1. 1
Community Health Needs Assessment Requirements
for Tax-Exempt Hospitals
Member Briefing, May 2015
Tax and Finance Practice Group
AUTHORS
Martha H. Somerville
Somerville Consulting
Baltimore, MD
T. Mills Fleming
HunterMaclean
Savannah, GA
Harold C. Moeller
Rutgers University Correctional Health Care
Trenton, NJ
2. 2
Introduction
The federal tax-exempt status of hospitals and other entities “organized and operated
exclusively for charitable purposes” has been in place since before the first federal
Income Tax Code; it endures today as the “charitable organization” exemption under the
Internal Revenue Code (I.R.C.) § 501(c)(3).1
In 1956, the Internal Revenue Service
(IRS) ruled that only a hospital “operated to the extent of its financial ability for those not
able to pay. . .” would qualify as tax-exempt under § 501(c)(3).2
This “financial ability”
test remained in effect until 1969, when the IRS established the “community benefit”
standard. Under the new standard, tax-exempt hospitals could demonstrate their
“charitable purposes” by providing broader health benefits to their communities.3
Concerns that tax-exempt hospitals were insufficiently accountable for their community
benefit responsibilities led to a series of congressional hearings and ultimately to the
IRS’ redesign of the Form 990 informational return for charitable organizations, as well
as the introduction of a new hospital-specific Schedule H. The latter would require tax-
exempt hospitals to report, categorically, expenses associated with their community
benefit programming and contributions, beginning with their 2009 tax year.4
I.R.C. § 501(r), enacted as part of the Patient Protection and Affordable Care Act of
2010 (ACA),5
requires each 501(c)(3) tax-exempt hospital organization, for each
hospital facility it operates, to conduct a Community Health Needs Assessment (CHNA)
every three years, and adopt an implementation strategy to address the community
health needs thus identified.6
Section 501(r) further requires that the CHNA take into
account input “from persons who represent the broad interests of the community served
1
Lars G. Gustafsson, The Definition of “Charitable” for Federal Income Tax Purposes: Defrocking the Old
and Suggesting Some New Fundamental Assumptions, 33 HOUS. L. REV. 587, 589-90 (1996).
2
Rev. Rul. 56-185, 1956-1 C.B. 202, 203.
3
Rev. Rul. 69-545, 1969-2 C.B. 117.
4
See Internal Revenue Serv., Form 990, Schedule H, 2008 Instructions at 1, available at
www.irs.gov/pub/irs-prior/i990sh--2008.pdf (indicating that Parts I-IV and VI of the Schedule are optional
for 2008).
5
The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010), amended by
the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (2010).
6
I.R.C. § 501(r)(3)(A).
3. 3
by the hospital facility, including those with special knowledge of or expertise in public
health,” and that the CHNA be made “widely available to the public.”7
The U.S. Department of the Treasury (Treasury) and the IRS proposed regulations to
implement § 501(r) on June 26, 20128
and April 5, 2013.9
A Final Rule (published in the
Federal Register on December 31, 2014) encompassed the subject matter of both the
2012 and 2013 proposed rules: CHNAs, financial assistance and emergency medical
care policies, limitation on charges, and billing and collection requirements.10
The Final Rule’s provisions concerning CHNA set forth process requirements that
reflect sometimes-competing policies of inclusiveness, hospital accountability, flexibility,
and community benefit transparency. This Member Briefing summarizes federal CHNA
requirements for tax-exempt hospitals, highlighting those elements of particular
importance to hospital governing bodies, including the avoidance of potential sanctions
for noncompliance.
Board Responsibility: “An Authorized Body of the Hospital Facility”
Paraphrasing I.R.C. § 501(r)(2)(A)(i), the Final Rule defines a “hospital organization” as
“an organization recognized (or seeking to be recognized) as described in section
501(c)(3) that operates one or more hospital facilities.”11
The Final Rule conditions a
hospital organization’s tax exemption with respect to each of the hospital facilities it
operates on the facility’s conducting a CHNA consistent with I.R.C. § 501(r)(3)
requirements.12
7
I.R.C. § 501(r)(3)(B).
8
Additional Requirements for Charitable Hospitals, 77 Fed Reg. 38148-38169 (June 26, 2012).
9
Community Health Needs Assessments for Charitable Hospitals, 78 Fed Reg. 20523-20544 (Apr. 5,
2013).
10
Additional Requirements for Charitable Hospitals; Community Health Needs Assessments for
Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return,
79 Fed. Reg. 78954-79016 (Dec. 31, 2014) (to be codified at 26 C.F.R. pts. 1, 53, & 602) (referenced in
the text as “the Final Rule”).
11
Compare § 1.501(r)-1(b)(18), 79 Fed. Reg. 78999 (Dec. 31, 2014) with I.R.C. § 501(r)(2)(A)(i).
