Patients earning below certain income limits can have their entire hospital bill erased, not as a favor, but because federal and state laws require nonprofit hospitals to offer financial assistance. Under IRS Section 501(r), every tax-exempt hospital must maintain a written financial assistance policy, limit what it charges eligible patients, and hold off on aggressive debt collection until it has made a genuine effort to determine whether someone qualifies. States like New Jersey and Illinois go further, setting specific income cutoffs that trigger full bill forgiveness or sharp caps on what a hospital can collect. Yet a federal audit has found that the IRS itself struggles to verify whether hospitals actually follow through.
Federal charity care rules and the states that raise the bar
The gap between what the law promises and what patients experience often comes down to where they live. Federal regulations under 26 CFR 1.501(r)-5 prohibit nonprofit hospitals from billing financial-assistance-eligible patients at gross charges and require that those patients pay no more than amounts generally billed to insured patients. The IRS also mandates that hospitals observe waiting periods after the first post-discharge billing statement before taking any extraordinary collection actions, such as sending accounts to debt collectors or filing lawsuits.
Those federal rules set a floor. Some states build well above it. New Jersey’s program provides full coverage for patients at or below 200% of the federal poverty level, effectively wiping out the entire bill for very low-income households and offering partial assistance somewhat above that line. Illinois takes an even broader approach: at many hospitals, the state discount law sets eligibility for uninsured patients with income or assets at or below 600% of the federal poverty level at non-rural hospitals, and it caps what any hospital can collect at 25% of a patient’s income.
For a family of four in 2026, 200% of the federal poverty level translates to a modest household income, while 600% reaches well into the middle class. That means a New Jersey family hovering just above the poverty line could see a hospital bill reduced to zero, while a middle-income Illinois family facing a major surgery without insurance would still be protected from ruinous charges. In both cases, the protection exists on paper whether or not hospital staff ever mention it to the patient.
The contrast matters because states with explicit, publicly documented thresholds give patients a concrete standard to cite when disputing a bill. In states that rely solely on the federal 501(r) framework, hospitals set their own eligibility criteria, and those criteria can vary widely from one facility to the next. One nonprofit hospital might cover patients up to 250% of the poverty level, while another across town might cut off help at 150%, even though both enjoy the same federal tax exemption. Patients who do not know their rights-or who never hear about financial assistance until after a bill goes to collections-can end up paying far more than the law intends.
IRS oversight gaps and what GAO report GAO-20-679 revealed
Federal law requires nonprofit hospitals to report their community benefit activities on Form 990 Schedule H, which the IRS is supposed to review. A Government Accountability Office audit, GAO-20-679, examined how the agency oversees tax-exempt hospitals’ community benefit obligations and flagged weaknesses in the review process. Investigators found that the IRS relies heavily on self-reported information and risk-based sampling, leaving many hospitals’ charity care practices largely unchecked unless a specific complaint or red flag surfaces.
According to the audit, the IRS does not systematically verify whether hospitals’ written financial assistance policies are actually applied to real patients or whether billing departments consistently honor eligibility rules. The agency’s tools are largely limited to paper reviews and occasional examinations, and it lacks detailed data on how much free or discounted care individual hospitals provide relative to their tax benefits. As a result, regulators may not catch situations in which a hospital aggressively pursues payment from patients who should have qualified for help.
Without strong enforcement, the legal requirement to offer charity care can function more like a suggestion at some facilities. Hospitals must, under federal billing rules, make reasonable efforts to determine whether a patient qualifies for financial assistance before resorting to extraordinary collection actions such as lawsuits, wage garnishments, or liens on property. But “reasonable efforts” are not always clearly defined in practice. Some hospitals may send a financial assistance application with the first bill and consider their duty satisfied, even if the form is dense, confusing, or never translated into the patient’s primary language.
The GAO report underscores how this enforcement gap can undermine state-level protections as well. When a hospital in New Jersey or Illinois fails to screen patients properly or does not proactively inform them about available discounts, families who meet the income thresholds may never see their bills reduced. They may enter payment plans, drain savings, or face collections for debts that should have been forgiven.
Closing that gap would require better data and clearer expectations. Advocates argue that the IRS could, for example, require hospitals to report standardized metrics on the number of patients screened for financial assistance, the share of eligible patients who receive it, and the volume of accounts sent to collections. Paired with state laws that set transparent income thresholds, such measures could turn charity care from a paper promise into a predictable protection.
For now, patients bear much of the burden. Knowing that nonprofit hospitals must maintain financial assistance policies, that some states guarantee full relief at specific income levels, and that federal rules limit aggressive collections can give patients leverage when they question a bill. But until oversight catches up with the law’s intent, access to those protections will continue to depend heavily on where a person lives and how hard they are able to push back.
