Since 2012, the American Hospital Association (“AHA”) (with assistance from EY) has published and released an annual report summarizing community benefits provided by tax-exempt hospitals, as reported on the Internal Revenue Service (“IRS”) Form 990, Schedule H.
According to the AHA 2017 Report, a total of 2,383 Schedule H’s were included, representing 2,764 hospitals in total. Together, these tax-exempt hospitals accounted for over $100 billion in benefits provided to the community during 2017.
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. The Schedule H Part I incorporates the Catholic Health Association (“CHA”) general principles for community benefit rules and regulations.
IRS Form 990 Schedule H, Part I; Community Benefit
The AHA report found 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 (2,764 hospitals)||6.4%||1.7%||0.5%||0.3%||1.4%||10.3%|
This information is further broken down within the AHA Report by hospital size, location, and type. 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.
The AHA report also 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).
Additionally, the report provides further detail by hospital segment (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 – more than $300 million 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: a single hospital can be in more than one “type” category.
Total Benefits to the Community
For the 2017 tax year, tax-exempt hospitals on average incurred approximately 13.8% 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 (2,764 hospitals)||
The data shows that the average total benefits to the community increased with the size of the hospital. Small hospitals incurred an average of 11.6% of their total expenses on benefits to the community, medium hospitals incurred an average of 12.6%, and large hospitals incurred an average of 14.1%. For medium hospitals, this increase was largely attributable to a higher Medicare shortfall, whereas, for large hospitals this increase was attributable to an increase in financial assistance and other community benefits.
|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|
Demographics typically impact a hospital’s community benefit and total benefits to the community. Data from the 2017 report showed that total benefits provided to the community for Urban/Suburban hospitals was 3.5% 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|
The report indicated that Critical Access hospitals incurred an average of 9.7% of their total expenses on benefits to the community, whereas General Medical hospitals incurred an average of 13.3%, Teaching hospitals incurred an average of 13.6% and Children’s hospitals incurred an average of 15.9%.
|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 report indicated that children’s hospitals spent an average of 2% of their total expenses on medical research, which was higher than any other hospital type.
Bad Debt Expense
The report found that 47% of the 1,931 individual hospital Schedule Hs 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 71% of hospitals reported having a Medicare shortfall on Part III, Section B of Schedule H. This shortfall, which accounted for 3.1% of hospital expenses in 2017, 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 include, but are not limited to, 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.
The AHA’s 2017 Schedule H report is a useful resource available to all hospitals which can be used to benchmark and compare a hospital to national averages. While this report allows for 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, throughout the COVID-19 pandemic and prospectively, community benefit, hospital operations/activities, and reporting transparency will continue to be important areas of focus for everyone associated with a hospital’s Form 990, Schedule H.
Current year Form 990 Schedule H planning considerations
Properly identifying and quantifying all of a tax-exempt hospital’s community benefit activities and programs remains critically important today for Federal, state, and local tax-exemption purposes. Withum recommends the following on at least an annual basis:
- Form an internal Form 990 Schedule H community benefit working group
- Compare and benchmark your tax-exempt hospital’s community benefit to the AHA report nationally
- Compare and benchmark your tax-exempt hospital to its state and local tax-exempt hospital peer group
- Communicate your respective hospital’s Schedule H community benefit information and benchmarks to your board, audit committee, and members of senior management
- Communicate your community benefit information to the general public, including consideration of preparing and posting a community benefit report on your website
Moreover, year 2020 was unprecedented due to COVID-19; we recommend that hospital organizations identify and capture all additional community benefit activities and programs and related costs associated with the COVID-19 pandemic. While additional guidance is forthcoming, please refer to Withum’s COVID-19 and Schedule H community benefit update, which highlights the preliminary general guidance released by the CHA for reporting community benefits related to COVID-19. Lastly, start planning early, as experience shows Schedule H community benefit programs and reported costs are typically higher with advanced planning and preparation.