12
§ 1.501(r)-3(a), 79 Fed. Reg. 79001 (Dec. 31, 2014).
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A hospital facility (defined as “a facility that is required by a state to be licensed,
registered, or similarly recognized as a hospital”) must develop a CHNA report and an
implementation strategy, both of which must be adopted by “an authorized body of the
hospital facility,” i.e., the governing body of the 501(c)(3) hospital organization that
operates the hospital facility, or a committee or other party it authorizes to do so “to the
extent such committee or other party is permitted under state law to act on behalf of the
governing body.”13
Thus, a 501(c)(3) hospital organization’s governing body—either
directly or through a committee or individual it has so authorized—ultimately is
responsible for adopting a facility-specific CHNA report that documents its CHNA
findings, and an implementation strategy that commits the hospital facility during its next
three tax years to specific actions designed to address the priority community health
needs identified through the CHNA process.14
Inasmuch as a 501(c)(3) hospital organization’s tax exemption rests on representations
concerning its charitable purpose, its community’s needs, and the community benefits it
provides, the importance of governing body oversight of CHNA processes cannot be
overstated. In addition, a governing body should familiarize itself with applicable state
law relating generally to duties of nonprofit corporate boards and the “business
judgment rule.” These generally require that a director be disinterested and act in good
faith in the best interests of the corporation.15
To avoid an inadvertent failure to “adopt”
(and the consequent failure to complete) a CHNA or an implementation strategy, the
governing body of a hospital organization that operates multiple facilities in diverse
13
§ 1.501(r)-1(b)(4)(i), 79 Fed. Reg. 79002 (Dec. 31, 2014) (emphasis added). With respect to a hospital
facility operated by an entity that is disregarded or treated as a partnership for federal tax purposes, “an
authorized body of the hospital facility” means the governing body of that entity, or a committee of, or
other party authorized by that governing body, “to the extent such committee or other party is permitted
under state law to act on behalf of the governing body.” § 1.501(r)-1(4)(ii), 79 Fed. Reg. 79002 (Dec. 31,
2014). This provision is further elaborated in the Final Rule’s preamble. See § 1.h., 79 Fed. Reg. 78959
(Dec. 31, 2014).
14
§§ 1.501(r)-3(a)(2), -3(b)(1)(iv), 79 Fed. Reg. 79001 (Dec. 31, 2014). Although a hospital facility must
conduct a CHNA and develop an implementation strategy only every three years, it is required annually to
provide updated information concerning actions taken to address needs identified in the CHNA. See
Internal Revenue Serv., Form 990, Schedule H, Part V “Facility Information,” §§ A, line 11, C, available at
www.irs.gov/pub/irs-pdf/f990sh.pdf.
15
See, e.g., Fed. Deposit Ins. Corp. v. Loudermilk, 295 Ga. 579, 761 S.E.2d (2011).
5. 5
jurisdictions should ensure that the committees or individual(s) tasked with approving
CHNA reports and implementation strategies at the facility level are permitted to act on
the hospital organization’s behalf under the law of the state in which the relevant facility
is located, as well as under that of the state in which the hospital organization is
organized.
CHNA Process Requirements
Section 1.501(r)-3(b)(1) identifies five steps that a hospital facility operated by a
501(c)(3) hospital organization must complete triennially:
1. Define the Community Served by the Hospital Facility.
A hospital facility has substantial flexibility in defining the community it serves for
purposes of conducting its CHNA. The primary limitation is that the defined community
may not exclude medically underserved, low-income, or minority populations who reside
within the facility’s geographic service area, or who otherwise would be included by
even-handed application of the definitional method used. In identifying its patient
populations for purposes of defining the community it serves, a hospital facility also
must take all patients into account without regard to insurance coverage or eligibility for
financial assistance.16
For example, if a hospital facility defines its community as its service area,17
based on
the predominant zip codes of its patient population, the Final Rule would prohibit the
exclusion of a subset of the predominant zip codes of its patient population in which
lower-income residents (or a disproportionately high percentage of minority populations)
16
§ 1.501(r)-3(b)(3), 79 Fed. Reg. 79001 (Dec. 31, 2014).
17
Regarding the geographic area served by a hospital facility, the Final Rule provides the following
clarification: “In the case of a hospital facility consisting of multiple buildings that operate under a single
state license and serve different geographic areas or populations, the community served by the hospital
facility is the aggregate of such areas or populations.” § 1.501(r)-3(b)(3), 79 Fed. Reg. 79002 (Dec. 31,
2014).
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reside. Methods of community definition appropriately may take into account “all of the
relevant facts and circumstances, including the geographic area served by the hospital
facility, target population(s) served (for example, children, women, or the aged), and
principal functions (for example, a pediatric or maternity hospital).”18
The just-quoted
provision suggests, for example, that a pediatric hospital might appropriately limit its
defined community to children, and that a psychiatric hospital might define its
community as individuals with behavioral health issues.
