On April 5, 2013, the Internal Revenue Service published proposed regulations (Proposed Regulations) in the Federal Register that provide guidance to charitable hospital organizations on the community health needs assessment (CHNA) requirements and related excise-tax and reporting obligations enacted as part of the Patient Protection and Affordable Care Act of 2010. These Proposed Regulations also clarify the consequences for failing to meet the CHNA requirements and other requirements for charitable hospital organizations.
The Proposed Regulations are generally consistent with earlier guidance the IRS and Treasury Department issued July 2011 in Notice 2011-52. Highlighted below are a few key issues addressed in the Proposed Regulations.
Section 501(r) of the Internal Revenue Code (Code) was enacted as part of the Affordable Care Act to establish additional statutory requirements for hospital organizations to qualify for Section 501(c)(3) tax-exempt status. Section 501(r) provides that a hospital organization will not be treated as a charitable hospital unless the hospital organization:
- Satisfies the CHNA and implementation plan requirements described in Section 501(r)(3);
- Complies with the financial assistance policy requirements in Section 501(r)(4);
- Observes the restriction-on-charges requirements in Section 501(r)(5), which limit the amounts charged by hospitals for emergency or other medically necessary care; and
- Employs billing and collection practices that satisfy the requirements in Section 501(r)(6).
If a hospital organization fails to comply fully with any requirement of Section 501(r), the hospital organization will lose its Section 501(c)(3) tax-exempt status at the entity level if it operates one hospital facility or at the hospital-facility level if it operates more than one hospital facility.
Changes to Key Definitions
On June 26, 2012, the Treasury Department and IRS published proposed regulations regarding the requirements of Sections 501(r)(4) through 501(r)(6). The 2012 proposed regulations also contain definitions of a number of key terms applicable to Section 501(r)(3), including the terms “hospital organization” and “hospital facility.”
The 2012 proposed regulations define “hospital organization” to include a tax-exempt organization under Section 501(c)(3) that operates one or more hospital facilities, including organizations that operate hospitals through disregarded entities. The Proposed Regulations provide that “operating a hospital facility” includes operation not only through a disregarded entity, but also through a joint venture, limited liability company or other entity treated as a partnership for federal income tax purposes except in the following limited circumstances: (i) the organization does not have control over the hospital facility sufficient to ensure that its operation furthers an exempt purpose under Section 501(c)(3), and consequently the hospital organization treats the operation of the hospital facility as an unrelated trade or business, or (ii) the partnership is operated pursuant to certain grandfathering rules for arrangements entered into prior to March 23, 2010.
The 2012 proposed regulations defined “hospital facility” as a facility that is required by a state to be licensed as a hospital. The definition of “hospital facility” in the 2012 proposed regulations permitted a hospital organization to treat multiple buildings operated by a hospital organization under a single license to be considered a single hospital facility. This rule was intended to allow flexibility for reporting organizations; however, the IRS believes it has made it harder for the public to understand and evaluate information reported on a hospital organization’s Form 990.
In order to increase consistency in the way hospital organizations designate hospital facilities, the Proposed Regulations require hospital organizations to treat multiple buildings operated under a single license as a single hospital facility for purposes of Section 501(r)(3).
CHNA and Implementation Strategy
Section 501(r)(3) requires a hospital organization to conduct a CHNA for each hospital facility at least once every three years and adopt an implementation strategy to meet the community health needs the CHNA identifies. Conducting a CHNA consists of five steps: (i) defining the community the hospital facility serves; (ii) assessing the significant health needs of that community; (iii) taking into account input from persons representing a broad interest of that community, including those with special knowledge or expertise in public health; (iv) documenting the CHNA in a written report that is adopted by the hospital facility; and (v) making the CHNA report widely available to the public.
The Proposed Regulations include details about each of these five steps, including the following:
- Defining the “community” served. The community a hospital facility serves may be defined based on all relevant factors and circumstances. A hospital may define its community to include populations in addition to its patient populations and geographic areas outside of those in which its patient populations reside. However, hospitals may not define the community in a manner that excludes medically underserved, low-income or minority populations that live in the geographic areas in which its patient populations reside or otherwise should be included based on the method used by the hospital to define its community.
Assessing health needs.
- Identification. A hospital facility must identify significant health needs of the community, prioritize those health needs and identify potential measures and resources available to address them. Hospital facilities need only identify “significant” health needs. Whether a health need is significant is based on all of the facts and circumstances present in the community served. For these purposes, health needs include requisites for the improvement or maintenance of health status in both the community at large and in particular parts of the community.
- Prioritization. The Proposed Regulations do not require a hospital facility to use any particular method or criteria in prioritizing health needs; it may use any criteria it deems appropriate to prioritize health needs.
