The American Hospital Association (“AHA”) released its annual report summarizing community benefits provided by tax-exempt hospitals, as reported on the Internal Revenue Service (“IRS”) Form 990, Schedule H. In its most recent report released in September 2021, AHA contracted with Guidestar to create a file of all electronically submitted Schedule H forms reported by tax-exempt hospitals in the 2018 tax year (“AHA 2018 Report”).
A total of 2,298 Schedule H’s were included in the AHA 2018 Report, representing 2,791 hospitals. Together, these tax-exempt hospitals accounted for over $105 billion in benefits provided to the community in 2018.
Tax-exempt hospitals file a Federal Form 990 annually, wherein they report their community benefit activities and associated estimated costs on Schedule H, Part I. Schedule H, Part I incorporates the Catholic Health Association (“CHA”) general principles for community benefit rules and regulations.
Withum’s Best Practices Regarding Community Benefit and Form 990 Schedule H
- Form a community benefit committee.
- Compare your most recent community health needs assessment (“CHNA”) in conjunction with Schedule H for new activities, programs and initiatives.
- Incorporate other recent Schedule H developments into your Schedule H including social determinants of health (“SDOH”); community building activities which improve health and certain subsidized health programs.
- Benchmark your hospital(s) to its peers, both nationally and regionally, and by size.
- Calculate your net community benefit costs and % using methods other than CHA, including AHA and state reporting (where applicable) and disclose this information in Form 990 Schedule H or Schedule O.
- Consider a written community benefit statement to include with your annual Form 990.
- Review your Form 990 with your audit committee annually, including your Schedule H and applicable benchmarking information.
- Ensure key individuals of your organization are aware of your net community benefit costs and % and applicable benchmarking comparisons, including senior management and Board members.
IRS Form 990 Schedule H, Part I; Community Benefit
The AHA 2018 Report revealed that hospitals spent an average of 10.3% of total expenses attributable to community benefit under the IRS definition, commonly referred to as the “community benefit percentage”. This information is summarized on Schedule H, Part I, and includes the expense of providing financial assistance at cost, subsidizing Medicaid underpayments, funding community health improvement services, underwriting health professions education, funding health research, subsidizing certain health services, and making cash/in-kind contributions for community benefit. Note that these expenses and resultant percentages are reported net of any associated offsetting revenue.
|Hospital Category||Financial Assistance, Unreimbursed Medicaid, Unreimbursed Costs From Means-Tested Government Programs||Health Professions Education||Medical Research||Cash And In-Kind Contributions to Community Groups||Other||Total Financial Assistance And Other Community Benefits|
|All Filed Schedule Hs (2,791 hospitals)||6.4%||1.6%||0.5%||0.3%||1.5%||10.3%|
This information is further identified within the AHA 2018 Report by hospital size, location, and type.
Size:Hospitals were then categorized by size (in terms of expenses) as follows:
- Small hospitals – less than $100 million in total hospital expenses
- Medium hospitals – $100 million to $299 million in total hospital expenses
- Large hospitals –$300 million or more in total hospital expenses
Location:Hospitals were categorized as “Urban/Suburban” or “Rural”
Type:Hospitals were categorized by type as either a General Medical, Children’s, Teaching, or Critical Access hospitals. Note that a single hospital can be in more than one “type” category.
For all categories, the majority of community benefit expense is derived from providing financial assistance, subsidizing Medicaid payments, and the unreimbursed costs from other means-tested government programs.
Total Benefits to the Community
The AHA 2018 Report expands beyond the CHA and IRS definition of community benefit and provides information with respect to “total benefits to the community”. Total benefits to the community include:
- Schedule H, Part I (financial assistance and certain other community benefits);
- Schedule H, Part II (community building activities); and
- Schedule H, Part III (Medicare shortfall and bad debt attributable to financial assistance).
