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Staying out of the 501(r) Crosshairs

Hospitals that are currently operating as non-profit facilities under Section 501(r) of the Internal Revenue Service code or facilities that are considering doing so may want to revisit their policies and procedures as the ranking member of the Senate Finance Committee is calling for the requirements to receive such a status be strengthened. The calls for ensuring that facilities are meeting their obligations to offer enough charity care are coming amidst a growing number of media reports spotlighting what they are deeming to be “aggressive” collection practices by hospitals, including those who are already nonprofits.

Section 501(r) dictates that hospitals must offer charity care — among other requirements — but does not say how much charity care must be administered. Hospitals that are granted 501(r) status do not have to pay federal income tax. It has been in effect since 2014.

Sen. Chuck Grassley, a Republican who is now the ranking member of the Senate Finance Committee, launched an investigation into the billing and collection practices at two hospitals after each was featured in a media report for filing lawsuits against individuals with unpaid debts. Sen. Grassley was seeking information to determine whether those facilities were not “abiding by the spirit” of Section 501(r) in their billing and debt collection practices. He called for the Senate to consider making changes to Section 501(r) to make it “clearer what nonprofit hospitals must do for low-income patients in order to maintain their tax-exempt statuses.”

Coupled with the devastating financial impact of the COVID-19 pandemic, this news should be met by hospitals with some concern. Hospitals were already suffering financially. To expect them to assign more cases to charity care than try to collect on them could leave them in an even bigger financial hole. One possible solution for hospitals is to improve or enhance their processes for screening patients and ensuring that anyone with the financial ability to repay a debt does so. Nobody wants to try and collect unpaid debts from individuals who are not able to repay them. That wastes time and effort while also putting a facility under a microscope for being too aggressive with its collection efforts.

Strengthening the requirements to receive 501(r) status may mean establishing a baseline for how much charity care a hospital is required to administer or prohibiting the use of extraordinary collection efforts, to name two possible scenarios. Hospitals may want to proactively implement their own policies and procedures lest they become the next hospital in the crosshairs of the media or Congress.


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