Community Health Needs Assessments – Proposed Rules Issued by the IRS
Tax-exempt hospitals are required by section 501(r) of the Internal Revenue Code to perform a community health needs assessment (“CHNA”) at least once every three years. Tax-exempt hospitals must both perform and complete a CHNA and formally adopt an implementation strategy based on the CHNA by the end of their ﬁ rst tax year that begins after March 23, 2012. This means that, depending on when a particular hospital’s tax year ends, hospitals have either passed the deadline for adopting and implementing a CHNA or are in the middle of the tax year in which the CHNA requirements must be satisﬁ ed.
The IRS previously published Notice 2011-52 to provide guidance to the industry on the proper methodology to follow when performing a CHNA. Hospitals were entitled to rely upon that Notice when performing CHNAs for six (6) months following the publication of further proposed rules on CHNAs. Those proposed rules were formally published by the IRS on April 5, 2013. Thus, for CHNAs that will be completed (and implementation strategies adopted) prior to October 5, 2013, hospitals may continue to rely upon the Notice. Those CHNAs that will not be completed until after October 5, 2013 should utilize the proposed regulations for guidance.
The proposed CHNA rules closely follow the Notice. However, there are a few noticeable clariﬁcations and differences, some of which are highlighted below:
The proposed regulations permit multiple facilities to produce a single report so long as the facilities share the same deﬁ nition of “community”. Notice 2011-52 provided that parties could join forces in performing a community health needs assessment, but that separate reports needed to be produced for each hospital facility. Even in the proposed regulations, however, each hospital facility’s governing body must still separately adopt the CHNA even though the CHNA reports may be identical.
Likewise, the proposed regulations permit hospital facilities to adopt joint implementation strategies so long as (i) they adopted a joint CHNA report, (ii) the joint hospital implementation strategy clearly applies to the hospital facility in question, (iii) the implementation strategy adopted clearly identiﬁ es the hospital facility’s particular role and responsibilities in the implementation strategy, and (iv) the joint implementation strategy includes a summary that helps the reader locate parts of the implementation strategy that apply to the hospital facility in question.
The proposed regulations continue to require gathering input from those with expertise in public health and members of medically underserved, low-income, and minority populations in the community, but also permit the hospital to include written comments received on the hospital’s most recently conducted CHNA. The proposed regulations also provide ﬂ exibility in gathering this information from individuals who are representatives of these populations.
Health needs that need to be prioritized and addressed in the implementation strategy are limited to the “signiﬁcant health needs” that are identiﬁ ed in the CHNA. The hospital is no longer required to address every health need that is identiﬁ ed in the assessment process in the implementation strategy. The proposed regulations continue to state that the hospital need not address each identiﬁ ed need, but for those needs that will not be addressed, the hospital will need to explain why it does not intend to address them.
The IRS provided transitional relief for the adoption of the implementation strategy associated with the ﬁ rst CHNA. For those CHNAs that are performed during the ﬁ rst tax year beginning after March 23, 2012, the CHNA will be compliant so long as the implementation strategy is adopted by the board on or before the ﬁfteenth day of the ﬁfth calendar month following the close of the tax year. Implementation strategies for subsequent CHNAs must be adopted during the same tax year in which the CHNA is performed.
There are numerous other clariﬁcations and changes in the proposed regulations, so those hospitals that are currently performing CHNAs but will not have them completed by October 5, 2013 should review the proposed regulations carefully and ensure that their CHNA conforms to the proposed regulations rather than Notice 2011-52.
The proposed regulations go beyond CHNAs. They also contain provisions related to the failure to satisfy 501(r) requirements. The failure to conduct a compliant CHNA will result in a $50,000 excise tax being assessed against the hospital facility each year that it remains non-compliant. However, the statute did not provide for excise taxes or intermediate sanctions for the failure to satisfy the other provisions of 501(r) (e.g., a charity care policy that fails to contain the written requirements speciﬁ ed in the statute, failing to limit charges for those who are eligible for charity care to not more than amounts general billed to those with insurance, taking extraordinary collection actions prior to making reasonable efforts to determine if a patient is eligible for charity care). The industry was concerned that even a minor lapse in a charity care policy, for example, would technically yield a revocation of exemption under the statute.
The proposed CHNA regulations set forth the IRS’s attempt to address this issue. The proposed regulations create a three-tiered structure in analyzing a facility’s shortcoming with the 501(r) provisions.
First the IRS creates a category of “minor and inadvertent omissions and errors.” These errors address issues such as the failure to insert required information in hospital policies. So long as the error was minor, inadvertent, and due to reasonable cause and the hospital facility corrects the error as promptly after discovery as reasonable given the nature of the error or omission, the hospital’s tax-exempt status will not be revoked.
If the error or omission does not satisfy this ﬁrst standard, a hospital’s exemption may still be safe if the failure to satisfy 501(r) was neither willful nor egregious and the hospital corrects the error and makes a disclosure to the IRS. The IRS will be the ﬁnal arbiter as to whether the error or omission was willful or egregious, and the facility may be subject to intermediate sanctions at the discretion of the IRS. The IRS will provide further guidance as to the notiﬁcation process.
Finally, if the error or omission does not satisfy either standard, the IRS will consider the relevant facts and circumstances to determine whether the error or omission should result in the revocation of exemption as to the hospital facility in question. Some of the facts and circumstances the IRS will consider include, among others, (i) the size, scope, nature, and signiﬁ cance of the organization’s failure; (ii) whether there is a history of failure to comply with 501(r); (iii) the reason for the compliance failure; and (iv) whether the facility, prior to the failure, had adopted practices and procedures that were designed to comply with section 501(r). If the IRS deems the failure to be egregious, it may revoke the exemption as to the organization in question (provided the organization operates only one licensed hospital).
The proposed rules conﬁrm that a failure may be hospital speciﬁ c for those tax-exempt organizations that operate more than one licensed hospital under the same corporate entity. Such an error could result in the operations of one hospital being considered unrelated business taxable income or, depending on the size of the offending hospital in relation to the entire exempt organization, could result in the entire organization losing its exempt status. The IRS conﬁ rmed that income earned by an offending facility will be taxable and reported on the Form 990-T.
Finally, the IRS previously indicated that it intended to ﬁnalize the proposed charity care regulations shortly after it issued proposed rules on the performance of CHNAs. However, with the issuance of these proposed rules, the IRS indicated that it intends to ﬁnalize all of the 501(r) regulations at the same time. This means that unless there is a change in plan, the proposed charity care regulations will continue to provide guidance as to the provision of ﬁ nancial assistance to patients for the foreseeable future and will not become ﬁnal until the IRS has received comments on the CHNA proposed rules, reviewed those comments, and made any necessary revisions to the proposed CHNA rules. It is likely that ﬁnalized 501(r) regulations will not be issued earlier than late summer to early fall.
In the meantime, we continue to recommend that facilities subject to 501(r), including dual status governmental hospitals, adopt policies and procedures that conform to the proposed regulations.