Achieving and Maintaining Compliance With 501(r)

By Janice M. Smith, CPA, and Rachel Spurlock, CPA
| 10/6/2015

Charitable hospitals have become very familiar with the requirements of Section 501(r) of the Internal Revenue Code and now are faced with fast-approaching deadlines (for tax years beginning on or after Jan. 1, 2016) for compliance with the final regulations implementing that law.

Hospitals have made significant inroads on the requirement to have 501(r)-compliant, board-approved policies in place regarding financial assistance, access to emergency medical care, and billing and collections that reflect their status as charitable organizations.

However, many organizations still have work to do in the operational realm – the far-reaching and highly detailed task of putting these policies into practice. This includes creating and updating signage and external Web content to inform patients of the availability of financial assistance; publishing and updating lists of providers that participate in the financial assistance program; and educating financial counselors, billing professionals, and other employees regarding underlying procedures.

The following recommendations will help organizations successfully tackle the challenges of 501(r) implementation:

Decide who will take ownership of the process. The introduction of 501(r) is the first time that the tax law has applied specifically to hospitals’ financial assistance and billing and collections policies. The tax code is being applied to many administrative and operational areas that have never had to think this broadly about how the law affects their respective functions. These changes pose significant challenges.

Compliance with 501(r) regulations requires multidisciplinary collaboration across the organization, involving participation by the tax, legal, billing and collections, patient accounting, revenue cycle, and other functions. It is imperative that someone assume responsibility for project management oversight for this collaborative process, including developing a timeline and enforcing deadlines in order to reach compliance by the effective date of the final rules.

In many cases, third parties work with hospitals as a project management resource in this regard. But whether it’s an individual or group from inside the hospital or an external resource, someone must take the reins to bring together the disparate disciplines and make sure the organization adheres to a timely and cohesive plan.

Don’t lose sight of the fact that compliance is an ongoing process. Meeting all of the provisions of 501(r) at any given point does not guarantee compliance two years or even two months later. Hospitals must keep this reality in mind to ensure that mechanisms to maintain compliance are an integral part of efforts to meet the law’s myriad requirements. For example, the IRS has determined that patients should be able to find out whether their provider is covered by the hospital’s financial assistance policy. The fact that these providers and the other entities with whom an organization contracts are constantly changing necessitates regular monitoring to ensure compliance with this part of the rules.

Focus on education and communication. All parties must understand how their role with regard to 501(r) fits into the overall picture. Achieving this awareness across the organization requires ongoing education and communication.

Think ahead. Hospitals should initiate strategic planning to analyze the impact of the new rules and expanded insurance coverage on charity care reporting. With Medicaid expansion and the requirement for individuals to obtain health insurance, many hospitals will see a decrease in their charity care expenditures. Organizations should start thinking strategically now about how they will continue to justify their tax-exempt status in light of this shift. As financial assistance and charity care numbers decline, theoretically, those dollars should be reallocated to other areas of community benefit, such as preventive care and wellness services. It is likely that the IRS will monitor this reallocation.

Tools and Resources

A variety of tools and resources exist that hospitals may use to build efficiencies and streamline their 501(r) compliance processes.

Interactive 501(r) dashboard. Dashboards facilitate consultations with hospitals, highlight areas of compliance and deficiencies, and help users to determine next steps in work plans to comply with 501(r) requirements regarding policies for financial assistance, emergency medical care, and billing and collections as well as every substantive provision of 501(r) beyond the policy requirements.

Educational programs for employees. A significant aspect of 501(r) implementation is educating employees on how to proactively inform patients and answer their questions concerning financial assistance, billing and collection procedures, and access to emergency medical care.

Detailed 501(r) compliance assessment, operational review, and mock audit procedures. A detailed assessment program to ensure that the organization has achieved substantial operational compliance can be incorporated into the 501(r) project plan. For example, an audit of the provision requiring hospitals to make the financial assistance policy widely available to the public would include a review of the hospital’s website, admissions area, and newsletter.

Hospitals need to act now and have procedures in place well into the future to maintain their tax-exempt status, avoid 501(r)-related penalties, and minimize undue scrutiny from the IRS, stakeholders, lawmakers, and other reporting bodies.



      Contact Information

      smith-jan-50 Janice Smith is with Crowe and can be reached at +1 202 779 9914.
      spurlock-rachel-50 Rachel Spurlock is a partner with Crowe and can be reached at +1 502 420 4522.


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