Health is inextricably linked to where one lives and the health care services one can access, as well as to education and health literacy. Nonprofit hospitals, which were established to respond to the health care needs of their communities, see this clearly and often focus their efforts on the most vulnerable segments of the population.
Practicing physicians often are removed from the tax status of hospitals. However, it is important to keep in mind the responsibilities of nonprofit hospitals and the potential impact their Internal Revenue Service-required community benefits can have in addressing the health needs of our communities. Community physicians can partner with an institution that leverages its resources to promote community health and well-being.
Dr. Rhonique Harris
Despite the recent focus on community benefits requirements, many health care providers know very little about them.
For nonprofit hospitals, community benefits are activities and programs that improve health care for disadvantaged groups, as well as address the specific health care needs of a community. Community benefits must not make a profit for the hospital. Unlike for-profit hospitals that are designed to earn for their owners, nonprofit hospitals reinvest their earnings to promote their mission and provide medical care. They are exempt from taxes, but in exchange they have a legal obligation to provide community benefits. In recent years, the federal government (largely through the IRS and congressional oversight committees) has been scrutinizing nonprofit institutions to ensure that they meet their obligation.
Historically, community benefit activities have included charity and emergency health care, but over time, the definition has broadened to include programs for health education training, public health research, preventive health services, and other activities. Nonprofit hospitals must report their community benefits programs to the IRS. There has been uncertainty, however, about what programs and activities fulfill the community benefits requirement and how to measure the value of the community benefits that are provided by hospitals.
New Criteria Established for Community Benefits
In December 2006, the Congressional Budget Office released a study that found little difference between for-profit hospitals and nonprofit hospitals in terms of the amount of charity care and community benefits they provide.
Dr. Norrell Atkinson
As a result, some critics questioned whether nonprofit hospitals deserve their tax exemptions, which cost the deficit-plagued local, state, and federal governments tens of millions of dollars in tax revenue. Why continue to provide nonprofit hospitals with exemptions if for-profit hospitals, which pay taxes, deliver equal benefits to their communities?
In 2009, in response to the heightened attention to nonprofit hospitals’ tax-exempt status and the lack of clarity about what constitutes community benefits, the IRS established strict criteria for defining what activities would fulfill the community benefit requirement. Such criteria included establishing core hospital staff for addressing community benefit activities, as well as conducting formal community needs assessment to determine how to appropriately target community benefit programs, to name a few.
In addition, hospitals were given 2 years to begin to take inventory of the community benefits they provided, and to report them annually to the IRS starting in fiscal year 2010. Failure to report or to demonstrate adequate community benefits can endanger an institution’s tax-exempt status.
How Well Are Nonprofit Hospitals Doing?
Over the past 2 years, we studied 43 nonprofit, freestanding children’s hospitals that had readily-identifiable community benefits reports (CBRs) in order to assess which programs had effective community benefits programs.
We used the criteria set forth by the National Association of Children's Hospitals and Related Institutions and the Catholic Health Association (A Guide for Planning & Reporting Community Benefit, 2008). The hospitals were screened to determine which institutions had published readily-identifiable CBRs prior to fiscal year 2010, the year the IRS requirement went into effect.
The first year, we found that only 25 institutions (58%) had readily identifiable CBRs available for the public’s viewing, as identified through hospital’s website or inquiry phone calls; however, it often took a great deal of searching to locate where hospitals publicized these reports. Fewer than half of these CBRs fit the guidelines for an effective community benefit program, as defined by NACHRI and the CHA. Many of the publications that hospitals produced as their CBR largely designated only how community benefit dollars were being targeted to specific programs, similar to a hospital’s annual report, which is not an acceptable publication according to the NACHRI/CHA definitions.
Moreover, given that many of these hospitals had not conducted a community needs assessment, there was little evidence as to whether their programs were appropriately designed to focus on the health issues of their community.