The Internal Revenue Service (IRS) recently released a proposed rule implementing the new community health needs assessment (CHNA) requirement for tax-exempt hospital facilities and organizations. Pursuant to health care reform requirements, hospitals must conduct a CHNA once every three years and adopt an implementation strategy. In July 2011, the IRS issued Notice 2011-52 (Notice), which detailed the IRS's anticipated CHNA regulations and solicited comments on the Notice. On June 26, 2012, the IRS issued a proposed rule (2012 Rule) on other new requirements for tax-exempt hospitals in the same section, Section 501(r), of the Internal Revenue Code as the CHNA provisions. The 2012 Rule affects some of the definitions applicable to CHNAs. The new proposed rule (2013 Rule) adopted many of the Notice provisions but also clarified some requirements, added flexibility, and modified some of the definitions in the 2012 Rule.

Major modifications and clarifications include:

1.     Clarifying that multiple hospital buildings operated under a single hospital license constitute a single hospital facility;

2.     Permitting two exceptions to the requirement that a hospital organization must conduct a CHNA for hospital facilities operated through a partnership with a separate organization;

3.     Establishing penalties for failures to comply with Section 501(r), which includes the CHNA requirement and other new requirements for tax-exempt hospitals, such as having a financial assistance policy;

4.     Permitting hospital facilities to assess only significant health needs, and not all health needs;

5.     Modifying the CHNA input requirement by limiting required input to public health departments, certain members on the hospital facility community, and written comments;

6.     Permitting joint CHNAs and implementation strategies; and

7.     Increasing requirements for making the CHNA report "widely available".

Definition of Hospital Facilities and Organizations

Generally, a "hospital facility" is a facility that the state requires to be licensed as a hospital. A "hospital organization" operates one or more hospital facilities. The IRS slightly modified the definition of "hospital facility" and created two exceptions to the definition of "operating a hospital facility".

Under the 2012 Rule, the IRS noted that multiple buildings "may be" a single hospital facility. The 2013 Rule proposes that multiple buildings operating under a single hospital license constitute a single hospital facility.

The IRS also provided two exceptions to the definition of "operating a hospital facility" in the context of partnerships between a hospital organization and other entities. In general, a hospital organization operates a hospital facility if it is a partner in a joint venture, limited liability company, or other entity treated as a partnership under federal income tax law that operates a hospital facility. The 2013 Rule proposes two exceptions to this requirement. First, if the tax-exempt partner does not have sufficient control over the partnership to ensure that the partnership furthers an exempt purpose, then the hospital organization will not be deemed to "operate" a hospital facility. Second, certain partnerships may be "grandfathered" and not be found to "operate" a hospital facility. To be grandfathered, on or after March 23, 2010, hospital organizations must have been organized and operated primarily for educational or scientific purposes and not for the operation of a hospital facility; and, for partnership arrangements entered into before March 23, 2012, the hospital organization must not own more than 35% of the partnership, be a general partner, or have sufficient control over the hospital facility to mandate compliance with the CHNA requirements.

The 2012 Proposed Rule clarifies that a hospital organization is not required to comply with the CHNA requirement for activities unrelated to operating a hospital facility.

Penalties for Failure to Comply

The 2013 Rule provides a penalty framework for noncompliance with the CHNA requirements.

Under the proposed rule, certain errors or omissions related to a CHNA or implementation strategy will not be considered a failure to comply if the omission or error was minor, inadvertent, due to reasonable cause, and the hospital facility takes prompt action to fix the problem. The IRS anticipates issuing further guidance for problems that are more than minor and inadvertent, but not willful or egregious. For these problems, however, the IRS anticipates requiring disclosure and correction.

For failures that are willful or egregious, the IRS notes that it will apply a facts and circumstances analysis to determine whether to revoke the tax-exempt status of the hospital organization. The IRS expects to revoke the tax-exempt status of compliance failures that are willful or egregious.

