Revises The IRS’s Nonprofit Hospital Community Benefit Reporting Standard

The Internal Revenue Service (IRS) uses the Community Benefit Standard (CBS), a set of 10 holistically analyzed metrics, to assess whether nonprofit hospitals benefit community health sufficiently to justify their tax-exempt status. Nonprofit hospitals risk losing their tax exemption if assessed as underinvesting in improving community health. This exemption from federal, state, and local property taxes amounts to roughly $25 billion annually.

However, accumulating evidence shows that many nonprofit hospitals’ investments in community health meet the letter, but not the spirit, of the CBS. Indeed, a 2021 study showed that for every $100 in total expenses nonprofit hospitals spend just $2.30 on charity care (a key component of community benefit)—substantially less than the $3.80 of every $100 spent by for-profit hospitals. A 2022 study looked at the cost of caring for Medicaid patients that goes unreimbursed and is therefore borne by the hospital (another key component of community benefit); the researchers found that nonprofit hospitals spend no more than for-profit hospitals ($2.50 of every $100 of total expense).

Given the well-documented role of social determinants in promoting health and health equity, focusing the components of the CBS more precisely on these social factors has the potential to measurably improve community health outcomes. Indeed, developing a more equitable, more socially focused federal standard could help to guide and, possibly, unify the patchwork of state-level spending policies on community health—and thereby better fulfill the spirit of the CBS.

Toward this end, we propose a set of revisions to the CBS—specifically, which standards to keep, which to modify or remove, and new ones to add. The substance of our proposal derives from our assessment of deficits in the CBS literature, our in-depth interviews with administrators in nonprofit hospitals whose community investments surpass the dollar value of their tax exemption (as measured by the Lown Institute), and the personal experience of one of us (MKH) in creating successful community benefit initiatives.

Standards To Keep

Operate an emergency department open to all, regardless of ability to pay.

The 1986 Emergency Medical Treatment And Labor Act requires all emergency departments to stabilize and treat all patients, regardless of ability to pay, thereby fulfilling communities’ needs for emergency care. Removing this CBS standard would encourage some nonprofit hospitals to eliminate their emergency departments.

Provide care to all patients able to pay, including those who do so through Medicare and Medicaid.

Without this legal guarantee, government-insured patients would risk not receiving care.

Set a limit on charges.

Patients eligible for financial assistance must not be charged more for a medical service than insured patients. This existing CBS standard is essential.

Standards To Modify

(With proposed modifications in italics)

Conduct a Community Health Needs Assessment (CHNA) collaboratively with the public health department, other nonprofit hospitals, and/or appropriate nongovernmental organizations within the county or relevant need area.

By emphasizing collaboration, this change should sharpen hospitals’ focus on coordination and impact in fulfilling community needs.

Maintain a written financial assistance policy that is easily accessible and proactive.

Financial assistance information should be easy to access, both in-person and online, within two clicks from a main webpage. Financial counselors and navigators within the emergency department—and in a frequented location of the hospital—should design their communications and outreach to ensure that patients are aware of the available resources.

Set billing and collection limits that restrain punitive action.

Current law protects only against “extraordinary collection action,” which still invites unfair collections, such as wage garnishment. Collection actions against patients should not occur until their financial assistance eligibility has been assessed.

Maintain a board of directors drawn from the communityreflecting diversity in viewpoint and background.

The current standard is too general to achieve a board truly focused on community needs. For example, board members may reside in the community, but if their socioeconomic status is relatively homogeneous, they may not have diverse viewpoints.

Use surplus funds to advance medical training, education, and research that align with long-term community needs.

This modification would direct research- and education-related community investment to community-specific needs. For a rural nonprofit hospital, for example, using funds to advance training and research in primary, rather than subspecialty, care is likely to benefit the community more.

Standards To Remove

Maintain an open medical staff policy.

Maintaining an open or closed model is an organizational-strategy decision that does not directly relate to community investment and therefore adds no real value to the CBS.

Use surplus funds to improve facilities, equipment, and patient care.

Over time, every hospital must inevitably improve facilities and equipment to maintain accreditation, but this standard does not stipulate the type of patient population to benefit from such investments. For example, a hospital could build a new facility in an affluent suburban neighborhood to meet the current standard. Therefore, this standard is superfluous.

New Standards To Add

Report the estimated property tax exemption and sales tax exemption.

The value of these tax exemptions constitutes the major components of overall tax-related benefits received by nonprofit hospitals—and thus can offer a benchmark for stakeholders and the public to evaluate the adequacy of community benefit provided. The estimation process is relatively transparent and not particularly susceptible to manipulation.

Measure and report community health interventions’ role in influencing health outcomes.

The CHNA implementation plan must be executed and documented. By measuring and reporting changes to health outcomes over time, this standard would provide the IRS documentation on the efficacy of various interventions.

Spend at least some of CBS-designated surplus funds externally, specifically to address social determinants of health.

Data consistently show that investments in social determinants of health can have the largest impact on health outcomes. Partnering with community-based organizations, social service providers, schools, and other entities can help to address poverty, homelessness, and other drivers of poor health.

Progress In Real-World Practice

Providing tax exemption to nonprofit hospitals imposes an opportunity cost: Local property tax dollars that nonprofit hospitals would have paid could have been used to build parks, improve schools, fix roads, and offer other services that bolster public health. A stronger focus on fulfilling needs identified in a CHNA can improve community health.

We believe that the generous tax benefits received by nonprofit hospitals should be surpassed by what they spend on fulfilling a community’s health needs and championing public health. Strengthening the Community Benefit Standard can help nonprofit hospitals fulfill their stated mission to promote the health and well-being of the communities they serve.

Adjusting the CBS to prioritize the social determinants of health and measurable health outcomes, not merely the provision of health services, can fortify entire communities so that residents feel the results tangibly. Several institutions are implementing this refined approach effectively in real-world practice, and a revised CBS will encourage others to follow their lead.

Authors’ Note

Ge Bai received support from Episcopal Health Foundation, the Commonwealth Fund, and Arnold Ventures. The authors thank Carol Paret and Deborah Gordon at Memorial Hermann Health System, Paula Morgen and Julie Chikowski at ThedaCare, Kate Walsh and Dr. Thea James at Boston Medical Center, Matt Ditmanson and Angela Dejene at Sanford Health, and Ingrid Taylor at Seton Healthcare Family for the valuable information they shared in interviews. Ge Bai is a visiting scholar at the Congressional Budget Office. No content in this article represents the opinion of the Congressional Budget Office.

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