Three Ways to Ensure Your Patient Statements Are 501(r)-Compliant

March 4, 2016 Brian Watson

501(r) patient statement compliance

To say the healthcare regulatory environment is constantly changing would be a major understatement.

Providers face a near-unrelenting stream of complex rules for areas like coding, patient privacy, reimbursement, and quality.  As soon as one deadline passes, it seems like implementation for another new regulatory project is already closing fast.

And 2016 is shaping up to provide more of the same regulatory story. The HHS currently has 153 new regulations in development – ranging from the fairly mundane to big, costly, and transformational. 

In other words, don’t expect any shortage of major regulatory stories in 2016.  But of all the deadlines on the horizon, IRS Rule 501(r) for tax-exempt hospitals might have the most far-reaching consequences for your organization.

A Quick Primer on 501(r)

501(r) is a requirement of the Affordable Care Act that outlines patient billing policies for tax-exempt hospitals – especially regarding patients that are unable to pay for the cost of their care. 

In particular, it asks the nearly 80% of hospitals that qualify to demonstrate their tax exempt status by meeting the following four requirements:

  • Complete a Community Health Needs Assessment (CHNA) once every three years and establish an implementation strategy to meet the findings of the assessment.
  • Create a Financial Assistance Policy (FAP) which include emergency medical care.
  • Establish limits on medical charges to patients eligible to be covered by the FAP for emergency or other medically necessary care. Limits should not exceed the amount generally billed (AGB) to patients with insurance coverage.
  • Implement a policy to make reasonable efforts to determine FAP eligibility before extraordinary collection actions (ECAs) are pursued.

All tax-exempt hospitals must be in full compliance with the new IRS regulations during the 2016 fiscal year to avoid hefty penalties – including a potential loss of 501-3(c) status.

But while all qualifying hospitals are expected to comply with the new rules in 2016, the effective date depends on the start of your organization’s fiscal year.  Tax exempt hospitals with a June 30th fiscal year-end have until July 1 to complete the process, for example.

The Effect of 501(r) on Patient Financial Communication

Given the fluidity of the deadline, most health organizations are either already well on their way to creating a 501(r) implementation plan or – in the case of tax exempt hospitals that start the fiscal year on January 1 – should have a working strategy in place. 

Which means the 501(r) summary above might not contain much that you aren’t already familiar with. 

But building and executing a plan that ensures 501(r) compliance is no simple process.  It requires planning, education, and process change that will impact many departments and organizational silos – not just compliance and finance, but areas like clinical operations and vendor management as well.

And, if you’re like most hospitals, the big, thorny, time-consuming projects – conducting a CHNA, calculating AGB, reviewing policies with third-party debt collectors – will likely take precedent over lower-hanging fruit like patient financial communication.  

But being out of compliance on patient billing comes with the same headaches and penalties of the more time-consuming items, including revocation of tax-exempt status.

In the rest of this blog, I’ll provide a 501(r) patient financial communication checklist designed to help simplify and expedite the billing portion of your implementation plan. 

501(r) Patient Statement Readiness Checklist

Add a ‘Conspicuous Written Notice’ to All Billing Statements

The initial rule published by the IRS in 2012 required hospital to provide patients with a plain language summary of its FAP prior to discharge and along with each billing statement delivered.  Fortunately, in the interest of reducing administrative costs and saving paper, the IRS has scaled back that initial requirement.

In its place, providers must instead provide a ‘conspicuous written notice’ to patients on all billing materials and explicit publication of a plain language summary elsewhere, such as on a website or in waiting areas. That tradeoff is a win for providers, delivering significant savings  –printing and inserting an extra page with each billing statement sent would add up quickly after all.  

In return, however, providers will be expected to meet a set of minimum IRS guidelines that formalize exactly how to handle publication of an FAP on patient financial communication.

In other words, your organization might already note its FAP on patient statements, but unless all billing documents meet the four conditions below, they are not yet 501(r)-ready.

