Providing financial assistance to patients in need of urgent medical services is one of the aspects of the policy promoted by the Internal Revenue Service. With the introduction of Section 501(r) as a supplement to the Affordable Care Act (ACA) adopted in 2010, people have been able to count on material support from tax-exempt healthcare institutions. This rule, in turn, has influenced healthcare and medical providers and defined clear norms for financial reporting and legal regulation of all challenges arising in the process of law enforcement. This work aims to reveal how IRC Section 501(r) has changed the way healthcare operates, what issues arise from its enforcement, how healthcare institutions manage this rule, and what accounting factors have arisen.
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IRC Section 501(r) and Its Enforcement
IRC Section 501(r) is an individual chapter of the ACA, which was adopted in 2010. Promoted by the Internal Revenue Service, it aims to monitor the financial aspects of non-profit healthcare institutions and, in particular, regulate their revenue cycles (501(r)). This influence is manifested in specific requirements that relate to the creation of conditions for providing patients in need of medical care with material assistance. According to Huber, Section 501(r) monitors “financial assistance and emergency medical care policies (“FAPs”),” defines a limit on FAPs-eligible patients, encourages providers to identify patients with FAPs-eligible status, and calls for community health assessments (11). Such requirements are mandatory for non-profit tax-exempt hospitals, and non-compliance with them is fraught with severe consequences, including the deprivation of tax-exempt status (Consequence of Non-Compliance with Section 501(r)). Therefore, following the provisions of this set of rules is an essential aspect of many healthcare institutions’ work and affects their revenue cycles directly.
The IRS promotes clear enforcement measures to ensure tax-exempt hospitals comply with Section 501(r). Huber cites an example of targeted work when, in 2017, the tax authority audited 968 hospitals, and nearly 40% of them were identified as needing additional assessment (14). This means that healthcare providers are forced to maintain strict accountability and follow the principles prescribed by the law. Moreover, special auditors conduct assessments not only remotely but also in medical institutions directly to make sure that all the necessary procedures for providing financial assistance to the population are followed (Shulman). This enforcement is designed to reduce Section 501(r) violations and encourage healthcare providers to comply with the rule thoroughly so that FAPs-eligible patients could count on free access to medical treatment.
Legal, Ethical, and Financial Issues
While the adoption of Section 501(r) as an addition to the ACA is a valuable step from the perspective of expanding many patients’ access to health services, this rule is often associated with some issues. In particular, healthcare providers are at risk of fines and penalties for not complying with the provisions of this law. For instance, under the legal framework, if one of the facilities of a multi-facility hospital evades Section 501(r), all departments may be held liable and deprived of their tax-exempt status (Consequence of Non-Compliance with Section 501(r)). Another example of a legal issue is providers’ incompetent work to identify FAPs-eligible patients, which can lead to lawsuits and proceedings due to complaints from both sides (501(r)). Therefore, Section 501(r) requires non-profit medical institutions to strictly adhere to the terms of interaction with the target audience.
One of the key ethical issues associated with the adoption and promotion of Section 501(r) is determining the status of patients who need financial assistance. Providers’ biased attitude, unwillingness to accept the position of the needy and some other aspects may be the consequences of this problem. Huber gives an example of a lawsuit that was caused by a deterioration in the patient’s condition, who did not receive the assistance required by law on time (8). Such an outcome is unacceptable and not only damages the reputation of medical providers but is also the reason for corresponding sanctions. Thus, ethical considerations are essential to consider when analyzing Section 501(r) implications.
Financial issues related to the enactment of the legislative rule in question and its enforcement affect healthcare providers and are manifested in fines. If a non-profit hospital does not meet the requirements prescribed by Section 501(r), a sanction tax is imposed at $50,000 (Consequence of Non-Compliance with Section 501(r)). Another potential outcome that concerns the financial field is the loss of a non-profit status (501(r)). A hospital can stop receiving funding from the authorities, which, in turn, will lead to bankruptcy and other related problems caused by the lack of funds. As a result, Section 501(r) is a strict set of rules, and compliance with it is of high importance to healthcare providers due to severe implications in case of violations.