2. Assess the Community’s Health Needs.
A hospital must identify its community’s significant health needs, prioritize those needs,
and identify potential resources available to address them. Although the Final Rule does
not prescribe a specific methodology for the assessment, numerous tools and resources
for planning and conducting a CHNA, including how to access relevant data, are
available online without charge.19
The Final Rule specifically recognizes that a community’s health needs include the
requisites for health maintenance and improvement, such as “the need to address
financial and other barriers to accessing care, to prevent illness, to ensure adequate
nutrition, or to address social, behavioral, and environmental factors that influence
18
To avoid an implication that the defined community “may not actually be the community served by the
hospital facility” (Preamble § 3.a.i., 79 Fed. Reg. 78962 (Dec. 31, 2014), the Final Rule deletes language
in the proposed rule indicating that 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 population resides.” §
501(r)-3(b)(3), 78 Fed. Reg. 20541 (proposed Apr. 5, 2014).
19
§ 1.501(r)-3(b)(4) (79 Fed. Reg. 79002 (Dec. 31, 2014). Tools and resources for conducting CHNA are
available from a number of public and private sources. For example, the U.S. Centers for Disease Control
and Prevention (CDC) has developed new tools for assessing factors affecting health across populations
and a collaborative approach to improving the health of communities; these are available as part of the
CDC Community Health Improvement Navigator at www.cdc.gov/CHInav. The Health Resources and
Services Administration maintains web-based directories for identifying designated Medically
Underserved Areas and Health Professional Shortage Areas based on provider-to-patient ratios with
respect to primary care, dental, and behavioral health services (available at http://hpsafind.hrsa.gov/ and
http://datawarehouse.hrsa.gov/GeoAdvisor/ShortageDesignationAdvisor.aspx). For geo-mapping data
relevant to health care access, health disparities, and underlying causes, see, e.g, Community Commons’
Vulnerable Populations Footprint, available at http://assessment.communitycommons.org/Footprint/) and
Dignity Health’s Community Need Index, available at
www.dignityhealth.org/Who_We_Are/Community_Health/STGSS044508).
7. 7
health in the community.” The significance of the just-quoted provision may transcend
the context in which it arises: with respect to hospital initiatives undertaken to address
such “upstream” health conditions, it would seem to support a hospital’s reporting of
expenses associated with such efforts as “community health improvement” (Schedule
H, Part I, line 7e) rather than in the less-favorable “community building” category
(Schedule H, Part II).20
The determination of whether an identified need is “significant” should be based on “all
the facts and circumstances” in the community. Prioritization may be based on “any
criteria” the hospital chooses to use. Whereas the proposed rule required community
input to be taken into account in determining the significance of identified needs (but not
their priority), the Final Rule expressly requires that community input be taken into
account in determining both the significance of community needs and in prioritizing
them.21
3. Solicit and Take into Account Input Received from Persons Who Represent
the Broad Interests of the Community, Including Those with Special
Knowledge of, or Expertise in, Public Health.22
Hospital facilities are encouraged to solicit and take into account input from a wide
variety of community sources, such as consumers, advocates, community-based
organizations, local government officials, and other health care providers. For purposes
of identifying and prioritizing the community’s significant health needs and potential
resources for addressing them, a hospital facility must solicit input and take into account
the input received, at a minimum, from the following sources:23
20
Cf. New Hospital Community Benefit Briefs: Reporting Requirements and Community Building, ROBERT
WOOD JOHNSON FOUNDATION (Oct.18, 2012, 8:00 AM), available at www.rwjf.org/en/blogs/new-public-
health/2012/10/new_hospital_communi.html (discussing Schedule H reporting of hospitals’ upstream
prevention initiatives).
21
§ 1.501(r)-3(b)(5) 79 Fed. Reg. 79002 (Dec. 31, 2014).
22
Id.
23
Id.
8. 8
At least one state, local, tribal, or regional governmental public health department, or
a State Office of Rural Health with knowledge, information, or expertise relevant to
the community’s health needs;
Medically underserved, low-income, and minority populations in the community
served by the hospital facility, or individuals or organizations serving or representing
their interests; and
Written comments received on the hospital facility’s most recently conducted CHNA
and its most recently adopted implementation strategy.
The Final Rule indicates that a hospital facility that is unable to secure input from any of
these mandatory sources can comply with the requirement by documenting its efforts to
secure such input and describing these efforts in its CHNA report.24
With respect to “medically underserved, low-income, and minority populations,” input
may be solicited and collected from individuals, organizations representing their
interests, or both. Hospital facilities often use surveys (which should not be limited to a
facility’s patients) to collect CHNA data from individual community residents. A facility
may disseminate and collect survey responses in person, by mail, or by telephone,
using contact lists targeting areas with significant low-income and minority populations.
