Community benefits and health reform: creating new links for public health and not-for-profit hospitals

The Patient Protection and Affordable Care Act (PPACA) put new requirements on not-for-profit (NFP) hospitals to document provision of community benefits, to justify their tax-exempt status. Specific PPACA provisions include requirements that NFP hospitals conduct or participate in a community health needs assessment and work to address the needs identified. Consideration is given to these particular PPACA mandates and to Internal Revenue Service (IRS) actions to implement them. The background of concerns that have been expressed about whether the NFP hospitals' tax exemption should be continued and a brief history of that exemption is noted. Not-for-profit hospitals have resources that the federal government is requiring them to bring to public health improvement, during a time when the public health agencies at the federal and state level continue to experience reductions in funding. Linking of the NFP hospitals' compliance activities with the public health agency community health planning activities will help fulfill its PPACA requirements and the regulatory reporting requirements for the IRS.     

Capacity considerations and community benefit expenditures of nonprofit hospitals

The United States Internal Revenue Service (IRS) and some states require nonprofit hospitals to demonstrate that they provide a substantial community benefit in order to get or maintain their tax-exempt status. This places every nonprofit hospital at risk. This article is about certain common factors that impact the management of all nonprofit hospitals and their ability to comply with such laws.     

The Impact of the Individual Mandate and Internal Revenue Service Form 990 Schedule H on Community Benefits From Nonprofit Hospitals

In response to a growing concern that nonprofit hospitals are not providing sufficient benefit to their communities in return for their tax-exempt status, the Internal Revenue Service (IRS) now requires nonprofit hospitals to formally document the extent of their community contributions.While the IRS is increasing financial scrutiny of nonprofit hospitals, many provisions in the recently passed historical health reform legislation will also have a significant impact on the provision of uncompensated care and other community benefits.We argue that health reform does not render the nonprofit organizational form obsolete. Rather, health reform should strengthen the nonprofit hospitals’ ability to fulfill their missions by better targeting subsidies for uncompensated care and potentially increasing subsidized health services provision, many of which affect the public''s health.INTERNAL REVENUE CODE § 501(c)(3) exempts nonprofit hospitals from federal income taxes. Since 1969 the community benefit standard1 has been the criteria by which the deservedness of tax exemption has been determined.2 There is, however, a long-standing debate in both the health policy and economics literatures on whether there is a substantial difference between the actions of for-profit and nonprofit hospitals, with empirical evidence supporting both schools of thought.3 The inconclusive nature of this research helped spur political and legal action regarding community benefit provision by nonprofit hospitals.4 In response to this growing concern that nonprofit hospitals are providing insufficient benefits to their communities in return for their tax-exempt status, the Internal Revenue Service (IRS) has revised Form 990 requiring nonprofit hospitals to submit additional detailed financial documentation regarding their community benefit expenditures on Schedule H beginning with 2009 filings.Simultaneously with tax reform, many provisions in the recently passed health reform legislation5 will also significantly impact hospitals and their provision of community benefit activities. Sufficient provision of these services has important implications for the public''s health. Former US Surgeon General David Satcher has argued that health reform and, specifically, the reduction in the number of uninsured, is “critical to our achieving the overarching goal of eliminating disparities in health.”6^(p15) Regina Benjamin, the current US Surgeon General, states that “eliminating health disparities should certainly be at the top of our national health agenda.”7 Approximately 31% of direct medical costs for minority populations from 2003 to 2006 were excess costs resulting from health inequities.8We explored the potential ramifications of the Patient Protection and Affordable Care Act (PPACA) and the Health Care Education Affordability Reconciliation Act of 2010 (HCEARA) on the level, measurement, and potential change in the composition of hospital community benefits, with regard to the new IRS regulations. We considered whether these legislative changes may further blur the distinction between for-profit and nonprofit hospital behavior and performance and explored the potential public health consequences of eliminating the tax-exempt status of nonprofit hospitals. We used data from Maryland, a state that implemented legislation similar to the recent IRS regulations in 2001, to guide our discussion and evaluate potential effects under these new legislative acts.     