Conducting the Community Health Needs Assessment

Under the 2013 Rule, a hospital facility must follow a certain process to "conduct" a CHNA. The hospital facility must define the community it serves and assess the community's health needs. The hospital facility must document the CHNA and must make the CHNA report widely available to the public. The CHNA is "conducted" once the hospital facility meets these requirements.

The 2013 Rule permits the hospital facility to use all relevant facts and circumstances to define the hospital facility's community. The community may be defined using geography, target populations, or specialized functions. The community also may be defined outside the area where the hospital facility's patient population resides. For example, if the hospital is collaborating with other area hospitals, then it could define its community as the hospital facility's metropolitan statistical area. However, the hospital facility cannot define its "community" in order to exclude medically underserved populations, low-income persons, or minority groups.

Importantly, a hospital facility is not required to assess all health needs. Hospital facilities must identify and prioritize significant health needs and identify resources and facilities that meet those health needs. While the IRS does not require hospital facilities to use a certain prioritization method, the IRS did provide examples of prioritization criteria.

The 2013 Rule requires hospital facilities to take into account input from at least one public health department with expertise in the community's health needs; members of medically underserved populations, low-income persons, or minority groups; and written comments that the facility received about the facility's most recent CHNA and implementation strategy. The hospital facility may also take into account input from other persons, including consumers and consumer advocates, academic experts, and private businesses.

The hospital facility must report its findings in the CHNA report. The report requires a definition of the community, a description of the CHNA process, a description of the measures used to take into account community input, a prioritized list of significant health needs, and a description of measures and resources to address the health needs.

In the Notice, the IRS noted that it intended to allow hospital organizations to conduct CHNAs in collaboration. The 2013 Rule permits collaborative CHNAs and overlap in CHNA reports, but still requires each hospital facility to have a separate CHNA report. For joint CHNAs, all hospital facilities must have the same community definition, conduct a joint CHNA process, and adopt the CHNA report as its own.

The hospital facility must make the CHNA report widely available. The IRS expanded this requirement in the 2013 Rule. The hospital facility must "conspicuously" post the CHNA report on its website until two subsequent CHNA reports have been posted and not require an account to access the report. The CHNA must also be available in paper form without charge.

The Implementation Strategy

Under the Notice, the IRS stated its intention to require hospital facilities to address each of the health needs identified in the CHNA. As noted above, the IRS limited the CHNA report to include significant health needs instead of all health needs. However, hospital facilities are not required to address all significant health needs. Instead, each hospital facility must detail how it plans to address significant health needs, and for those needs the hospital facility does not intend to address, it must explain why it will not address the need.

In addition to reporting the actions the hospital facility intends to take, the hospital facility must also report the anticipated impact and state how to evaluate the impact. The hospital facility must detail programs and resources it will commit and any planned collaboration.

The IRS proposes permitting joint implementation strategies. To do so, hospital facilities must first conduct a joint CHNA. Additionally, the joint implementation strategy must clearly apply to the hospital facility, clearly outline each hospital facility's role and responsibilities, and include a summary or other tools to allow readers to easily determine which portions of the implementation strategy apply to the hospital facility.

Hospital facilities must adopt an implementation strategy by the end of the same taxable year it conducts a CHNA.

Reporting Requirements and Excise Tax

Hospital facilities must either attach the facility's most recent implementation strategy to its latest Form 990 or provide a website link to the implementation strategy. However, in each Form 990, hospital facilities must include a description of the steps it took to address significant health needs or a description of why no steps were taken for certain significant health needs.

The 2013 Rule adopted the Notice's provision that the $50,000 excise tax is imposed on a facility-by-facility basis. For example, if a hospital organization operates two hospital facilities, both of which do not comply with 501(r), then the hospital organization would be subject to a total excise tax of $100,000.

Conclusion

The 2013 Rule eases some of the provisions in the Notice while also requiring hospitals to comply with additional reporting and publication requirements. The IRS will be accepting comments on the 2013 Rule until July 5, 2013.