AHLA’s Top 10 Health Law Issues in 2023: ESG

2023 should be a consequential year for the application of environmental, social, and governance (ESG)-related matters across the health care industry. This is especially the case given the significant manner in which ESG issues presented themselves to the industry in 2022, and the perceived impact of both a recessionary economy and divided federal government on continued ESG focus.

ESG Definition and Clarity as a Threshold Issue. The ESG movement may continue to suffer from lack of certainty concerning the definition and scope of ESG and the impact of ESG on corporate performance, investment, and disclosure. Environmental factors remain better defined and understood than Social or Governance factors, both across the board and in the health care sector. As scrutiny on ESG ratings agencies continues, as discussed below, one outcome may be development of separate “E,” “S,” and “G” ratings, with better-defined measures for each.

ESG Ratings Agencies Face Increased Scrutiny. Continued controversy and government attention can be expected regarding the objectives, methodologies, and incentives of the ESG ratings providers. Increasingly, deficiencies and inconsistencies among ratings agency ESG methodologies are being brought forward as a fundamental concern about the integrity of the ESG ratings system. These perceived ratings agency ecosystem issues include varying sources of data, inconsistent scoring approaches, lack of transparency as to ratings methods, insufficient updating of data, and unexplained variation in ratings results within a single ratings agency. One consequence of this concern could be domestic and international government efforts at making the ESG ratings process more transparent and consistent.

HHS Involvement. The health industry impact of two prominent ESG-related bureaus within HHS should be monitored. The Office of Climate Change and Health Equity serves as a “department-wide hub for climate change and health policy, programming and analysis, in pursuit of environmental justice and equitable health outcomes.” The Office of Environmental Justice develops and implements HHS-wide strategy on environmental justice and health.

CMS Policy on Health Equity. Health care organizations will want to monitor the extent to which CMS implements its new Framework for Health Equity policy in its relationship with stakeholders. CMS has already announced the five specific priority areas it will be emphasizing as it works to address health disparities across all its programs.

Accreditation of Health Care Providers. Certain health care providers will need to be prepared to respond to new and revised Joint Commission requirements designed to reduce health care disparities as they will be applied effective January 1, 2023 to ambulatory health care, behavioral health care and human services, critical access hospitals, and hospital accreditation programs.

Credit Analysis of Health Industry Organizations. Many health care organizations will prepare to participate in efforts by credit rating agencies, such as Moody’s Investor Services, to formally quantify ESG factors into the credit analysis process for health care institutions. Scoring systems, such as those developed by Moody’s, are designed to convey ESG factors that may already be incorporated into credit ratings. As indicated above, however, these ratings agencies may experience pressure to modify their ratings methods.

Tax-Exempt Health Care Organizations. ESG-related tax planning will continue to be an important consideration, as tax-exempt health care organizations evaluate whether (1) their ESG activities are in furtherance of tax-exempt purposes, and (2) ESG investments and health equity initiatives may/should be addressed by those organizations in the Form 990 (e.g., Schedule H) in support of their continued Section 501(c)(3) status.
Executive Compensation. ESG goals are likely to be increasingly considered as related incentive targets in health care executive compensation arrangements (e.g., long term incentive pay plans). Achievements in addressing health care equity, and in making improvements to the social determinants of health, may be particularly well suited for such use.

Recession Impact on ESG Implementation. An increasing number of indicators suggest that organizational ESG commitments may be delayed or reduced as CEOs seek to respond to the financial pressures anticipated from a looming recession. These efforts are not necessarily intended to demonstrate disinterest in ESG, but rather are intended to address near-term economic challenges. In the health care sector, these financial stresses could be especially severe.

Federal Political Climate. 2023 will be an especially crucial year for the implementation of ESG principles, as a divided federal government may spark efforts by ESG opponents to curtail or roll back ESG regulations and other initiatives.