Evaluating Hospitals’ Provision of Community Benefit: An Argument for an Outcome-Based Approach to Nonprofit Hospital Tax Exemption

Nonprofit hospitals are exempt from federal income taxation if they pass organizational and operational tests, including satisfying the community-benefit standard. Policymakers, however, have questioned the adequacy of the community benefits that nonprofit hospitals provide in exchange for these exemptions.The Internal Revenue Service recently responded to these concerns by redesigning its tax forms for nonprofit hospitals. The new Form 990 Schedule H requires nonprofit hospitals to provide additional information about their community-benefit activities. This new reporting requirement, however, places an undue focus on input-based community-benefit indicators, in particular expenditures.We argue that expanding the current input-based reporting requirement to include not only monetary inputs but also population health outcomes would achieve greater benefit for society.NONPROFIT HOSPITALS ARE vital to the health and welfare of millions of Americans1 and constitute a major portion of our economy.2 The tax exemption that these institutions received was worth $12.6 billion in 2002 and has subsequently grown.3 To remain tax-exempt, nonprofit hospitals have to meet the Internal Revenue Service’s (IRS’s) community-benefit standard, which grants health care organizations tax exemptions in exchange for engaging in activities that promote health for the benefit of the community.4Policymakers have recently started to question the adequacy of the community-benefit activities that nonprofit hospitals provide in exchange for their substantial tax exemptions. The IRS responded to these concerns by redesigning its federal tax return for nonprofit hospitals, Form 990, and adding Schedule H.5 However, this new reporting requirement only partially achieves its policy objective because it is hampered by an undue focus on input-based indicators of community benefit, in particular how much nonprofit hospitals spend on community-benefit activities. The current standard does not assess the health outcomes that these community-benefit activities do or do not help to achieve. The community-benefit standard would provide a more meaningful evaluation of hospitals’ community-benefit activities if it complemented input-based measures of community benefit with information on population health outcomes, thereby better effectuating the standard’s original policy goals and achieving greater benefit for society.6A standard that includes input as well as outcome measures would offer significant incentives for nonprofit hospitals to increase public benefit. A new community-benefit standard should thus take a more balanced approach, evaluating both input and outcome-related measures, which show how benefit accrues to the public. A more robust conception of community benefit, with tighter criteria for inclusion and exclusion of potential population benefits, would help facilitate this transition.Provisions in the Patient Protection and Affordable Care Act (ACA) have modified the community-benefit standard to include measures of both input and outcomes. As of this year, nonprofit hospitals are required to conduct regular community-health needs assessments and implement improvement plans, which may provide some of the information necessary for a meaningful evaluation of the outcomes of a hospital’s community-benefit initiatives.7Policymakers at both the federal and state level have many tools at their disposal to help make the community-benefit standard more outcome-focused. The IRS, for instance, could require nonprofit hospitals to complement their community-benefit expenditures disclosed in Form 990 Schedule H with a detailed report on the population health outcomes of their community-benefit activities. Federal and state governments could then use this information when deciding whether to grant nonprofit hospitals tax exemptions.     

A review of state legislation and a state legislator survey related to not-for-profit hospital tax exemption and health care for the indigent

This study examines recent states' legislation related to the not-for-profit (NFP) hospital tax exemption and care to the uninsured and underinsured, and compares these legislative provisions to a past survey of state legislators' opinions about appropriate criteria for the NFP hospital tax exemption. To be tax-exempt, hospitals need to provide services that benefit the community. The problem lies in the ambiguous nature of the community benefits standard and the type of information required for compliance with the standard. As a consequence, NFP hospital tax-exemption challenges have occurred across the nation, resulting most recently in a federal class action lawsuit against NFP hospitals across several states. Empirical research has examined whether the NFP hospital tax exemption is justified based on the amount of community benefits and charitable care provided, without examining the type of policy alternatives that might be proposed by legislators who are responsible to change and create tax-exemption regulations. This article surveys state legislators and examines state legislation. The survey reveals that legislators from states with tax-exempt challenge activity focus more narrowly on the provision of charitable care and that state legislators consider quantitative information to be as important as qualitative information for the tax-exemption decision. Essentially, the survey predicts that state legislation would focus primarily on charitable care policy and indigent care guidelines, which is confirmed by the review of recent state legislation; however, there is still much variation in tax-exemption legislation between states. More standardization is needed to address the needs of indigent patients equitably.     

True to form. The IRS' updated reporting rules for tax-exempt organizations could require full disclosure on community benefits, charity care

By mid-month, the IRS expects to unveil extensive changes to its Form 990 reporting rules for not-for-profits, which could further affect current disclosure or nondisclosure of tax-exempt hospitals' community benefits and charity care. Most hospitals welcome the revisions, but the legislative process to implement those reforms could be lengthy, says healthcare attorney Bernadette Broccolo, left.     

