Report Addresses Improving Hospital Community Benefit Spending

Report Addresses Improving Hospital Community Benefit Spending

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On December 1, 2015 George Washington University’s Milken Institute School of Public Health released a report, Improving Community Health through Hospital Community Benefit Spending: Charting a Path to Reform (“Report”).  The purpose of the Report is to discuss community benefit reporting by tax-exempt hospitals in conjunction with Internal Revenue Service (“IRS”) rules and regulations and the broader policy goals and implications.

“Building on a wealth of research pointing to the value of expenditures that improve the underlying social conditions of health, such as housing supports, nutrition, child development, employment, and community development, this report describes opportunities to strengthen the role of hospitals in community-wide health improvement efforts.”


As noted in the Report, for approximately the past half a century in order to maintain tax-exempt status, hospitals are required by law to meet certain community benefit criteria.  “Over time, the community benefit test has become a significant aspect of U.S. health policy, providing a means by which the public can measure how nonprofit hospitals give back to their communities in exchange for the tax benefits they receive.”  Dating back to 1956, through Revenue Ruling 56-185 the IRS introduced the “Charity Care Standard” which requires hospitals in order to qualify for tax-exempt status to provide, to the extent of its financial ability, free or reduced-cost care to patients unable to pay for it.  In 1969, with the issuance of Revenue Ruling 69-545, the IRS replaced the “Charity Care Standard” with a “Community Benefit Standard”.  The Community Benefit Standard established a wider range of expenditures that could qualify hospitals for tax-exempt status including, but not limited to, operating an emergency room open to all, participation in health insurance, professional education and training and research.  In 2009, reporting of community benefit for tax-exempt hospitals became mandatory with the introduction of Form 990, Schedule H, Hospitals.  Schedule H reporting includes information on a variety of hospital activities including its net community benefit costs in accordance with IRS designated categories.

With the reforms included in the Affordable Care Act (“ACA”), community benefit has become a necessary responsibility of tax-exempt hospitals. As part of the ACA, Internal Revenue Code §501(r)(3) was established, which requires tax-exempt hospitals to conduct a Community Health Needs Assessment (“CHNA”) once every three years.  In conjunction with the CHNA requirement these hospitals must include an annual implementation strategy which outlines how the significant needs identified in the CHNA will be addressed. The Report notes that numerous hospitals are reviewing the allocation of community benefit funds and taking initiatives “to reallocate a portion of their community benefit spending toward activities that more broadly promote community-wide health.”

Policy Opportunities

As the authors of the Report state, “Given its broad grant of regulatory powers under the Internal Revenue Code and its authority to define the concept of community benefit, the IRS could take action to align community benefit policy with this larger vision of community-wide health improvement, a concept now widely accepted as essential to health system transformation by both public and private payers.”  The Report notes the following three policy opportunities:

  1. Broaden the definition of community health improvement;
  2. Bring greater transparency to community benefit reporting; and
  3. Establish community-wide health improvement guidance, along with goals and metrics for reallocating community benefit spending toward a broader set of community health improvement activities.

If these policies were undertaken by the IRS, the goals would be to assist in aligning the definition of community health improvement for purposes of community benefit spending to include both patient specific clinical care and activities that promote the health of the community.  In addition, another goal would be “to develop the range of policies and guidelines that actively encourage tax-exempt hospitals to contribute to and participate in community-wide efforts that emerge through the community health needs assessment process and that lift the health of communities as a whole.”  The main priority is that, with these policy reforms, the IRS could promote hospitals to better address the social conditions which impact the daily lives of the individuals in their communities, and accordingly, exert a major influence on the health of these individuals and the community as a whole.  The IRS is not alone in addressing these fundamental shifts in policies as the hospitals and other governmental agencies are also taking a much closer look at how hospitals can work strategically with others to better address the social determinants of health.

In citing reasons why the public has an active interest in how community benefit is currently defined the Report notes a variety of causes.  In a 2015 IRS Report to Congress it was noted that during 2011, total hospital spending on community benefit exceeded $62.4 billion, which equated to approximately 9.6% of hospitals’ total operational spending for the year.  Additionally, there is public interest in how these hospitals define their community benefit due to the public’s investment in tax-exempt hospitals inherent in the tax savings provided by their tax-exempt status and the ability to qualify for tax-deductible contributions.  The Report further notes that in 2011, the estimated national total value of tax-exemption for these hospitals was approximately $24.6 billion.  This amount had approximately doubled in value from the previous decade.  The third reason provided in the Report relates to the alignment between hospitals spending on health and social initiatives.  With the CHNA requirement, the IRS has implemented regulations which underscore the importance of the social presence hospitals provide that has far reaching impact beyond the specific services they provide to patients and the community.   As noted, “hospitals have the potential to serve as what leading policy figures have termed ‘hubs,’ with the capacity to influence not only the accessibility and quality of health care, but also the overall health of communities through activities that address the ‘upstream’ factors that influence health.”

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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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