For the 2018 tax year, tax-exempt hospitals on average incurred approximately 13.9% of their total annual expenses on “benefits to the community”, which is comprised of the following:
|Hospital Category||Financial Assistance And Certain Other Community Benefits||Community Building Activity||Medicare Shortfall||Bad Debt Expense Attributable to Financial Assistance||Total Benefits to the Community|
|All Filed Schedule Hs(2,791 hospitals)||10.3%||0.1%||3.3%||0.4%||13.9%|
Size: The data shows that the average total benefits to the community increased with the size of the hospital. Small hospitals incurred an average of 11.8% of their total expenses on benefits to the community, medium hospitals incurred an average of 12.7%, and large hospitals incurred an average of 14.5%.
|Hospital Size||Financial Assistance And Certain Other Community Benefits||Community Building Activity||Medicare Shortfall||Bad Debt Expense Attributable to Financial Assistance||Total Benefits to the Community|
Location: Demographics typically impact a hospital’s community benefit and total benefits to the community. Data from the AHA 2018 Report indicated that total benefits provided to the community for Urban/Suburban hospitals was 3.4% higher than total benefits provided by Rural hospitals.
|Hospital Location||Financial Assistance And Certain Other Community Benefits||Community Building Activity||Medicare Shortfall||Bad Debt Expense Attributable to Financial Assistance||Total Benefits to the Community|
Type: The AHA 2018 Report indicated that Critical Access hospitals incurred an average of 10.5% of their total expenses on benefits to the community, whereas General Medical hospitals incurred an average of 13.8% in comparison., Teaching hospitals incurred an average of 14.0% and Children’s hospitals incurred an average of 15.5%.
|Hospital Type||Financial Assistance And Certain Other Community Benefits||Community Building Activity||Medicare Shortfall||Bad Debt Expense Attributable to Financial Assistance||Total Benefits to the Community|
Children’s hospitals had a substantially higher percent of community benefit expenses when compared to the other hospital types which is typically attributable to a higher rate of unreimbursed Medicaid. In addition, the AHA 2018 Report indicated that Children’s hospitals spent an average of 2.1% of their total expenses on medical research, which was higher than any other hospital type.
Bad Debt Expense
The AHA 2018 Report revealed that 46% of the 1,913 individual hospital Schedule H’s reported bad debt expense attributable to the organization’s financial assistance policy. A majority of hospitals reported that some portion of their bad debt expense would qualify as community benefit had the patient completed the hospitals’ financial assistance processes and provided the requisite financial and other information.
Medicare Surplus and Shortfall
Approximately 74% of hospitals reported having a Medicare shortfall on Part III, Section B of Schedule H. This shortfall, which accounted for an average of 3.3% of hospital expenses in 2018, occurs when the Federal government reimburses hospitals at less than their costs for treating Medicare patients.
Community Building Activities
Individual hospitals and systems reported an average of 0.1% of their total expenses on community building activities. These activities can include workforce development, environmental improvements, and hospital employee participation on state Boards of Health, regional health departments, neighborhood community relations committees, and with university and other school partnerships.
Community Benefit Oversight and Enforcement
In a report issued in October 2020, the Government Accountability Office (“GAO”) assessed the IRS’ oversight of how tax-exempt hospitals provide community benefits and determined that the IRS could improve its processes for reviewing community benefits provided by tax-exempt hospitals. The IRS acknowledged the findings of the GAO report and said it will work to clarify Form 990, Schedule H and revamp its community benefit examination process in the future. In this report, the GAO made five recommendations:
- Congress should consider specifying in the Internal Revenue Code (“IRC”) what services and activities it considers sufficient community benefit.
- The IRS should make updates to Form 990, Schedule H to ensure that information on community benefits provided by a tax-exempt hospital is clear and can be easily identified by Congress and the public.
- The IRS should assess the benefits and costs of requiring tax-exempt hospital organizations to report community benefit expenses on Schedule H by individual facility, rather than in aggregate.
- The IRS should establish a well-documented process to identify hospitals at risk for noncompliance with the community benefit standards and ensure that the hospitals’ community benefit activities are being consistently reviewed.
- The IRS should establish specific audit codes for identifying potential noncompliance with the community benefit standard.
As a result of this report and the IRS’ plans for action, we can expect more audit activity surrounding tax-exempt hospitals for potential noncompliance with the community benefit standard.
The AHA’s 2018 Schedule H Report is a useful resource available to all hospitals which can be utilized to benchmark and compare a hospital to national averages. While this report provides quick comparisons, it is important to note that each hospital has a different set of facts and circumstances to consider, including size, location, and hospital type, which can affect its community benefit percentage in relation to its peers.
The IRS, Department of Health, state and local regulators, as well as the general public all utilize Guidestar and other publicly available information to review total benefits provided to the community by hospital organizations. In addition, community benefit, hospital operations/activities, and reporting transparency continue to be important areas of focus for users of the 990.