New arrangements, new scrutiny. The IRS reconsiders hospital-physician relationships at tax-exempt facilities

The pressure to maintain adequate operating margins has forced many not-for-profit hospitals to adopt more overtly competitive behavior than they have in the past. However, in struggling to remain economically viable, these facilities should carefully avoid actions that would threaten their tax-exempt status. Not-for-profit facilities should be particularly careful that their arrangements with physicians, which often appear designed to increase referrals, do not violate the criteria according to which the Internal Revenue Code extends tax exemption to charitable organizations. Section 501(c)(3) of the code exempts organizations "no part of the net earnings of which inures to the benefit of any private shareholder or individual." According to this provision, "insiders" (i.e., those with a personal interest in or opportunity to influence organization activities from the inside) are entitled to no more than reasonable payment for their goods or services. The Internal Revenue Service (IRS) takes the position that, as employees or individuals having a close professional working relationship with a hospital, physicians are insiders. Thus a hospital that pays physicians what the IRS judges to be more than fair market value for services (or charges physicians less than fair market value for office rental) may find its exemption in jeopardy. If not-for-profit hospitals want to maintain their tax-exempt status, they must be certain the arrangements they enter into with physicians truly further their exempt purpose: to promote the health of the community.     

Contribution retribution. Health system, CEO must pay excise taxes after pressuring workers to help fund state association's PAC through payroll deductions

The IRS wants not-for-profit health systems to remember to keep their distance from politics--it's taxing the payroll contributions at one system that went to a state hospital association's PAC. Kenneth Robbins, left, says hospitals should always be conscious of activities that could jeopardize their tax-exempt status. "It's an issue we've been concerned with as long as I can remember," he says.     

The IRS strikes out in court!

Three organizations that recently took the IRS to court to obtain tax-exempt status under section 501(c)(3) of the code have won their cases--an HMO and a PSRO on the basis of their benefit to the community, and a cooperative hospital laundry because of its connection with tax-exempt institutions and its nonprofit operation.     

A threatened privilege

Because their tax-exempt status was at stake, Wisconsin hospitals joined together in 1990 to study and develop a system to better measure and quantify their provision of needed community services. The goal of a task force made up of members of the Catholic Health Association of Wisconsin (CHA-W) and the Wisconsin Hospital Association (WHA) was to develop a proactive response to potential legislative and municipal initiatives that could challenge the tax-exempt status of not-for-profit hospitals. The CHA-W/WHA Task Force on Social Accountability decided to generate data to demonstrate hospitals' tax-exempt worthiness and to show that hospitals pay for many of the direct municipal services they receive. The task force surveyed Wisconsin hospitals on the services they provide to their communities, the municipal service fees they pay, and whether any of their services compete with local businesses. The survey results showed that Wisconsin hospitals do provide needed community services. However, the hospitals do not always adequately communicate to their communities the extent of these benefits. The survey results also showed that Wisconsin hospitals pay most service fees that are quantifiable and measurable. In 1991 the task force adopted a statement of policy which emphasizes that hospitals must clearly demonstrate that they have assessed the health-care needs of their communities, implemented programs to respond to those needs, and maintained their mission to serve.     

Progress and Challenges with Connecting Hospitals with the Public Health System

We examined the effect of nonprofit hospital (NFP) and local health department (LHD) collaboration in local health planning on drug-induced mortality. NFPs must provide certain types of community benefit (CB) in order to keep their tax-exempt status. The IRS reported that NFPs spent over $60 billion on CB activities in 2011. Despite the magnitude of spending, there is little evidence as to whether this spending leads to tangible improvements in population health. Traditionally, NFPs dedicated most of their CB dollars to charity care, health professions education, and research. While these areas of spending are beneficial to the community, they represent a partial fulfillment of the CB requirement per the IRS. NFPs are also expected to improve the overall health of the communities they serve by providing health care and prevention activities outside its four walls. Section 9007 of the PPACA, part of the IRS CB requirement, is a regulatory approach that steers NFPs toward providing community health activities that fall outside its acute care focus. It required NFPs to submit a triennial community health needs assessment (CHNA) and an implementation strategy. A few states have leveraged Section 9007 to encourage collaboration between NFPs and LHDs. New York (NY) is the only state that has required NFPs and LHD to collaborate on all three of the following key local health planning activities: CHNA, joint selection of health priorities, and joint implementation of initiatives to address health priorities. We estimated a difference-in-differences model using hospital and county data collected before and after hospitals targeted drug use in their community health improvement implementation strategy in 2013. We used robust standard errors clustered on county to calculate the p-value. As a robustness check, we also used permutation tests to calculate the p-value. We implemented several sensitivity and falsification tests. The study’s outcome is county-level drug-induced mortality per 100,000 residents. Our sample included 220 counties of which 22 were in NY and 198 were control counties. We found that NY’s requirement to collaborate on all three local health planning activities led to a decrease in drug-induced mortality of approximately 7 deaths per 100,000 population compared with hospitals that did not collaborate with local health departments. This represents a 35% decrease in drug-induced mortality rate based on the 2016 US national rate. Our findings support the hypothesis that the NY policy, with its requirement for NFP and LHD collaboration, is associated with a decrease in drug-induced mortality when drug use is jointly prioritized. The requirement for NFP and LHD collaboration is the cornerstone of the NY policy. This finding may be of particular relevance to states that are moving in a similar direction as NY; for instance, Maryland’s Local Health Improvement Coalitions and Maine’s Shared Community Health Needs Assessment. Ohio recently enacted regulation that is virtually identical to NY which mandated all hospitals to collaborate with their LHDs on community health assessment and improvement plans by 2020. Moving forward, it will be key to monitor whether these states experience a similar effect as observed in NY. Agency for Healthcare Research and Quality.     

