Four Key Rules for Hospital Charity Care under the ACA

What organizations come to mind when people hear the word “charity”? Food banks, shelters, and community outreach programs are typically high on the list. Less widely known outside of the healthcare industry, however, is a common and critical type of charity: hospitals and health systems. Non-profit hospitals qualify as charity organizations under section 501 (c)(3) of the Internal Revenue Code, and thus are exempt from paying federal income tax. These hospitals provide care to large populations of patients who are uninsured and often have limited or no means to pay. Prior to the enactment of the Affordable Care Act (ACA), hospitals had only to follow a basic set of guidelines in order to obtain charity status, including having an independent board of trustees and an emergency department that provided care to uninsured patients.

The ACA ushered in four new compliance requirements hospitals must meet to maintain their tax-exempt status. These requirements appear to make it more difficult for hospitals to qualify as charities, as they impose substantial extra work in the form of research, writing, community outreach, and evaluation of patients’ financial status. Hospitals are indeed being pushed to go the extra mile, but the ACA requirements will benefit patients by encouraging more transparency around financial assistance, caps on charges for care, and fair collections guidelines. Having more highly satisfied patients will in turn benefit the hospital, as keeping patients happy with the overall hospital experience—rather than just with their clinical care—is an integral part of healthcare provider organizations’ roles.

The new rules, summarized below, are detailed in subsection (r) under section 501 of the Internal Revenue Code.

1. Conduct a Community Health Needs Assessment

Every three years, hospitals must analyze the health needs of the community and write a report detailing the findings. The report must include information about:

  • The methods used to complete the assessment
  • How the hospital took into account the input of individuals who represent broad interests in the community
  • A prioritized description of the community’s health needs
  • A description of existing local healthcare facilities

The assessment must be made widely available. Based on the health needs identified in the assessment, the hospital must then write an implementation strategy detailing its capability to meet those needs.
The community health needs assessment (CHNA) requirement was effective for tax years beginning after March 23, 2012.

2. Establish a written financial assistance policy

The financial assistance policy must include the following:

  • Eligibility criteria for financial assistance
  • The basis for calculating amounts charged to patients and the methods used to determine amounts billed
  • The method and necessary documentation for applying for assistance
  • The actions the hospital could take to collect payment
  • Measures to publicize the policy within the community

These requirements apply to all medical care, not just care provided in the emergency department.

3. Limit charges for care

Hospitals cannot charge uninsured patients more than they charge insured patients; charges must be limited to the rates generally billed to insured individuals. This limitation applies to both emergency and non-emergency care. One of two methods can be used to determine rates generally billed:

  • Retrospective method: based on past claims paid to the hospital by Medicare fee-for-service or Medicare fee-for-service and private insurance payments.
  • Prospective method: based on an estimate of the amount the hospital would be paid by Medicare and a Medicare beneficiary if the patient were a Medicare fee-for-service beneficiary.

Chargemaster rates cannot be billed to patients who are eligible for financial aid, but are still permitted for those who don’t qualify for aid.

4. Practice reasonable billing and collections activity

Hospitals may not engage in extraordinary collections actions in certain instances. “Extraordinary collections actions” are defined as actions taken by a hospital against an individual relating to obtaining payment of a bill for care covered under the hospital’s financial assistance plan that require legal or judicial process. Before beginning any collections effort, hospitals must evaluate the patient’s eligibility for financial aid and ensure the patient has submitted complete financial assistance application.

Hospitals are prohibited from supplying information about aid-eligible patients to credit reporting agencies, as well as from selling these patients’ debt. Finally, hospitals cannot rely on a written waiver of a patient’s right to financial aid, but must attempt to independently determine whether the patient is eligible for aid.

These rules seem demanding compared to the former rules around charity status, especially when one considers the lengths non-profit hospitals will have to go to in order to meet all four requirements. While they must work diligently to meet these guidelines, providers’ efforts are likely to pay off, not only with their taxes but with their patients and communities as well.


Vanessa Bates is Senior Lead, Marketing, at Accretive Health.