Web-based surveys may be publicized, for example, through local news outlets. Some
hospitals have adopted innovative approaches to collecting input from individuals within
these vulnerable populations.25
In addition, the Final Rule permits the solicitation and
receipt of such input through “organizations serving or representing the interests” of
24
§ 1.501(r)-3(b)(6)(iii), 79 Fed. Reg. 79002-79003 (Dec. 31, 2014).
25
See, e.g., Raleigh Rozier, Community Connection Pig Roast Brings Together Diverse Athens Crowd.
ATHENS BANNER-HERALD: ONLINE ATHENS (Mar. 22, 2013), available at http://onlineathens.com/local-
news/2015-03-21/community-connection-pig-roast-brings-together-diverse-athens-crowd (public events
supported by local hospitals to collect community health data); Anderson, M. Muskegon Lakeshore
Healthcare Workers Seek Community Feedback for Needs Assessment Survey. MLIVE MICHIGAN (Mar.
14, 2015), available at
www.mlive.com/news/muskegon/index.ssf/2015/03/muskegon_lakeshore_healthcare.html (hospital
seeking community volunteer community residents to help conduct CHNA surveys).
9. 9
these populations.26
In addition, a hospital facility might seek the assistance of such
representatives to identify and secure input directly from individual members of
medically underserved, low-income, and minority populations themselves.
The Final Rule’s preamble suggests that a hospital facility satisfies its duty to “solicit”
written comments on its most recent CHNA and implementation strategy by making its
CHNA report widely available to the public on a website (as required by § 1.501(r)-
3(b)(7)(a)), and by making its implementation strategy public, either as an attachment to
its Form 990 or by disclosing on its Form 990 the URL of a website on which the
implementation strategy is posted (as required by § 1.6033-2(a)(2)(ii)(I)(2)).27
In
addition, the preamble confirms that, except for directing hospital facilities to provide (in
their next CHNA report) a general description of the comments received, the Final Rule
does not prescribe specific methods by which a hospital facility should respond to
written comments on its CHNA or implementation strategy. Similarly, a hospital facility is
free to collect written public comments in any workable format (e.g., via a form on the
hospital facility’s website, email, or mailed paper correspondence). A hospital facility
thus is afforded the flexibility to “set up a collection and tracking system that works with
[its] internal systems and makes the most sense for [its] particular community.”28
Resources and tools addressing how to conduct CHNAs, engage the community, and
identify a community’s medically underserved, low-income, and minority populations are
available from a number of public and private sources; a selection of these is listed in
the notes.29
26
§ 1.501(r)-3(b)(5)(B), 79 Fed. Reg. 79002 (Dec. 31, 2014) (emphasis added).
27
Preamble § 3(a)(iii)(C), 72 Fed. Reg. 78965-66 (Dec. 31, 2014).
28
Id.
29
See, e.g., Engaging Communities in the Redefinition of the H: Tools and Resources, AM. HOSP. ASS’N
(Jan. 2015), available at
www.aha.org/content/14/engaging_communities_redefinition_H_tools_resources.pdf; Resources & Tools:
So, How Do You “Do” Community Engagement?, Minn. Dep’t of Health, available at
www.health.state.mn.us/communityeng/needs/ (accessed Mar. 14, 2015). For additional resources for
identifying medically underserved, low-income, and minority populations, as well as for conducting CHNA,
see supra note 19.
10. 10
4. Document the CHNA in a Written Report That Is Adopted for the Hospital
Facility by an Authorized Body of the Hospital Facility.
CHNA documentation requirements are designed to make a hospital facility’s CHNA
process transparent to its community via a detailed report that includes an array of
specifications, disclosures, and process descriptions and is made “widely available to
the public.” A CHNA report must include all of the following:
The hospital facility’s community definition and how it was determined;
Details of how the CHNA process was conducted (data collection, analysis, and use;
and involvement of collaborating organizations and contractors);
How the hospital facility solicited and took into account community input: summaries
of input and when and how it was received; input by outside organizations; input
from medically underserved, low-income, or minority populations; or if unable to
secure such input, a description of the hospital’s efforts to do so;
A prioritized description of the community’s significant health needs and the criteria
used to determine their significance and priority;
A description of potentially available resources for addressing the community’s
significant health needs; and
An evaluation of actions taken since the hospital’s last CHNA to address significant
needs identified by a previous CHNA.30
Although a hospital facility needs to conduct a CHNA and develop an implementation
strategy only triennially, it must annually provide information (via Form 990, Schedule H)
30
§ 1.501(r)-3(b)(6), 79 Fed. Reg. 79002 (Dec. 31, 2014). The Final Rule’s requirement (in § 1.501(r)-
3(b)(6)(i)(F)) that a hospital’s CHNA report include an evaluation of actions taken in response to
significant health needs identified by the previous CHNA replaces the proposed rule’s requirement that an
implementation strategy include a description of the anticipated impact of actions the hospital facility
intends to take to meet the significant needs identified by the CHNA, and a plan to evaluate such impacts.
