators and advisors should
be well-versed in Section 501(r) of the
Internal Revenue Code of 1986, as amended,
and the related Treasury Regulations (the
501(r) regulations).1
If not, these hospitals
may have a significant problem,
because the deadline for compliance
with the 501(r) regulations has
passed for most, and the 501(r)
regulations provide no further
transition period for compliance.
Although Section 501(r) compliance
efforts have been a challenging
and time-consuming task for most
hospitals, they should not consider their
work complete. Besides confirming current
compliance, charitable hospitals should adopt
policies and implement internal procedures
to ensure ongoing compliance with Section
501(r) and the 501(r) regulations. A detailed
analysis of every issue addressed in the 501(r)
regulations exceeds the scope of this article,
but it will discuss the requirements of Section
501(r) generally and provide practical tips
for charitable hospitals in their Section 501(r)
compliance efforts.
Scope of Section 501(r)
The Patient Protection and Affordable Care
Act, enacted in 2010, created Section 501(r).
It applies to all Section 501(c)(3) organizations
that operate a hospital facility (hospital
organizations). In defining a hospital facility,
Section 501(r) relies on state law. It provides
that a hospital facility generally is any facility
that a state requires to be licensed, registered,
or similarly recognized as a hospital.2
Because each state is different, a particular
type of facility may qualify as a hospital
subject to Section 501(r) in one state, but not
in another.
Section 501(r) may apply even if a hospital
organization does not directly operate a
hospital. For example, a hospital organization
may be deemed to “operate a hospital
facility” if it does so through partnership or
a limited liability company that is taxed as a
partnership or that is a disregarded entity.3
This rule does not apply, however, if the
hospital organization treats the activity as
by John F. Crawford
Practical Section 501(r)
compliance tips for
charitable hospitals
»» Internal Revenue Code Section 501(r) imposes four additional requirements on charitable hospitals.
»» Charitable hospitals must comply with the final Section 501(r) Treasury Regulations for all tax years beginning after December 29, 2015.
»» The IRS likely will increase its Section 501(r) enforcement activities in the future.
»» Charitable hospitals that fail to meet the Section 501(r) requirements may lose their Section 501(c)(3) status.
»» Many states impose their own requirements on charitable hospitals.
John F. Crawford (jcrawford@polsinelli.com) is Shareholder at
the law offices of Polsinelli PC in Chicago. /in/jcrawford312

3. 26 www.hcca-info.org 888-580-8373
ComplianceToday July2016 FEATURE
an unrelated trade or business, or does not
control the entity.
Practical tip: When entering into a joint
venture with another organization to operate
a hospital, a charitable organization should
ensure that the governing documents of
the joint venture (e.g., a limited liability
company operating agreement or partnership
agreement) specifically require compliance
with Section 501(r). The hospital organization
also should educate its joint venture partner
on the requirements of Section 501(r) to
ensure that the joint venture adheres to these
provisions in its operations.
Section 501(r) requirements generally
Section 501(r) imposes additional requirements
on hospital organizations to qualify or
maintain status as a Section 501(c)(3)
organization. Regarding each hospital facility,
Section 501(r) specifically requires that a
hospital organization:
·· Conduct a community health needs
assessment (CHNA) and adopt an
implementation strategy at least once every
three years;
·· Establish written financial assistance and
emergency medical care policies;
·· Limit amounts charged for emergency or
other medically necessary care provided to
individuals who are eligible for assistance
under the hospital’s financial assistance
policy (FAP); and
·· Make reasonable efforts to determine
whether an individual is eligible for
assistance under the FAP before engaging
in extraordinary collection actions against
the individual.
Congress left many of the details
regarding the requirements of Section
501(r) to the Department of Treasury. After
the issuance of proposed and temporary
regulations and other guidance under
Section 501(r), the Department of Treasury
and the Internal Revenue Service (IRS)
issued the 501(r) regulations at the end of
2014. The 501(r) regulations are effective
for all tax years beginning after December
29, 2015. Thus, hospital organizations with
a calendar year accounting period must
have been in compliance beginning January
1, 2016. Before the effective date of the
501(r) regulations, hospital organizations
may rely on a good-faith interpretation of
Section 501(r).
Practical tip: The IRS will look to
a hospital organization’s Form 990 for
identifying non-compliance with Section
501(r). But, hospital organizations should
also expect more specific IRS compliance
checks and other enforcement measures in
the future. Thus, it is imperative that hospital
organizations ensure compliance on an
ongoing basis.