Managing Section 501(r) by Local Healthcare Organizations
To avoid problems and sanctions from the IRS, healthcare organizations are to maintain strict financial records and adhere to the principles and requirements set out in the legal document. At the same time, one should take into account that Section 501(r) does not imply the obligatory use of FAPs of the same type as instruments regulating the procedure for financial assistance to the population. Shulman remarks that hospitals can apply customized billing and collection policies but with specific conditions. For instance, if a healthcare organization promotes an individualized financial control program, such a program is to include sanctions measures to be applied to the institution in case of non-payment (Shulman). In addition, such non-profit hospitals should provide everyone with an opportunity to review the relevant provisions of their billing policies. Therefore, despite the rigor of Section 501(r), organizations can adapt to working in such a mode and implement customized mechanisms for engaging with their target audiences while remaining accountable.
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By meeting these conditions, healthcare providers can even benefit and manage Section 501(r) successfully. According to Huber, when collecting data on patients in need of financial assistance, non-profit organizations obtain a comprehensive picture of the health of the population in their community (11). Such hospitals cannot afford to lose their tax-exempt status since they will not be able to exist as independent participants in the healthcare sector. As Huber states, when the IRS announced the inclusion of Section 501(r) in the ACA, the news alarmed many providers, in particular, with the upcoming changes in financial reporting practices (14). However, over time, hospitals have adapted to work in these conditions. Potential minor violations committed for objective reasons are not an unequivocal reason to deprive a hospital of a tax-exempt status (Consequence of Non-Compliance with Section 501(r)). Therefore, in the case of following the provisions of Section 501(r), healthcare providers can monitor their work individually and not be afraid of losing their jobs due to minor reporting errors.
One of the main effects of Section 501 (r) on the healthcare industry is increased financial reporting. Huber argues that medical providers are committed to reporting on target patient outcomes, and “this information can be used to hold the tax-exempt hospital community more accountable” (22). Some reporting issues can be caused by the biased work of non-profit healthcare institutions with the population, in particular, the determination of a FAPs status. For instance, when providers delve deep into an individual’s financial history, they become involved in complex economic processes related to credit reporting, selling debt to third parties, and other complexities (501(r)). Without an objective justification for such an intervention, hospitals run the risk of inaccurate data, which, in turn, would lead to accounting problems. As Huber notes, in case of errors, organizations are allowed to interact and resolve specific aspects of reporting together through the consolidation of funds and their allocation (19). Nevertheless, such activities carry risks because providers have to rely on colleagues’ reliability and competencies. Thus, the enforcement of Section 501(r) can be associated with individual accounting issues.
The topics of Section 501(r) adoption, its enforcement, implications, and related issues reveal the key aspects of this legal rule and its impacts on healthcare providers and the healthcare system as a whole. Non-profit hospitals should comply with the requirements in order not to be included in the sanctions list and be deprived of tax-exempt status. The analysis of individual legal, ethical, and financial nuances of the enforcement of Section 501(r) suggests the complex and rigorous nature of this law. An expanded range of accounting conventions, in turn, proves the value of this document for the population because of an opportunity to obtain financial assistance. At the same time, numerous conventions that healthcare facilities face require increased responsibility from providers, and this work environment is tense.
“501(r): IRS Regulations and the Hospital Revenue Cycle.” Parallon, 2021, Web.
“Consequence of Non-Compliance with Section 501(r).” Internal Revenue Service, 2020, Web.
Huber, Brandon. “Implementing 501 (r): Has 501 (r) Lived up to Its Intended Purpose?” Belmont Health Law Journal, vol. 2, no. 1, 2019, pp. 1-25.
Shulman, Hayley. “The IRS Is Checking 501(r) Compliance!” Withum, 2018, Web.