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How 501(r) Will Affect Your Nonprofit Hospital

June 3, 2015

What 501(r) and 501(c)(3) Medical Organizations Need to Know about Collecting Debt

Nonprofit hospitals and other medical groups operating with charitable status have a few different rules — even when it comes to collecting unpaid bills from patients.
In order to keep their charitable status with the IRS, medical facilities are required to abide by section 501r of the IRS tax code. This code requires charitable organizations to have certain policies and procedures in place.  

These requirements apply to 501(c)(3) organizations that operate one or more hospital facilities. Collection agencies aren’t affected, but it’s important for hospital administrators to understand how the changes affect their collection practices.

The main part of the code requires such hospitals to:

  • Implement a written financial assistance policy (FAP),
  • Limit charges for medically necessary care to individuals who qualify for financial assistance,
  • Conduct a community health needs assessment,
  • Prohibit certain collection practices.

Collection Policies
The new rules require hospitals to explain who qualifies for financial assistance and how to apply. It also requires hospitals to explain in simple language what parts of care that financial assistance may cover and how care prices are calculated.

On the collection side, a hospital must list what collection action they will take and when if a patient does not pay. Many hospital administrators have never had to define who is eligible for collection and who is not. These policies bring up questions such as:

  • At what point will the patient be sued?
  • When will the patient be referred to a credit agency?
  • Who is in charge of making sure those timelines are followed?

That’s why it’s important for administrators to work with their collection agency about how to score people for this new policy. Even more importantly, the policies prohibit certain collection actions, known as Extraordinary Collection Actions, or ECAs. Hospitals must make “reasonable efforts” to determine whether a patient qualifies for financial assistance before resorting to ECAs. These ECAs include:

  • Any legal or judicial actions, such as a lawsuit, garnishing wages, or a property lien.
  • Selling the debt to a third party.
  • Reporting the patient to consumer credit reporting agencies or credit bureaus.

Referring the account to a collection agency is not considered an ECA, but there are specific requirements about timing and language within their letters.

  1. A hospital must allow a 240-day waiting period from the date the final bill was submitted so patients can apply for financial assistance.
  2. Hospitals and collection agencies must refrain from ECAs for at least 120 days.
  3. And collection agencies are required to provide the patient with the hospital’s financial assistance policy if they are given the account within that 240-day period.

Our letters reflect our client’s FAP by providing the address and phone number of the administrators of the program. Our collectors are also trained on how and when to provide the charity’s information to the consumer.

If you have questions about handling unpaid bills at your nonprofit hospital, please contact us for help.

Affiliations Audits & Achievements

  • HFMA: Healthcare, financial, management, association
  • AAHAM: American Association of Healthcare Administrative Management
  • ACA International

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