The Internal Revenue Service and Department of Treasury recently issued final regulations under Section 501(r) of the Internal Revenue Code (Final Regulations). Section 501(r), added as part of the Patient Protection and Affordable Care Act of 2010 (PPACA), established additional requirements for hospitals exempt from federal income taxation under IRC 501(c)(3) – most notably periodic community health assessments, financial assistance policies, limits on patient charges, and billing and collection policies.
The Final Regulations combine two sets of proposed regulations from 2012 and 2013. Due to the implementation deadlines established in the PPACA, the proposed regulations were used by many hospitals and health systems to comply with 501(r)’s requirements, including the initial community health needs assessment, and the IRS/Treasury Department indicated that continued reliance on those regulations until a hospital’s first taxable year beginning after December 29, 2015 – in other words, the first full year following issuance of the final regulations – is acceptable.
Because of the breadth and volume covered by regulations, we will address them in multiple posts. This post will address specifically the final regulations for community health needs assessments. Future posts will address requirements for financial assistance and emergency care policies, limitations on charges, billing and collection policies, and consequences of noncompliance.
Hospital Community Health Needs Assessments – 501(r) Final Regulations
IRC 501(r)(3) mandates that 501(c)(3) hospitals conduct a community health needs assessment (CHNA) at least every three years, and to adopt an implementation strategy to meet the community health needs identified through the CHNA. A CHNA must take into account input from representatives of the community’s interests, including public health experts. The CHNA must be made widely available to the public. As noted above, hospitals should have already completed their initial CHNAs, relying primarily on guidance found in the previous proposed regulations. A hospital’s prior CHNA can serve as the starting point for successive CHNAs, but new CHNAs should evolve to ensure compliance with the new Final Regulations.
The CHNA is a two-step process: the assessment and development, and implementation of the strategy to address the results of the CHNA. The needs assessment contains four steps: 1) defining the community served, 2) assessing the health needs of the community, 3) documenting and adopting the written CHNA report for the specific hospital facility, and 4) making the report widely available to the public.
The Final Regulations appropriately provide a degree of flexibility to a hospital facility defining its community, stating that a hospital facility may take into account all relevant factors, including geography, target populations, and principal functions. However, the Final Regulations specify that a hospital facility must account for, and may not exclude from its “community,” underserved, low-income, and minority populations, unless these patient groups are not part of the target populations or affected by the hospital facility’s principal functions. A hospital facility cannot define its community based on whether and how much a patient or patient’s insurance pays for care, or his/her eligibility for financial assistance.
Assessing Community Needs
To some extent, the 501(r) regulations make miniature public health departments out of every nonprofit hospital. Each hospital facility is tasked with identifying and prioritizing its community’s most significant health needs, and then identifying all actual and potential resources available to address these needs. By way of example, specific health needs could include barriers to accessing healthcare, shortcomings and gaps in education (e.g. nutrition, health promotion, disease prevention), or other specific social or environmental conditions. Prioritization of health needs, contemplated by the Final Regulations, can be instrumental in properly focusing the development and implementation of a strategy to address the CHNA.
A critical factor in the needs assessment is the involvement of community stakeholders and representatives. The Final Regulations specifically require each hospital facility to solicit at least one public health department (state, local, tribal, etc.), and members of underserved, low income, and minority populations. While not explicitly setting more detailed expectations, the IRS clearly expects robust and meaningful conversations, alluding to focus groups, surveys, and multiple meetings. Notably, the Final Regulations also require the hospital to consider written comments received on the previous CHNA and implementation strategy in developing its current CHNA. A hospital may seek input from various other sources in the community as well.
The CHNA Report
The written CHNA report to be disseminated to the public is the end product of a hospital facility’s efforts, and should adequately reflect a level of detail that captures the hospital’s efforts, if for no other reason than to reassure the IRS that the hospital diligently performed its CHNA duties. The report must document the needs assessment and strategy, as well as the process and methods used to develop the report. Not surprisingly, the IRS requires that if any required representative does not provide input into the CHNA, the report must document efforts to secure such input. Again, the takeaway is the same: a thorough CHNA report will be the best defense in the event of 501(r) scrutiny.
Collaboration is encouraged in the CHNA process, but the Final Regulations are clear that it is each hospital facility’s duty to ensure that it documents its own CHNA assessment and strategy. However, if through the collaborative process separate hospital facilities identify a common community or portion of a community, and similar health needs, to the extent that these are consistent among and between hospitals, each hospital facility participating in the collaborative effort may use those portions of the CHNA assessment and strategy that are applicable to it. Hospital facilities which define the same community may in fact adopt the same CHNA needs assessment and strategy if certain requirements are satisfied.
Disseminating the Report
As noted above, a hospital facility is not deemed to be in compliance with the Final Regulations until it has made the CHNA report widely available. In the Final Regulations, the IRS clarifies only that a CHNA report marked “Draft” does not establish the date on which the hospital facility performed its CHNA – it must be the final report that is made available. In addition to publishing the report online, a hospital facility should make it available for public inspection.
Timing of the Needs Assessment and Implementation Strategy
The taxable year in which the CHNA is deemed to have been performed is that year in which the CHNA report is made widely available. By May 15 of the year following completion of the CHNA needs assessment, the governing body of the hospital facility must adopt an implementation strategy to address the needs identified, and provide explanations for areas that the strategy does not address. There are exceptions to the timeframes for new and newly-acquired hospital organizations and facilities.
The next post in this series will focus on financial assistance and emergency care policies required by the Final Regulations under IRC 501(r). If you have questions regarding your hospital facility’s obligations under these Final Regulations, or other concerns regarding your tax-exempt organization, you may contact Briar Siljander or Jennifer Gross at 810-227-3103.