In the 501(r) regulations and subsequent
guidance, the IRS primarily focused on
transparency and patient protections.
In many instances, the IRS left hospital
organizations with broad discretion in
meeting the four requirements of Section
501(r). Hospital organizations should
carefully consider these two focal points
when addressing their compliance efforts
under Section 501(r).
Community health needs assessments and
implementation strategies
Section 501(r) requires each hospital
to conduct a CHNA and to adopt an
implementation strategy to meet the
community health needs identified in the
CHNA at least once every three years.4
In
conducting its CHNA, each hospital must:
·· Define the community it serves;

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ComplianceToday July2016
FEATURE
·· Assess the health needs of that
community;
·· Solicit and take into account input received
from persons who represent the broad
interest of that community, including those
with special knowledge of or expertise in
public health, when assessing the health
needs of the community;
·· Document the CHNA in a written report
that is adopted for the hospital by an
authorized body of the hospital; and
·· Make the CHNA report widely available to
the public.
Practical tip: In conducting its CHNA,
a hospital may define its community
differently for different purposes, provided
it does not exclude medically underserved,
low-income, and minority populations.
For example, the hospital’s community for
purposes of care it provides in its Emergency
Room may be different than its community for
purposes of care it provides in its Oncology
department. The CHNA report should
address these differences when defining the
community it serves.
A hospital is not prohibited from
collaborating with other hospitals or
organizations when conducting its CHNA. In
situations where there are multiple hospitals
in the same geographic region, it may make
sense for hospitals to combine resources when
defining their community. The hospitals may
issue a joint CHNA report if the hospitals
define their communities the same, the joint
CHNA report is clearly identified as applying
to each hospital, and an authorized body of
each hospital adopts the report.
An authorized body of the hospital
also must adopt a written implementation
strategy within five-and-a-half months after
the year that it conducted its CHNA. The
implementation strategy must describe how
the hospital plans to address each significant
health need identified in the CHNA, or
identify the significant health need as one the
hospital does not intend to address and why it
does not intend to address it.
As discussed above, the 501(r) regulations
focus on transparency rather than on rigid
requirements regarding the conduct and
content of a CHNA and its corresponding
implementation strategy.
Practical tip: A hospital organization
should use the CHNA report and
implementation strategy as an opportunity
to descriptively share its story about
the needs of the community and how it
plans to address those needs. If possible,
hospital organizations should also use this
as an opportunity to share resources and
collaborate with other organizations in the
community to ensure that the community’s
needs are best identified and addressed.
Financial assistance and
emergency medical care policies
A hospital organization must adopt a written
FAP and a written emergency medical care
policy for each hospital facility it operates.
Like the requirements for CHNAs, the 501(r)
regulations focus on transparency regarding
the FAP and emergency medical care policy
requirements. The 501(r) regulations do not
specify that hospital organizations maintain
certain eligibility requirements for financial
assistance and do not require that hospital
organizations provide a certain amount of
financial assistance.
Practical tip: Hospital organizations
should remember that certain states
(e.g., California) have their own financial
assistance requirements and billing and
collection restrictions. So, every hospital
should ensure that its FAP complies with

5. 28 www.hcca-info.org 888-580-8373
ComplianceToday July2016 FEATURE
state law and Section 501(r) and the 501(r)
regulations.
As mentioned above, the 501(r)
regulations give a hospital broad discretion
when determining the amounts of and
eligibility for financial assistance contained
in its FAP, provided, however, that the
FAP must:
·· Apply to all emergency and other
medically necessary care provided by
the hospital;
·· Be widely publicized and include:
• The 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;
• If the hospital does not have a
separate billing and collection policy,
the actions that may be taken in the
event of non-payment;
• If applicable, any information
obtained from sources other than
an individual seeking financial
assistance that the hospital uses, and
under what circumstances it uses
prior FAP-eligibility determinations,
to presumptively determine that the
individual is FAP-eligible; and
• A list of providers, other than the
hospital itself, who deliver emergency
or other medically necessary care in
the hospital. The list must specify
which providers are covered by the
FAP and which are not.