§ 1.501(r)-3(c)(2), 78 Fed. Reg. 20542 (proposed Apr. 5, 2013).
11. 11
regarding how it is addressing its community’s significant needs that were identified
through the CHNA.31
5. Make the CHNA Report Widely Available to the Public.
A hospital must conspicuously post its CHNA report on its website32
and make a paper
copy available for inspection without charge upon request. The CHNA must remain
posted and made available for public inspection until two subsequent CHNAs have
been made widely available to the public.33
Implementation Strategy
For each significant health need identified in the CHNA report, a hospital facility’s
written implementation strategy must include either a description of how the hospital
plans to address the need (identifying resources to be committed and any planned
collaborations) or a brief explanation of why the hospital will not address the need.34
The implementation strategy must be adopted by an authorized body of the hospital
facility35
and made public, either by posting it on a website (and reporting the website’s
URL on the hospital’s Form 990) or by attaching a copy of the implementation strategy
to its Form 990.36
31
See I.R.C. § 6033(b)(15)(a); Preamble, § 8.a., 79 Fed. Reg. 78994-95 (Dec. 31, 2014); IRS, Form 990,
Schedule H, Part V “Facility Information,” §§ A, line 11, and C, available at www.irs.gov/pub/irs-
pdf/f990sh.pdf.
32
For detailed requirements relating to accessibility of the CHNA through a website, see § 1.501(r)-
1(b)(29), 79 Fed. Reg. 79000 (Dec. 31, 2014).
33
§ 1.501(r)-3(b)(7), 79 Fed. Reg. 79003 (Dec. 31, 2014).
34
§ 1.501(r)-3(c), 79 Fed. Reg. 79003-79004 (Dec. 31, 2014).
35
§ 501.1(r)-3(a)(2) 79 Fed. Reg. 79001 (Dec. 31, 2014).
36
§ 1.6033–2(a)(2)(ii)(I)(2), 79 Fed. Reg. 79015 (Dec. 31, 2014). The URL of the website on which the
implementation strategy is posted should be reported on Form 990, Schedule H, Part V “Facility
Information,” § B, line 10a, available at www.irs.gov/pub/irs-pdf/f990sh.pdf.
12. 12
501(c)(3) Government Hospital Organizations
In the preamble to the Final Rule, Treasury and the IRS acknowledge comments the
agencies received in response to their 2013 proposed rule, which advocated the
exemption of government hospital organizations from CHNA and related requirements.
Although generally not required to file Form 990s, Treasury and the IRS clearly indicate
that 501(c)(3) government hospital organizations are subject to all I.R.C. § 501(r)
requirements “that do not involve disclosure on or with the Form 990,”37
including the
new reporting requirements under I.R.C. § 6033(b)(10)(D) and (b)(15) relating to Form
990 disclosures and attachments.38
The development of an implementation strategy,
required by I.R.C. § 501(r) 3)(A)(ii) and § 1.501(r)-3(c) of the Final Rule, therefore,
applies to all 501(c)(3) hospital organizations. However, since § 1.6033-2 is the only
provision of the Final Rule that specifically requires implementation strategies to be
made public (via Form 990 attachment or disclosure), there appears to be no express
requirement that a 501(c)(3) government hospital organization do so. Thinking ahead to
its next CHNA, however, a government hospital organization would be prudent to
consider the § 1.501(r)-3(b)(5)(C) requirement to “solicit and take into account” written
comments on its most recently adopted implementation strategy. Making the
implementation strategy public (ideally, by posting it on a website) would seem to be an
efficient and sufficient means of securing the written comments that a hospital facility is
required to solicit and take into account when conducting its next CHNA.
Collaborative and Joint CHNAs and Implementation Strategies
I.R.C. § 501(r)(2)(B) provides that a hospital organization operating more than one
hospital facility must satisfy CHNA requirements separately with respect to each
hospital facility it operates. However, the IRS has provided encouragement for hospital
facilities to conduct their CHNAs collaboratively with other facilities and organizations,
such as state or local health departments, employers, community-based organizations,
37
Preamble § 8.c., 79 Fed. Reg. 78995. (Dec. 31, 2014).
38
Preamble § 1.d, 79 Fed. Reg. 78957-78958; and § 8.c, 79 Fed. Reg. 78995. (Dec. 31, 2014).
