Nonprofit Hospital 501(r) Obligations

Nonprofit hospitals receive significant federal tax benefits — exemption from federal income tax, access to tax-exempt bond financing, and the ability to receive tax-deductible charitable contributions. In exchange, they must provide measurable community benefit. Section 501(r) of the Internal Revenue Code, enacted as part of the Affordable Care Act, codified specific requirements that each 501(c)(3) hospital must meet. Understanding these obligations helps patients know what to demand, what the law requires, and what recourse is available when hospitals fall short.

The four core requirements under 501(r)

The 501(r) framework imposes four distinct categories of obligations on nonprofit hospitals. A hospital that fails to meet any of them risks IRS penalties and, in the most serious cases, loss of tax-exempt status.

1. Financial assistance and billing policies

Every nonprofit hospital must maintain two written policies:

Financial Assistance Policy (FAP): This document must specify:

• Who qualifies for financial assistance, based on income and other factors the hospital chooses
• The income thresholds for free care and any sliding-scale discount levels
• The basis for determining eligibility (typically income relative to the federal poverty level)
• How to apply and what documentation is required
• The languages in which the FAP is available (it must be available in the languages spoken by significant portions of the community)

Billing and Collections Policy: This policy must describe the actions the hospital may take against patients who do not pay, as well as the good-faith steps the hospital will take before initiating extraordinary collection actions.

Both policies must be made widely available — posted in waiting areas, billing offices, and on the hospital’s website — and included with billing statements. A patient or family member can request either document at any time from the billing department.

2. Limits on charges: the AGB rule

Nonprofit hospitals are prohibited from charging financial-assistance-eligible patients more than the amounts generally billed (AGB) — the amount the hospital actually accepts from insured patients, not the inflated chargemaster rate. The difference is often dramatic: a chargemaster price of $10,000 might correspond to an AGB of $3,000 to $4,000 based on what Medicare and private insurers actually pay.

The IRS allows two methods to calculate AGB:

• Look-back method: Based on average rates from all payers — Medicare, Medicaid, and private insurers — over a prior period.
• Prospective method: Based on a percentage of Medicare or a blend of Medicare and Medicaid rates.

A hospital cannot simply bill a FAP-eligible patient the full chargemaster rate. If it does, the patient may dispute the charge and demand the AGB-equivalent rate.

Additionally, for uninsured patients who are seeking care and may qualify for assistance, hospitals must provide notice of the FAP and cannot charge more than AGB until a determination is made. This rule prevents hospitals from demanding full chargemaster payment from uninsured patients who have not yet had the opportunity to apply.

3. Extraordinary collection actions: what they are and when they are prohibited

Extraordinary collection actions (ECAs) are the collection measures that 501(r) places behind a mandatory procedural wall. No ECA may begin until the hospital has:

1. Notified the patient about the FAP through billing statements and other communications.
2. Made the FAP application widely accessible.
3. Waited at least 120 days from the first billing statement (this is the minimum; hospitals may set a longer window).
4. Made reasonable efforts to determine whether the patient qualifies for financial assistance — including, in some circumstances, attempting a direct oral or written notification.

ECAs include:

• Selling the debt to a third-party collector
• Reporting the debt to a consumer credit bureau
• Filing a lawsuit against the patient
• Wage garnishment or bank levy
• Placing a lien on a patient’s property
• Referring the account to a collections agency

If a hospital initiates an ECA before completing these steps, it is in violation of 501(r). Patients in this situation should contact the hospital’s financial assistance office, document the premature action, and if necessary report the violation to the IRS.

If a hospital initiates an ECA in error against a patient who then applies for and is approved for financial assistance, the hospital is required to reverse the ECA — including recalling the debt from collections, removing any credit report entry, and adjusting the bill.

The community health needs assessment requirement

Every three years, each nonprofit hospital must conduct a Community Health Needs Assessment (CHNA) and make the results publicly available. The CHNA is a formal process for identifying the significant health needs of the communities the hospital serves. It must involve input from persons with public health expertise and representatives of low-income, minority, or underserved populations.

After conducting the CHNA, the hospital must adopt an implementation strategy — a written plan describing what the hospital will do to address the identified needs and what needs it will not address. Both the CHNA and the implementation strategy must be posted on the hospital’s website and filed with the IRS as part of Form 990.

The CHNA requirement is designed to ensure nonprofit hospitals engage substantively with community health challenges rather than operating as businesses with tax advantages but no community accountability.

How 501(r) compliance is monitored

The IRS monitors 501(r) compliance primarily through the annual Form 990, which requires hospitals to file a Schedule H detailing their community benefit activities, financial assistance provided, and compliance with each 501(r) requirement. Form 990 filings are publicly available, making it possible for watchdog organizations and the public to review hospital compliance records.

The IRS may also conduct audits specifically targeting 501(r) compliance. A hospital that fails to comply — including by not maintaining a FAP, by charging FAP-eligible patients above AGB, or by initiating ECAs prematurely — faces financial penalties:

Violation	Penalty
Failure to meet 501(r) requirements in a given year	Potential loss of tax-exempt status for that year
Technical noncompliance corrected under IRS procedures	Fixed penalty in lieu of loss of exempt status
Repeated or egregious violations	Full revocation of 501(c)(3) status

Loss of tax-exempt status would cost a hospital access to tax-exempt bond financing, tax-deductible donations, and exemption from federal income tax — a potentially enormous financial impact.

Documents and terms you’ll see

When researching a hospital’s 501(r) compliance or navigating a dispute, these terms will appear:

• 501(r) — the section of the Internal Revenue Code that governs nonprofit hospital financial assistance, AGB billing limits, extraordinary collection action prohibitions, and community health needs assessments
• Financial assistance policy (FAP) — the hospital’s required written document; you can request it at any time; if the hospital refuses to provide it, this is itself a potential compliance issue
• Amounts generally billed (AGB) — the billing ceiling for FAP-eligible patients; always substantially below the hospital’s chargemaster rate
• Extraordinary collection action — the specific list of collection measures the hospital cannot take until a minimum 120-day notification period has elapsed and reasonable efforts to determine FAP eligibility have been made

Reporting suspected violations

If you believe a nonprofit hospital has violated its 501(r) obligations, you have two primary reporting avenues:

1. IRS — file a complaint using Form 13909, Tax-Exempt Organization Complaint. The IRS uses complaints to target audit activity, including 501(r)-specific reviews.
2. State attorney general — many state AGs have authority over nonprofit corporations and can investigate hospitals that fail to provide their required community benefit, including financial assistance.

For the practical steps involved in applying for financial assistance, see the How to Apply for Charity Care page. For the broader landscape of hospital financial assistance, see the Hospital Financial Assistance and Charity Care guide.