An organizational structure of the future. The not-for-profit clinic

It used to be unthinkable . How could a small, freestanding group practice attain tax-exempt status without engaging in teaching or research activities? In the late 1960s, four internists in northeastern Ohio did just that. This case study chronicles their ordeal in seeking, obtaining, and maintaining a not-for-profit designation from the IRS, and closely examines the laws which detail tax-exempt qualifications. Undoubtedly, there are freedoms relinquished when a group operates under the close scrutiny of the IRS, but the numerous benefits gained by the not-for-profit clinic could well make it the organizational structure of the future.     

IRS proposes ruling on physician recruitment. How a hospital recruits physicians would affect its tax-exempt status

On March 15, 1995, the Internal Revenue Service (IRS) announced a proposed revenue ruling stating how certain physician recruitment practices could be implemented without threatening hospitals' tax-exemption. As proposed, the IRS ruling would provide flexibility for recruitment incentives rather than a list of strict physician recruitment guidelines. The proposed ruling is not legally binding until issued in final form, and there is no deadline for finalizing it. In the meantime, however, the standards outlined in the proposed ruling reflect arrangements the IRS likely would approve, which should be an incentive for tax-exempt hospitals to follow reasonable physician recruitment practices. Assuming a hospital complies with other legal requirements such as fraud and abuse laws, it must answer two key tax-exempt status questions for its recruitment or retention package: Will the incentives result in a disguised distribution of profits from the operation of the organization? Is the total incentive package reasonable under all the facts and circumstances, both in absolute total value for physician(s) recruited and in relation to services required by the hospital and the community? The proposed ruling also provides guidance on basic documentation requirements and a process for approving recruitment arrangements.     

Community benefit prevails. Are radical changes in hospital tax-exemption laws necessary?

Voluntary, not-for-profit hospitals are in danger of losing their tax-exempt status as policymakers lean toward stricter charity care requirements that would penalize hospitals which failed to provide at least a predetermined level of charity care. Proposed legislation abandons community benefit and advocates a relief-of-poverty standard. The relief-of-poverty standard advances the notion that hospitals are not providing enough charity care to merit their tax exemption. However, the voluntary hospitals' share of uncompensated care costs (as a percentage of total costs) increased from 70 percent in 1981 to 75 percent in 1989. The relief-of-poverty standard is inferior to the community benefit standard because it does not take into account that the character of community benefit varies among hospitals and communities. However, community benefit must be better defined. Some current activities--individual hospital reassessments, collective hospital reassessments, voluntary development of criteria, and statutory standards--will be instructive in efforts to arrive at a definition of community benefit that is appropriate for the specific community. Leaders in voluntary, not-for-profit hospitals need to develop positive and equitable criteria for hospital tax exemption. These hospitals' accountability is in question, but it is their integrity that is at stake.     

