“With the added attention to community benefit has come a growing realization of the extent of variability among stakeholders in what should count and how to measure it,” writes the GAO. “At present, determination and measurement of activities as community benefit for federal purposes are still largely a matter of individual hospital discretion. Given the large number of uninsured individuals, and the critical role of hospitals in caring for them, it is important that federal and state policymakers and industry groups continue their discussion addressing the variability in defining and measuring community benefit activities.”
Two notable Wall Street Journal articles in particular one on nonprofits’ expansion in suburban areas and one on nonprofits’ increasing power appear to question whether nonprofits are providing enough of a “community benefit” to justify the federal tax exemptions they have received from the IRS for the last five decades. And in September, the Illinois 4th District Appellate Court stripped Provena Covenant Medical Center of its property-tax exemption and had harsh words regarding what it believes is hospitals’ misuse of the term “charity.”
Here, the GAO interviewed federal and state officials and industry-group representatives, and analyzed federal and state laws; the standards and guidance from federal agencies and industry groups; and 2006 data from California, Indiana, Massachusetts and Texas in order to understand (1) IRSs community benefit standard and the states requirements, (2) guidelines nonprofit hospitals use to define the components of community benefit, and (3) guidelines nonprofit hospitals use to measure and report the components of community benefit.
The report is predicated on the fact that nonprofit hospitals qualify for federal tax exemption from IRS if they meet certain requirements. However, since 1969, the IRS has not specified that these hospitals have to provide charity care to meet these requirements, so long as they engage in “activities that benefit the community.” Rather, hospitals have flexibility to determine the services and activities that constitute community benefit. Many of these activities are intended to benefit the approximately 47 million uninsured individuals in the United States who need financial and other help to obtain medical care. Further, state laws governing the requirements hospitals must meet in order to qualify for state tax-exempt or nonprofit status “vary substantially in scope and detail,” says the GAO. “For example, 15 states have community benefit requirements in statutes or regulations, and 10 of these states have detailed requirements.”
Despite this wide variance, the GAO did find that, among the standards and guidance used by nonprofit hospitals, consensus exists to define charity care, the unreimbursed cost of means-tested government health care programs (programs for which eligibility is based on financial need, such as Medicaid), and many other “community benefit” activities. However, consensus is lacking to define bad debt (the amount patients are expected to pay, but do not) and the unreimbursed cost of Medicare (the difference between a hospitals costs and its payment from Medicare) as community benefit. The result is that nonprofit hospitals report significantly different amounts of “community benefit” activity. Further, says the GAO:
Even if nonprofit hospitals define the same activities as community benefit, they may measure the costs of these activities differently, which can lead to inconsistencies in reported community benefits. For example, standards and guidance vary on the level at which hospitals may report their community benefit (e.g., at an individual hospital level or a health care system level) and the method hospitals may use to estimate costs of community benefit activities. State data demonstrate that differences in how nonprofit hospitals measure charity care costs and the unreimbursed costs of government health care programs can affect the amount of community benefit they report.
Noting that determination and measurement of community benefit activities, for federal purposes, are still largely matters of individual hospital discretion, the GAO concludes by calling for the federal, state and industry discussion on this topic to move toward standardization in defining and measuring community benefit activities. The GAO is encouraged by “the potential availability of two national data sources derived from mandatory reporting to IRS and CMS,” as “national data should be helpful in standardizing reporting and informing public policy on the community benefit standard.” However, the agency cautions that it could be several years before this data is available for analysis and, until then, it is hard to know whether the data will be consistent and reliable.
Download Nonprofit Hospitals: Variation in Standards and Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements (PDF).