- Incorporating required input. Input is required, at a minimum, from (i) at least one state, local, tribal or regional government public health department official with knowledge or expertise relevant to the health needs of the community; (ii) members of medically underserved, low-income or minority populations in the community or persons representing their interests; and (iii) written comments received from the public on the hospital facility’s most recent CHNA and implementation strategy. The term “medically underserved populations” includes populations experiencing health disparities or at risk of not receiving adequate medical care as a result of being uninsured or underinsured or due to geographic, language, financial or other barriers. The new requirement to include comments on the most recent CHNA and implementation strategy is an attempt to foster a meaningful exchange over time between hospital facilities and the public.
- Documenting the CHNA. A hospital facility must document its CHNA in a report that includes (i) a definition of the community the hospital facility serves and a description of how the community was determined; (ii) a description of the process and methods used to conduct the CHNA; (iii) a description of how the hospital facility took into account input from persons who represent the broad interests of the community it serves; (iv) a prioritized description of the significant health needs of the community identified through the CHNA, along with a description of the process and criteria used in identifying certain health needs as significant and prioritizing such significant health needs; and (v) a description of potential measures and resources identified through the CHNA to address the significant health needs.
- Making the CHNA report widely available. A hospital facility must post the CHNA report, or a link to the CHNA report, on the hospital facility’s website or, if the hospital facility does not have its own website, on the hospital organization’s. The hospital facility must ensure that individuals with Internet can access, download, view and print a hard copy of the CHNA report without requiring a fee, any special computer hardware or software, or personally identifiable information. A hospital facility must also make paper copies of the CHNA report available for public inspection without charge. A CHNA report must remain widely available until two subsequent CHNA reports have been made widely available.
A CHNA is not considered conducted until all five steps are complete. Timing of the CHNA is important because it determines whether or not the CHNA is in compliance with the three-year rule and because the implementation strategy must be adopted by the end of the taxable year in which the CHNA was conducted.
The Proposed Regulations allow hospital facilities to collaborate in conducting a joint CHNA as long as the facilities define their community to be the same and the report clearly identifies each hospital facility to which it applies. The authorizing body of each collaborating hospital facility must adopt the joint CHNA as its own. Even if hospital facilities fall short of creating a joint CHNA, the Proposed Regulations allow substantively identical reports of collaborating hospital facilities “if appropriate under the facts and circumstances.”
An Implementation Strategy must address each of the health needs identified through a hospital facility’s CHNA. For each health need, strategies must either (i) describe the hospital’s plan to address the need or (ii) identify it as one the hospital does not intend to address and give reason. The Proposed Regulations provide examples of why a hospital might not address a need, including resource constraints, lack of expertise or the need’s relatively low priority.
Failure to Satisfy 501(r) Requirements
A hospital organization’s failure to comply with Section 501(r) with respect to one or more hospital facilities that it operates may result in revocation of the hospital organization’s Section 501(c)(3) status. In considering whether to revoke a noncompliant hospital organization’s Section 501(c)(3) status, the IRS will consider all the facts and circumstances surrounding the failure, including whether the organization has had previous failures to comply of the same type; the relative size, scope, nature and significance of the failure; the reasons for the failure; and whether the organization has implemented safeguards designed to prevent similar failures from occurring in the future.
If a hospital organization operating multiple hospital facilities fails to meet one or more of the requirements of Section 501(r) with respect to a particular hospital facility, the net income from the noncompliant hospital facility will be subject to tax at regular corporate rates. The IRS will impose tax if, assuming the noncompliant hospital facility were the organization’s only hospital facility, the hospital organization would lose its tax-exempt status after applying the facts-and-circumstances test described above.
It is important to point out that the Proposed Regulations provide that a hospital organization operating a noncompliant hospital facility subject to tax will continue to be treated as a Section 501(c)(3) organization for all purposes of the Code, including, for example, with respect to tax-exempt bonds issued to finance the noncompliant hospital facility.
Furthermore, in accordance with Section 4959 of the Code, the Proposed Regulations impose a $50,000 excise tax on hospital organizations for each hospital facility it operates in each taxable year that it fails to meet the requirements of Section 501(r)(3).
Minor and Immaterial Omissions
When a hospital facility makes an error with the respect to the implementation or operational requirements of Section 501(r), such error or omission will not be considered a Section 501(r) violation if it is minor, inadvertent, due to reasonable cause and corrected by the hospital facility as promptly after discovery as is reasonable given its nature. Additionally, in order to encourage prompt discovery and correction by hospital facilities, the IRS intends to publish further guidance providing for correction and disclosure of omissions or errors that rise above the level of minor and inadvertent but are neither willful nor egregious.
The Proposed Regulations include transition rules for the application of the regulations for the next three years. Hospital organizations may rely on the interim guidance in Notice 2011-52 for any CHNAs that are conducted or any implementation strategy that is adopted on or before October 5, 2013.
The Proposed Regulations are open for comment until July 5, 2013, and are expected to be finalized together with the 2012 proposed regulations for Sections 501(r)(4) through 501(r)(6).