Under the gun

This year Congress will consider proposals to significantly restrict the access of not-for-profit healthcare organizations to affordable capital and other federal benefits of their tax-exempt status. The federal benefits of tax-exempt status are (1) exemption from federal tax on net income, (2) eligibility for tax-deductible charitable contributions, and (3) access to tax-exempt financing. Of these, the last is probably most important because hospitals' capital needs are substantial and almost always met through the issuance of tax-exempt bonds. In recent years, budget pressures have prompted many state and local governments to challenge the tax-exempt status of not-for-profit organizations. At the federal level, tax-exempt bonds have been under sustained attack for the past 10 years, and tax-exempt organizations have been under scrutiny for the past 4 years. In 1989 several bills were introduced in Congress that would limit some of the benefits of tax exemption. This year the signs are particularly ominous: Budget pressures are severe, no one seems willing to call for "new taxes," and tax-exempt organizations are considered fair game. To preserve their tax-exempt status, not-for-profits must act now to convince congressional decision makers that they deserve their tax exemptions and need them to continue to provide community service.     

Debt,investment and endowment accumulation: the case of not-for-profit hospitals

Not-for-profit hospitals benefit from special tax rules that allow state authorities to issue tax-exempt bonds on their behalf, which may affect their investment and financing choices. Hospitals may respond by increasing their investment in physical assets; however, they may also engage in tax arbitrage by using the tax-exempt debt while maintaining endowment assets. The paper combines data from tax (information) returns and the annual survey of hospitals by the American Hospital Association for 1993-1996. Overall, the results are consistent with substantial tax planning by not-for-profit hospitals. Of the US$ 55.9 billion in tax-exempt liabilities of hospitals in 1996, as much as US$ 32.6 billion could have been eliminated if hospitals spent their endowments instead of borrowing. Furthermore, controlling for hospital size (in terms of revenues and operating assets), endowment assets are associated with a higher ratio of tax-exempt (or total) debt to operating assets. In contrast, endowment assets are not related to taxable debt suggesting that the effects of the endowment on borrowing are motivated by tax incentives. Investment and endowment accumulation regressions suggest that increases in debt increase both physical investment and endowment accumulation but these effects are concentrated among cash-rich hospitals for which the effects on endowment accumulation effects are larger than the effects on physical investment.     

Why nonprofits? Hospitals and the future of American health care

The future of the nonprofit hospital depends on its relationship to the for-profit and governmental sectors of our economy. A decade ago, the primary challenge came from the growing investor-owned hospital companies. Nonprofit hospitals' responses--both competitive and imitative--led to new challenges from government regarding tax-exempt status. The reasons underlying this challenge include the growing commercialism of health care, the nation's failure to deal directly with the problem of the uninsured, and the lack of a coherent theory of tax exemption. Although hospitals are likely to retain exemptions from federal taxation, challenges to local tax exemptions are likely to continue. Strategies that hospitals pursue for competitive purposes may undercut their legitimacy as tax-exempt institutions, but several groups are working to address the issue.     

An evaluation of charity care for tax-exempt hospitals engaging in joint ventures

The study examines whether the level of charity care and financial stability contribute to a nonprofit hospital's motivation for partnering with a for-profit hospital through a joint venture. The Internal Revenue Service (IRS) has heightened its scrutiny of joint ventures within the health care sector. Considering recent calls to investigate the merit of the tax-exempt status of hospitals engaged in joint ventures, this research will assist policy makers in the evaluation of nonprofit hospitals. Constituents will continue to question whether joint ventures contribute to a reduced focus on charitable activities. Results indicate that the propensity to engage in a joint venture significantly increases with increased levels of charity care. Furthermore, nonprofit hospitals with lower profitability are more likely to engage in joint ventures. These results are useful to policy makers when evaluating the level of charity care provided by hospitals seeking alternative strategic alliances. Considering many critics allege hospitals are reducing the provision of charity care to the community, it is imperative for management to be conscious of the impact of joint ventures on the provision of charity care.     

Community benefit plans and action

The tax-exempt sector in America is significant, and not-for-profit healthcare is its largest component. The basis for not-for-profit hospitals' tax exemption is not only "charity care" but the broader "community benefit." Community benefit planning and reporting offers a significant positive opportunity for not-for-profit hospitals. Such planning allows a not-for-profit institution to: differentiate from the investor-owned hospital; re-focus on the local hospital and the benefit it brings to the community; change the public's perception of the value of the hospital; and regain public support by leading many of the community benefit programs addressing community needs. As Weckwerth suggested in his paper, regaining the public's trust needs to be done through action and not just words. The most effective action a not-for-profit hospital can take is to develop a sound, logical community benefit plan; carry out that plan; achieve benefits for the community through the plan's programs; and then widely report the accomplishments of the community benefit programs throughout the community. Then, the hospital should do it again and again, year after year. Although the financial stability of the not-for-profit hospital is important, far more important at this time is regaining the public's trust through demonstration of the many community benefits gained from having a local, not-for-profit hospital.