  • Provide a brief notice to patients of the availability of financial assistance through your FAP policy.  A sentence or two announcing the program and describing who is eligible in general terms is a good starting point.
  • Include a phone number of the department or office within your hospital that can provide additional information about the FAP and your application process.
  • Include the direct URL to the page on your website where patients can view a plain language summary of your FAP, the entire policy, and copies of an FAP application and all related documentation.
  • The conspicuous written notice must be applied to all statements and related billing documents provided to patients during the initial 120-day window after the first post-discharge statement is sent. That includes any past-due notices or letters as well as traditional billing statements.

Review the Billing of Hospital-Owned Affiliates

501(r) policies apply to all services that take place in a hospital facility and in which a hospital has a “capital or profits” interest or are treated as a part of the entity for tax purposes. 

However, if the corporation is a separate taxable entity, 501(r) requirements don’t apply – even if it is wholly or partially owned by the hospital.

That’s an important distinction from a billing perspective for this reason: all physician or emergency care entities that use hospital facilities – and are grouped together for tax purposes – must also comply with all 501(r) requirements, including the presence of a conspicuous written notice that appears on all patient financial communication. 

For health systems that operate separate billing offices or use a different statement format, inconsistent FAP notification on patient-facing financial communication could be a possible stumbling block on the path to 501(r) compliance.  Qualifying hospitals should be aware of the need for 501(r) compliance, but a hospital-owned entity might not understand that they are also expected to comply.

To avoid that potential slip-up, coordinate with all applicable hospital-owned affiliates to vet patient statements for message consistency.  In addition, providers should also ensure affiliates utilize a joint or facility-specific FAP and communicate a plain language summary not just on patient billing, but also websites, common areas, and all other external financial communication.

Provide a Suitable Notice of Extraordinary Collection Actions

Financial assistance policies aren’t the only area that will be significantly affected by 501(r) compliancy.  The new rules will also have a clear impact on billing operations, including when and how tax-exempt hospitals can use extreme collection actions (ECAs) to pursue unpaid patient balances.

Hospitals are now required to make a “reasonable effort” to determine FAP eligibility and inform patients about the plan before initiating ECAs – such as selling debt to a third party, reporting debt to a credit bureau, or taking legal actions to seize property or garnish wages.

As part of a reasonable effort, hospitals will now have to wait at least 120 days from the date that the first post-discharge billing statement is provided prior to ECA follow-up.  In addition, the following patient billing steps must first be completed:

  • Send at least three statements to patients before following-up with ECAs.
  • Make reasonable efforts to determine a patient's FAP eligibility.
  • Provide an eight month (240 day) window for patients that are determined to be FAP-eligible to submit an application before using ECAs.
  • Provide at least one written notice of the ECAs that you intend to use to pursue debt if the patient does not complete an FAP application or pay their outstanding balance within the appropriate windows. This notice must also state a deadline for when ECAs may be initiated that is no earlier than 30 days after the notice was sent.
  • The written notice of ECAs that you intend to use must also include the full plain language description of your FAP.  This is the one instance where a conspicuous written notice included with a statement alone will not suffice.  Notifications can be delivered to patients who opt in for electronic communication – either via email or viewed in a patient billing portal – but only if they expressly indicate that is their preferred engagement channel.

Hospitals will be held responsible for the actions of third party billers that violate 501(r) rules, so it’s imperative that you work alongside all applicable vendors to create an implementation plan with clear collection guidelines.

The Wrap-Up

Although the patient billing requirements of 501(r) might not provide the administrative headaches as conducting a CHNA or calculating SBGs, non-compliance still has the same risks – including loss of tax-exempt status. 

By following the simple checklist above, you can rest assured that your hospital’s patient financial communication is vetted, approved, and 501(r)-ready prior to the start of the 2016 fiscal year.  And who knows – that may just provide the pre-deadline window you’ll need to tackle 2016’s next really-big regulatory project.

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