13. 13
and other stakeholders.39
If a hospital facility conducts its CHNA with other related or
unrelated hospital organizations and facilities, the hospital facility generally must
separately document its own CHNA. In appropriate circumstances, however, a hospital
facility’s CHNA report may incorporate portions of the CHNA of another collaborating
facility or organization that relate to shared portions of their respective defined
communities. For example, two or more hospital facilities that serve non-identical but
overlapping communities may include in their separate CHNA reports identical data and
descriptions relating to the overlapping portion(s) of their communities. In addition, a
hospital facility’s CHNA report may include portions of a state or local health
department’s needs assessment that are relevant to the hospital facility’s community.40
The benefits of collaborative CHNAs include the avoidance of duplicated effort and
expense (for example, through shared data collection and analysis), the ability to
leverage hospital and community resources, and opportunities to align collaborating
entities’ community health improvement strategies and action for greater impact.
Hospital counsel should be sensitive, however, to any proposed collaboration among
competing hospitals that could lead to inadvertent antitrust exposure. The issue might
arise, for example, in the context of a proposal to address identified community needs
through joint initiatives involving physician recruitment or contracting (pricing) for
medical supplies or devices.41
Under certain circumstances, the Final Rule also permits hospital facilities to jointly
conduct a CHNA with other related or unrelated hospital facilities. Adoption of a joint
CHNA report is permissible if all collaborating hospital facilities adopt identical
community definitions, the joint CHNA report clearly identifies the hospital facilities to
39
See, e.g., § 1.501(r)-3(b)(6)(iv), 79 Fed. Reg. 79003 (Dec. 31, 2014).
40
§ 1.501(r)-3(b)(6)(iv), 79 Fed. Reg. 79003 (Dec. 31, 2014).
41
The U.S. Department of Justice and the Federal Trade Commission have provided important guidance
for health care providers by identifying conduct that the agencies will not challenge under the antitrust
laws, absent extraordinary circumstances. Dep’t of Justice & Fed. Trade Comm’n, Statements of Antitrust
Enforcement Policy in Health Care (1996), available at www.justice.gov/atr/public/guidelines/0000.htm
14. 14
which it applies, and the report includes all the elements prescribed under § 1.501(r)—
3(b)(6)(i).42
Generally, a separate implementation strategy must be adopted for each hospital
facility. As provided in § 1.501(r)-3(c)(4), however, when a joint CHNA report has been
adopted, a joint implementation strategy also is permissible, provided it describes how
one or more of the collaborating hospitals or organizations plan to address each
significant health need identified in the joint CHNA or explains why they do not intend to
address it. In addition, the joint implementation strategy must clearly identify that it
applies to the hospital facility, describe its role and responsibilities for actions to be
taken, and identify the resources it plans to commit. It also must include a summary or
other tool for easily locating portions of the joint implementation strategy that relate to
the hospital facility.
Example: Collaborative CHNA
Hospital A and Hospital B are unrelated hospital facilities located on opposite sides of
the same city. Hospital A defines its community to include the entire geographic area
within the city limits, while Hospital B defines its community to correspond with zip
codes located on the city’s west side and adjacent counties. Both hospitals participate in
and contribute resources to a collaborative citywide community needs assessment led
by the city health department. The health department issues a report of the collaborative
assessment, which includes population health data by city zip code. Hospital A may
incorporate these data into its separate CHNA report. Hospital B may incorporate into
its separate CHNA report those portions of the health department’s report that are
relevant to the population residing within the city zip codes that are part of Hospital B’s
community definition. Once they have completed their separate CHNAs, Hospital A and
Hospital B develop separate implementation strategies.
42
For elements required to be included in a CHNA report under § 1.501(r)-3(b)(6)(i), see text
corresponding to note 30, supra.
15. 15
Example: Joint CHNA
Hospital facilities A, B, and C are located in and serve the population of a Metropolitan
Statistical Area (MSA). Each of these facilities defines its community as the entire MSA
and decides to collaborate in conducting an MSA-wide CHNA with the other two
hospitals, the state health department, and local health department jurisdictions within
the MSA. They work together to collect and analyze quantitative and qualitative
population health data (including input from medically underserved, low-income, and
minority populations and comments received on the hospitals’ most recently conducted
CHNAs and implementation strategies) to identify health needs in the MSA. The
hospital facilities also work together to develop a joint CHNA report documenting their
joint CHNA process and containing all the elements required by § 1.501(r)-3(b)(6)(i) of
the Final Rule, including identification of the collaborating hospital facilities by name
(both within the report and on its cover). The respective boards/authorized bodies of the
hospital organizations operating hospital facilities A, B, and C adopt the CHNA report for
their respective hospital facilities.43
Hospital facilities A, B, and C also may adopt a joint
implementation strategy, consistent with the requirements of § 1.501(r)-3(c)(4) of the
Final Rule.