The last requirement (that the FAP contain
a list of providers that are and are not subject
to the FAP) has been a cause for concern and
significant confusion among hospitals. Many
hospitals have hundreds of providers who
deliver emergency and medically necessary
care at their facilities. Attaching a list of each
provider who delivers care can transform a
relatively short FAP into a lengthy document.
Compounding this problem is that this
list may frequently change as providers
change. Hospitals were concerned that the
FAP would have to be re-adopted each time
the provider list changed, putting them in an
impractical situation. To help address these
concerns, the IRS issued Notice 2015-46 to
provide clarification on how a hospital can
meet this requirement, including that:
·· The provider list is not required to indicate
whether that provider’s services are,
or may be, covered by another entity’s
financial aid policy or program;
·· Subject to certain conditions, the provider
list may be contained in a document
separate from the FAP, such as in an
addendum or appendix to the FAP;
·· If only the provider list is changed, a
hospital’s authorized body is not required
to re-adopt the FAP; and
·· If a hospital updates the list of providers
at least quarterly, it will be considered
to have taken reasonable steps to ensure
the accuracy of the list and corrected any
minor omissions or errors on the list.
Practical tip: A website link to a list of
providers or a drop-down box with a list of
providers that are subject and not subject to
the FAP, located together with the FAP, should
satisfy the 501(r) regulations provider list
requirement. However, hospitals still must
have a paper copy of the list of providers
available upon request.
Limitation on charges
Regarding care provided at each hospital
facility, Section 501(r)(5) requires hospital
organizations to limit the amounts charged

6. 888-580-8373 www.hcca-info.org 29
ComplianceToday July2016
FEATURE
(i.e., the amount the patient is responsible for
paying) to those individuals who are FAP-
eligible. For emergency or other medically
necessary care, a FAP-eligible patient cannot
be charged more than the amounts generally
billed (AGB) to individuals who have
insurance for the same care. For non-emergent
or medically necessary care, FAP-eligible
patients must be charged less than the gross
charges for the care.
The 501(r) regulations provide two methods
for calculating AGB. The first method is
referred to as the “look-back method.” Under
the look-back method, AGB is calculated by
multiplying the hospital facility’s gross charges
for the care by one or more percentages of gross
charges (AGB percentages). AGB percentages
are calculated by dividing the sum of all
allowed claims for emergency or medically
necessary care for the prior 12 months by
the sum of the associated gross charges for
those claims. To calculate AGB percentages,
the hospital must include the claims allowed
by (A) Medicare fee-for-service, (B) Medicare
fee-for-service and all private insurers, or (C)
Medicaid, either alone or in combination with
A and B above.
The 501(r) regulations allow for a hospital to
calculate different AGB percentages for separate
categories of care or for separate items or
services. For example, a hospital may calculate
an AGB percentage for charges related to a
broken arm using claims allowed by Medicare
fee-for-service, but use claims allowed under
Medicaid for charges related to a heart surgery.
The second allowable method for
calculating AGB is the “prospective method.”
Under the prospective method, a hospital can
calculate an AGB percentage by basing it on
whether the FAP-eligible patient is a Medicare
fee-for-service or Medicaid beneficiary, or
both. Some hospitals prefer the prospective
method because there is a smaller chance for
miscalculating AGB percentages.
Practical tip: A hospital should ensure
that its FAP explains how AGB is calculated
and, because the calculations can become
complicated under the look-back method, that
the calculations are being properly made by its
Finance department.
Billing and collection
With a goal of providing better patient
protections, Section 501(r) prohibits a hospital
from engaging in extraordinary collection
actions (ECAs) against an individual to obtain
payment for care before the hospital has made
reasonable efforts to determine whether the
individual is eligible for financial assistance
for the care under its FAP. ECAs include:
·· Selling an individual’s debt to another
party (with certain exceptions);
·· Reporting adverse information about the
individual to consumer credit reporting
agencies or credit bureaus;
·· Deferring or denying treatment or
requiring a payment before providing
medically necessary care because of an
individual’s non-payment for previously
provided care covered under the hospital’s
FAP; and
·· Actions that require a legal or judicial
process, such as seizing a bank account or
garnishing wages.
Practical tip: Banks and hospitals will
enter into contracts for the bank to offer
financing programs to hospital patients to
help with medical bills. Hospitals often use
these programs to help with revenue cycle
management. Hospital organizations should
approach these programs and agreements
with caution, and ensure that the agreements
do not violate the patient protections provided
in Section 501(r) and the 501(r) regulations.
