New Rules to Limit Tactics on Hospitals’ Fee Collections

The Obama administration has adopted sweeping new rules to discourage nonprofit hospitals from using aggressive tactics to collect payments from low-income patients.

Under the rules, nonprofit hospitals must now offer discounts, free care or other financial assistance to certain needy patients. Additionally, hospitals must try to determine whether a patient is eligible for assistance before they refer a case to a debt collector, send negative information to a credit agency, place a lien on a patient’s home, file a lawsuit or seek a court order to seize a patient’s earnings.

The rules, issued at the end of last year by the Treasury Department and the Internal Revenue Service, lay out detailed requirements for nonprofit hospitals that have or want tax-exempt status, about 60 percent of hospitals nationwide.

Health care lawyers said the rules could set an industry standard, influencing the practices of for-profit hospitals, because another federal agency, the Consumer Financial Protection Bureau, had endorsed them. The bureau has broad authority to supervise credit reporting companies and debt collectors.

For-profit hospitals, like other businesses, are typically owned by investors and pay dividends and taxes. By contrast, if a nonprofit hospital earns a surplus, it is normally reinvested in the organization, not distributed to shareholders. Nonprofit hospitals may qualify for tax exemptions if they can show that they are organized and operated for charitable purposes and provide “community benefits.”

“With these rules, it should be easier for low- and moderate-income people to get care without having to worry about a hospital or a bill collector hounding them for money they don’t have,” said Jessica L. Curtis, a lawyer at Community Catalyst, a national consumer group based in Boston.

“The rules protect low-income patients against price gouging,” Ms. Curtis said, “but hospitals can still define who qualifies for financial assistance.”

Melissa B. Jacoby, a law professor at the University of North Carolina and an expert on medical debt, said: “The regulations are really important. They don’t prevent a hospital from engaging in otherwise lawful debt collection, but hospitals must first evaluate a patient’s need for financial assistance.”

The rules, published in the Federal Register on Dec. 31, address a peculiar feature of hospital finances: For decades, uninsured patients have been required to pay much more than Medicaid, Medicare and private insurers pay for the same services. Uninsured patients were often the only ones who paid full “list prices” at hospitals.

Under the rules, patients eligible for financial assistance cannot be charged more than “the amounts generally billed” to people who have insurance through a government program or a private carrier.

In practice, said Melinda R. Hatton, senior vice president of the American Hospital Association, this means that “no one will be charged much more than the Medicare rate.”

Senator Charles E. Grassley, Republican of Iowa, who began investigating the practices of nonprofit hospitals in 2005, when he was chairman of the Finance Committee, welcomed the rules.

“Nonprofit hospitals and for-profit hospitals have often been indistinguishable,” Senator Grassley said. “The rules make clear that tax-exempt hospitals have to earn their tax exemption.”

The rules clarify broadly worded provisions of the Affordable Care Act. Under the rules, each nonprofit hospital must assess the health needs of its community at least once every three years and take steps to address those needs. Hospitals that do not meet this requirement may be subject to a tax penalty of $50,000.

In addition, each nonprofit hospital must establish and publicize a written policy stating who is eligible for financial assistance and how people can apply.

Policies will vary. Some hospitals may offer free medical care to anyone with income below the federal poverty level ($11,670 a year for an individual), while others may set the threshold twice as high. Others still could provide discounts on a sliding scale for people with incomes up to three times the poverty level.

Hospitals often go to court to collect unpaid bills. Their collection practices have been documented in hundreds of court decisions around the country. In many cases, the basic facts are not disputed: A patient received care. The hospitals often win by default because the patients do not show up in court.

The rules generally require nonprofit hospitals to give consumers at least 120 days before taking “extraordinary collection actions,” which include reporting debts to credit bureaus and using debt collection agencies.

The Consumer Financial Protection Bureau, created by the Dodd-Frank Act of 2010, has taken a keen interest in health care debts.

“Since September 2013, debt collection has been the top complaint at the consumer bureau,” said Corey Stone, an assistant director of the agency. “Among all debt types, medical debt tops the list.”

Richard Cordray, director of the consumer bureau, said he supported the I.R.S. rules. Moreover, he said, “consumers would benefit if for-profit hospitals and all other medical providers adopted the same approach.”

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