This Health Care Tax News article is Part II in a series discussing the proposed regulations under Code Section 501(r). The previous installment provided a general overview of why Hospital Organizations should move forward to comply with the proposed regulations and can be accessed by clicking here.
Following enactment of the Affordable Care Act ("ACA") in 2010, each tax-exempt Hospital Organization had three years to conduct its first community health needs assessment ("CHNA") and adopt an implementation strategy pursuant to the requirements of Section 501(r)(3) of the Internal Revenue Code. Now that these initial steps have been completed, Hospital Organizations should focus upon addressing the needs identified. In addition, it would be prudent for Hospital Organizations to begin planning for their next CHNA, as described below.
The Basics of the Law
Under Code Section 501(r)(3), every Hospital Organization (meaning any Code Section 501(c)(3) organization that operates one or more Hospital Facilities) is required to conduct a CHNA at least once every three years and adopt an implementation strategy to meet the community health needs identified through the CHNA. The CHNA must take into account input from persons who represent the broad interests of the community served by the Hospital Facility, including experts in public health, and the CHNA must also be made widely available to the public. A $50,000 excise tax applies to a Hospital Organization for a failure to meet the CHNA requirements for any taxable year with respect to each Hospital Facility.
Guidance from the IRS
Since 2010, the IRS has been developing guidelines to elaborate on the basic CHNA requirements described above. In 2011, the IRS issued Notice 2011-52, a summary of which is available here, to provide the first substantive guidance on how to comply with the CHNA requirements. Hospital Organizations were able to rely on this guidance until October 5, 2013, which was six months after the IRS released proposed regulations addressing the CHNA requirements. A summary of the current proposed regulations is available here. In addition, Schedule H to Form 990 requests a variety of information regarding CHNA compliance that has helped steer Hospital Organizations toward a satisfactory CHNA.
The CHNA Is Complete - Now What?
Although Hospital Organizations have completed a CHNA and adopted an implementation strategy for the first time, it is important to remember that the compliance process does not end there. The CHNA requirements are ongoing and continual, so Hospital Organizations should be mindful of their current implementation strategy and cognizant of the need to prepare a new CHNA within three years. In light of this, Hall Render offers the following practical recommendations:
- Implement the implementation strategy. Presumably, a Hospital Organization's implementation strategy sets out achievable action steps to address the community health needs identified in the CHNA. As a best practice, a Hospital Organization should diligently carry out its implementation strategy so that the next CHNA can reflect positive progress toward meeting identified needs.
- Evaluate the proposed regulations and monitor developments regarding future guidance. During the initial compliance cycle, many Hospital Organizations likely had the option to follow Notice 2011-52 or the proposed regulations. During the next compliance cycle, Hospital Organizations cannot rely on Notice 2011-52. In addition, the IRS likely will issue final regulations during 2014, and Hall Render anticipates that the final regulations will closely track the proposed regulations with respect to the CHNA requirements. Thus, Hospital Organizations should begin familiarizing themselves with the proposed regulations and other guidance and consider the impact of such authorities on the processes currently in place.
- Ensure that the CHNA report and implementation strategy is publicly available. A critical component of the CHNA requirements is that a written CHNA report be made widely available to the public. To be considered compliant, the CHNA report must be posted on a website (typically on the website of the Hospital Facility or the Hospital Organization). In addition, the CHNA report cannot be marked "draft" and must remain posted on a website until two subsequent CHNA reports are posted.
- Evaluate the process. While several states already required some form of needs assessment, the CHNA requirements presented many challenges and questions for Hospital Organizations during the initial three-year compliance cycle. Hospital Organizations should evaluate the process used for potential improvements. This evaluation may include reviewing the availability/accessibility of data internally and externally, the level of leadership involvement, the performance of advisors and the community partners utilized.
- Consider whether to partner with other Hospital Organizations. The CHNA requirements allow Hospital Organizations to partner with other Hospital Organizations to conduct a CHNA, provided that the Hospital Organizations adopt separate CHNA reports and implementation strategies.
- Review and evaluate the Hospital Organization's responses to CHNA questions on Form 990. Schedule H of Form 990 includes questions regarding the CHNA requirements. Thus, Hospital Organizations will need to evaluate the proper approach to responding to these questions.
- Develop a communications strategy. While not a requirement, a Hospital Organization should have a communications strategy to share information about the CHNA with the community it serves. An effective communications strategy can help publicize the positive contributions the Hospital Organization is making to the community and generate goodwill.
- Consider advantages of engaging legal counsel. Hospital Organizations should consider engaging legal counsel to evaluate compliance with the CHNA requirements, which can also offer certain confidentiality protections under the attorney-client privilege.
Now that the initial three-year compliance cycle for the CHNA requirements has concluded, Hospital Organizations need to focus on carrying out their implementation strategies and begin planning for their next CHNA, which will be due within three years of their current CHNA. Hospital Organizations will also want to review and revise their processes once the IRS releases final regulations. Until then, Hospital Organizations can rely on the proposed regulations to ensure compliance in the eyes of the IRS.