Prescribed Timeframes
The Final Rule does not establish intermediate deadlines for completion of the separate
steps of the CHNA process. A hospital is considered to have “conducted” a CHNA “on
the date it has completed all of the [five] steps. . .” of the process as outlined above.44
Consistent with the proposed rule, the Final Rule requires that a hospital’s initial §
43
This example of a joint CHNA process is adapted from one appearing in the Final Rule as § 1.501(r)-
3(b)(5)(B), 79 Fed. Reg. 79002
44
§ 1.501(r)-3(b)(2) 79 Fed. Reg. 79001 (Dec. 31, 2014). For the “sole purpose” of determining the tax
year in which a CHNA is conducted, the required step of making the CHNA report widely available to the
public occurs on the date the hospital first makes the report widely available to the public (i.e., on the first
day the report is posted on the hospital’s website and a paper copy is made available for inspection upon
request at the facility.) Id.
16. 16
501(r)-compliant CHNA be completed by the end of its first tax year beginning after
March 23, 2012, and by the end of every third tax year thereafter.45
Whereas the proposed rule would have required adoption of a hospital facility’s
implementation strategy by the end of the same tax year as its adopted CHNA was
made widely available to the public,46
the Final Rule provides additional time for
implementation strategy development by requiring its adoption on or before the 15th day
of the fifth month after the end of the tax year in which the final step of the CHNA
process was completed.47
This matches the due date (without extensions) by which a
hospital organization must file its Form 990 for the tax year in which a CHNA is
conducted.
Potential Consequences of Noncompliance
Section 1.501(r)-2 of the Final Rule recognizes three categories of noncompliance with
I.R.C. § 501(r), and assigns to them different potential consequences:
Section 1.501(r)-2(b): Certain Errors or Omissions That Are Not Considered
Failures. Errors and omissions in this category are minor, inadvertent, or due to
reasonable cause, and are limited to failures to provide required information in a
policy or report required by § 1.501(r)-3 or § 1.501(r)-4, and errors concerning
implementation or operational requirements under § 1.501(r)-3 through § 1.501(r)-6.
If the hospital organization corrects such an omission or error promptly after
discovery and establishes practices or procedures designed to promote and facilitate
overall compliance with § 501(r), it will not be considered a failure to meet a
requirement of I.R.C. § 501(r);
45
Cf. § 1.501(r)-3(e) 79 Fed. Reg. 79004 (Dec. 31, 2014) (indicating that transition rule for CHNAs
conducted in taxable years beginning before March 23, 2013).
46
§ 1.501(r)-3(c)(5), 78 Fed. Reg. 20543 (proposed Apr. 5, 2013).
47
Id.
17. 17
Section 1.501(r)-2(c): Failures to Meet § 501(r) Requirements That May Be
Excused. These failures are neither willful nor egregious, and shall be excused if the
hospital facility corrects and discloses the failure in accordance with IRS
requirements; and48
Willful or Egregious Failures to Meet § 501(r) Requirements That May Not Be
Excused. These are omissions and errors occurring due to “gross negligence,
reckless disregard, or willful neglect,” or “very serious failures, taking into account
the severity of the impact and the number of affected persons.”49
Potential Consequences of Noncompliance: Hospital Organizations Operating a
Single Hospital Facility
Excise Tax (Single Facility)
I.R.C. § 4959 (added by § 9007(b) of the ACA) and § 53.4959-1 of the Final Rule
provide for the imposition of a $50,000 excise tax on a hospital organization that fails to
conduct a CHNA required by I.R.C. § 501(r), for each taxable year that it fails to meet
such requirements, applied in addition to any other tax imposed due to revocation of the
hospital organization’s § 501(c)(3) tax exemption. Omissions and errors described in §
1.501(r)-2(b) that are corrected as provided therein are not considered failures, so that
no penalty will result. Other failures to meet I.R.C. § 501(r)(3) requirements will trigger
48
The IRS recently issued Revenue Procedure 2015-21, setting forth correction and disclosure
procedures by which hospital organizations may seek to have failures to meet I.R.C. §§ 501(r)(3)-(r)(6)
requirements excused. See Stephen Clarke’s and Justin Lowe’s recent AHLA Email Alert: “IRS Issues
Correction and Disclosure Procedures for Certain Failures to Meet 501(r) Requirements,” available to
AHLA members at
www.healthlawyers.org/Members/PracticeGroups/TF/alerts/Pages/IRS_Issues_Correction_and_Disclosur
e_Procedures_for_Certain_Failures_to_Meet_501(r)_Requirements.aspx. Revenue Procedure 2015-21
appears in Internal Revenue Bulletin 2015-13 (Mar. 30, 2015), which is publically available at
www.irs.gov/irb/2015-13_IRB/ar20.html.
49
§ 1.501(r)-2(c), 79 Fed. Reg. 79000 (Dec. 31, 2014).