To make reasonable efforts to determine
whether an individual is FAP-eligible, the

7. 30 www.hcca-info.org 888-580-8373
ComplianceToday July2016 FEATURE
501(r) regulations require hospitals either
to make a presumptive determination or
to notify the patient of the individual’s
opportunity to submit a FAP application.
The 501(r) regulations require a hospital to
take certain steps to notify an individual of
his/her opportunity to submit an application.
A hospital must take these steps and provide
an individual with at least 120 days after the
patient receives a bill after being discharged
from the hospital to apply for financial
assistance before the hospital engages in
any ECAs. After this initial 120-day period
has passed, and for the next 120 days, the
hospital must suspend any ECA against an
individual if he/she submits an application
for financial assistance.
Practical tip: Unlike the provisions
regarding CHNAs and FAPs, the 501(r)
regulations are fairly detailed in dealing
with patient protections regarding billing
and collections. Because of these detailed
requirements, implementation of these rules
can be problematic for many hospitals. Thus,
it is imperative that hospitals understand
these rules and develop internal procedures
and external procedures with third-party
vendors to ensure ongoing compliance.
Penalties for non-compliance
Failure to meet the CHNA and
implementation strategy requirements of
Section 501(r)(3) results in a $50,000 tax
on a hospital organization.5
Besides the
tax, a hospital organization risks losing its
Section 501(c)(3) status for failing to meet any
requirement under Section 501(r). The IRS
puts a hospital organization’s non-compliance
with Section 501(r) into three different
categories, provided for in IRS Notice 2015-21
and as clarified in IRS Notice 2015-46.
The first category provides that
omissions or errors that are minor and either
inadvertent or due to reasonable cause will
not be considered to be a failure to meet a
requirement of Section 501(r) if the hospital
corrects the omission or error promptly after
discovery. In Notices 2015-21 and 2015-46,
the IRS provided examples of minor errors
and omissions that were inadvertent or due
to reasonable cause. These examples are non-
exclusive and the IRS has indicated that it
may issue further guidance on this topic in
the future.
In the second category, the IRS provides
that it will excuse the failure to meet the
requirements of Section 501(r) if the failure
is not willful or egregious and the hospital
corrects and discloses the failure on its Form
990. A hospital should correct any failure as
quickly as reasonably possible and restore any
affected individual to the position in which
he/she would have been had the failure not
occurred. It also should establish procedures
for the correction of any errors in the future.
Practical tip: Because the IRS has offered
limited guidance on what constitutes an
omission or error that is minor and either
inadvertent or due to reasonable cause,
hospital organizations should consider
disclosing on its Form 990 all omissions or
errors, including those that are seemingly
innocuous, until the IRS issues further
guidance to ensure that the second category
requirements are met.
In the third category, failures to comply
with Section 501(r) that are willful or
egregious will result in the revocation of the
hospital organization’s Section 501(c)(3) status.
Conclusion
Section 501(r), the 501(r) regulations, and
other IRS guidance give charitable hospitals
and their advisors an enormous amount of
information to digest. Even the most diligent

8. 888-580-8373 www.hcca-info.org 31
ComplianceToday July2016
FEATURE
organizations may find omissions or errors
regarding Section 501(r) compliance. Therefore,
it is imperative that hospital organizations
adopt policies and implement procedures to
ensure ongoing compliance. Hopefully, this
article provides charitable hospitals with a
few practical compliance tips for their ongoing
Section 501(r) compliance efforts. In addition
to following these compliance tips, every
hospital should:
·· Recognize that there are no transition
grace periods for compliance with
Section 501(r).
·· Develop policies and define internal
procedures that ensure ongoing
compliance.
·· Ensure that these policies and procedures
are being properly implemented.
·· Do not forget state law requirements.
·· Tell the hospital’s story in its CHNA report,
implementation strategy, and Form 990.
1. Department of the Treasury, Internal Revenue Service: T.D. 9708
(December 29,2014), T.D. 9708, Correction (March 10, 2015). Fed Reg
12761. Available at http://1.usa.gov/27VJCmY
2. Section 501(r)(2).
3. Treas. Reg. Sections 1.501(r)-1(b)(22) and 1.501(r)-1(b)(28).
4. Treas. Reg. Section 1.501(r)-3(b).
5. See Section 4959.
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