In response to Congressional concerns that there was little to distinguish a for-profit hospital from a tax-exempt nonprofit hospital, Congress enacted IRC 501(r) which mandates that tax-exempt nonprofit hospitals:

1.        Conduct community health needs assessments;

2.        Establish and disclose financial assistance policies;

3.        Limit charges to needy individuals; and

4.        Follow reasonable billing and collection practices.

Treasury has issued proposed regulations under IRC 501(r).  The proposed regulations are in addition to Notice 2011-52 which sunsets October 5, 2013.  As noted above, among the requirements of IRC 501(r) is the requirement that the hospital conduct a community health needs assessment once every three years, and to have adopted an implementation strategy to meet the community health needs identified in the assessment.  IRC 501(r) carries some serious teeth.  Failure to comply with IRC 501(r) potentially jeopardizes a hospital’s tax-exempt status.  Also, hospitals that fail to conduct and implement a community health needs assessment may be liable for a $50,000 excise tax under IRC 4959.

The proposed regulations provide a flexible facts and circumstances regulatory scheme and a good roadmap as to how a hospital conducts a community health needs assessment.   More importantly, the proposed regs may be relied upon by a tax-exempt hospital until final or temporary regs replace them.  Some of the highlights from the Regs are:

1.        Hospitals may collaborate with other facilities in conducting a community health needs assessment, and facilities that serve all the same communities may issue a joint report;

2.        Facilities that collaborate with one another may duplicate portions of their reports;

3.        Each hospital must define the community it serves.  However, there is flexibility in the definition.  A hospital may define its community by geography, target populations, and principal functions;

4.        The community health needs assessment must assess and address the needs of medically underserved, lower-income and minority populations in the area it serves;

5.        The community health needs assessment must identify significant health needs, prioritize those needs, and identify measures and resources to address those needs;

6.        The proposed regs require that the facility obtain input from state, regional or local public health departments, and members of medically underserved populations; and

7.        The community health needs assessment must be widely available to the public, e.g. posted on the hospital’s website and making printed copies available.

Once the community health needs assessment is issued, the hospital has until the end of the year in which the needs assessment is issued to issue an implementation strategy which either explains how the hospital intends to address the need, or explain why it does not intend to address the need.

The proposed regulations also provide penalty relief where the error is inadvertent and due to reasonable cause, if it is corrected promptly upon discovery.  More serious errors  that are not willful or egregious may be excused if the facility corrects and provides disclosure.

For more information about these proposed rules or tax law generally please contact Leslie Pesterfield.