18. 18
imposition of the tax, regardless of whether the failure has been corrected and disclosed
in accordance with § 1.501(r)–2(c).50
Revocation of Hospital Organization’s 501(c)(3) Status (Single Facility)
The ultimate penalty that the IRS may impose on a 501(c)(3) hospital organization for
failure to comply with § 501(r) requirements is the revocation of its federal tax
exemption, effective “as of the first day of the taxable year in which the failure occurs,”
making the organization’s income in that tax year subject to taxation.51
Although the Final Rule does not provide a roadmap detailing how the IRS will initiate,
investigate, and communicate its consideration of a tax-exemption revocation, it does
indicate that the IRS Commissioner will consider “all relevant facts and circumstances,”
and includes examples of the kinds of factors that will be considered relevant. These
include, but are not limited to:
The hospital organization’s previous failure(s) to meet the requirements of § 501(r);
The size and scope of the failure(s);
The reasons for the failure to comply;
Prior adoption of practices or procedures designed to achieve overall compliance
with the regulations, and whether or not they were routinely followed;
Corrective actions taken by the hospital organization promptly after the failure’s
discovery to mitigate obstacles to compliance; and
Whether such corrective actions were taken before discovery of the failure by the
IRS.52
50
§ 53.4959-1(b), 79 Fed. Reg. 79015 (Dec. 31, 2014).
51
§ 1.501(r)-2(a) and (d), 79 Fed. Reg. 79000-79001 (Dec. 31, 2014).
52
§ 1.501(r)-2(a) 79 Fed. Reg. 79000 (Dec. 31, 2014).
19. 19
Potential Consequences of Noncompliance: Hospital Organizations Operating
Multiple Hospital Facilities
Excise Tax (Multiple Facilities)
Section 53.4959-1 of the Final Rule interprets I.R.C. § 4959 to impose the tax
separately with respect to each noncompliant hospital facility operated by a hospital
organization for each tax year in which it is noncompliant, and offers specific examples
of how the excise tax may be imposed on hospitals failing to comply with the CHNA and
the implementation strategy requirements of § 1.501(r)-3. As with a single-facility
hospital organization, unless the failure to comply is not considered a failure under the
circumstances specified in § 1.501(r)-2(b), an excise tax penalty of $50,000 will be
imposed; with respect to a hospital organization operating multiple hospital facilities, the
tax penalty will be imposed with respect to each noncompliant facility for each year in
which the failure occurs.53
Revocation of 501(c)(3) Status (Multiple Facilities)
The rules and considerations involved in determining whether to apply the revocation
penalty to a hospital organization operating multiple facilities are the same as those
discussed above in connection with single-facility organizations, with one addition: when
it operates multiple hospital facilities, the number, size, and significance of the hospital
organization’s noncompliant facilities relative to those that are compliant also are
relevant.54
Subject to these considerations, an unexcused failure or failures to meet the § 501(r)
requirements separately with respect to one or more of the hospital facilities it operates
may result in revocation of a hospital organization’s § 501(c)(3) status under § 1.501(r)-
2(a). Alternatively, § 1.501(r)-2(d) of the Final Rule provides (in its practical effect) for
53
§ 53.4959-1(b)(1) and (d), 79 Fed. Reg. 79015 (Dec. 31, 2014).
54
§ 1.501(r)-2(a), 79 Fed. Reg. 79000 (Dec. 31, 2014).
20. 20
the penalty to be applied at the facility level: the hospital organization retains its tax
exemption, but income derived by the organization from its noncompliant hospital facility
during the tax year (or years) in which the failure occurs becomes taxable.
The Final Rule reiterates the proposed rule’s statement that the imposition of a facility-
level tax “shall not, by itself, affect the tax-exempt status of bonds issued to finance the
noncompliant hospital facility”55
and adds clarifying language to indicate that neither will
a facility-level tax “by itself, result in the operation of the noncompliant hospital facility
being considered an unrelated trade or business” under I.R.C. § 513.56
Other Negative Impacts of Noncompliance
Besides potentially triggering an IRS enforcement action, substantial noncompliance
with § 501(r) requirements can negatively impact a hospital’s reputation in the
community and discourage donations. Moreover, such recalcitrance may prompt a
formal complaint to the IRS. The IRS reviews any communication alleging a tax-exempt
organization’s noncompliance with the tax law, whether the complaint originates with a
member of the general public, a state or federal agency, or a member of Congress. In
appropriate cases, the IRS initiates a full examination of the hospital organization
against which the complaint was filed.57
Engaged members of the community and
advocates likely will attach significant importance to the CHNA and implementation
strategy processes required by the Final Rule. Tax-exempt hospitals will find the Final
Rule’s guidance useful for avoiding the distractions and damage to their reputations that
may result from noncompliance.
55
Proposed § 1.501(r)-2(d)(4), 78 Fed. Reg. 20541 (Apr. 5, 2013).
56
§ 1.501(r)-2(d)(4) 79 Fed. Reg. 79001 (Dec. 31, 2014).
57
IRS Complaint Process for Tax Exempt Organizations (last updated Jan. 2013), INTERNAL REVENUE
SERV., available at www.irs.gov/uac/IRS-Complaint-Process-For-Tax-Exempt-Organizations.
