Identifying Gaps in Federal Oversight of Hospitals’ Community Benefit Investments – Opportunities for State Policy

December 10, 2019/ by Trish Riley, Amy Clary and Elinor Higgins

In the decade since the Patient Protection and Affordable Care Act (ACA) placed additional community benefit requirements on tax-exempt hospitals, the United States has seen a foundational change in the health care landscape.

The consolidation of hospitals and physician-owned practices into large, regional players has accelerated, driving prices higher and burdening already-lean state health budgets, while rural hospitals struggle to stay afloat.

In this costly, consolidated health care environment, policymakers need every available policy tool and lever to improve health and safeguard resources. This invites a conversation about whether it is time to update the Internal Revenue Service’s community benefit requirements to reflect the new contours of the health care landscape and:

  • Revisit the definition of “community” in the wake of hospital mergers;
  • Develop strategies to strengthen Form 990 Schedule H to facilitate state policymaking; and
  • Ensure that hospital community benefit spending effectively addresses the health priorities of communities and aligns with state health priorities.

What Are Federal Community Benefit Requirements?

In exchange for their federal tax-exempt status, nonprofit hospitals must conduct community health needs assessments every three years, and make investments that benefit the community. But as the health care landscape changes, state policymakers are revisiting federal and state policy levers to ensure that hospital spending aligns with community needs and state health priorities.  

In the spirit of opening a dialogue between federal and state officials, some opportunities for policymaking are also offered below.

Opportunities for Policymaking

IRS Code Section 501(c)(3) and Revenue Ruling 69-545 require tax-exempt hospitals to invest in activities and services that benefit “a class of persons that is broad enough to benefit the community,” and to serve a “public rather than a private interest.” The ACA imposed additional requirements on tax-exempt hospitals, including the requirement to conduct a Community Health Needs Assessment (CHNA) once every three years and develop an implementation strategy to address those needs. The IRS Code defines certain hospital investments as community benefit activities, including providing financial assistance to patients (also called charity care), covering the difference between Medicaid payments and the hospital’s estimated cost of services, funding education programs for health professionals, and subsidizing services that meet community needs, such as neonatal intensive care and trauma services. Hospitals can also count as a community benefit “community health improvement services,” or hospital programs that don’t generate revenue but seek to improve community health.  

States forgo billions of dollars of revenue by awarding tax exemptions to nonprofit hospitals. As a result, many states seek to maximize hospital community benefit and ensure that those dollars are spent where they are truly needed. However, opportunities exist to close gaps in federal reporting requirements in order to help states ensure that their loss of tax revenue is balanced by significant community investment that meets state and local health needs. While the ACA placed new community benefit requirements on charitable hospitals governed by section 501(c)(3) of the Internal Revenue Code (IRC), limits to these requirements offer opportunities for state policymaking. The following list of limitations and opportunities draws heavily from the work of Sara Rosenbaum, including the George Washington University Milken Institute School of Public Health report, Improving Community Health through Hospital Community Benefit Spending: Charting a Path to Reform.  

  • Tie spending to needs identified by the community. The IRS does not explicitly require hospitals to connect community benefit spending to needs identified in the needs assessment. 
    • The ACA requires hospitals to adopt an implementation strategy as part of the CHNA process, detailing how the needs identified in the CHNA will be addressed. However, it does not require hospitals to direct spending to those areas or to report how spending ties directly to CHNA needs. 
  • Count community building as a community benefit. While the IRS permits community building activities (e.g., housing, economic development, community supports such as child care and mentoring) to be reported as community benefit, there is ambiguity about the reporting process that may cause some hospitals to avoid spending on them.
  • Require more transparent reporting. While the IRS requires each individual hospital to answer the CHNA questions on Part V of Form 990, Schedule H, a hospital system with multiple facilities that use the same employer identification number can report its community benefit spending in aggregate. Requiring each separate hospital facility to report on its spending towards needs identified in its CHNA would increase transparency and provide the community and policymakers with actionable information. 
  • Consider minimum spending floors. Federal law does not require hospitals to spend a minimum amount on community benefits, leading some hospitals to report community benefit investments of zero dollars. (Modern Healthcare reported some hospitals spend between 0 to 28.6 percent of expenses on community benefit.) While some leaders are wary of blanket spending floors that could result in some hospitals spending less than they had spent historically, Oregon is now in the process of implementing a new law that requires a minimum spending floor tailored to each hospital or health system.  

Selected Federal Laws and Regulations Governing Hospital Community Benefit and Community Building Investments

This chart is designed to help state policymakers understand federal requirements and guidelines related to hospital community benefit and community building investments in order to identify opportunities to better align hospital spending with community need and state health priorities.

Federal laws, regulations, and sub-regulatory guidance govern many aspects of hospital community benefits and community-building investments. The table below examines provisions governing nonprofit hospitals’ community health needs assessments (CHNAs), implementation strategies, and activities, as well as the enforcement levers available to federal officials. It analyzes the relevant provisions in:

  • ACA changes to the Internal Revenue Code;
  • The December 2014 Final Internal Revenue Service (IRS) Rule related to additional requirements for charitable hospitals and CHNAs;
  • IRS Form 990, Schedule H instructions, and, where applicable;
  • Sub-regulatory guidance from the IRS Exempt Organizations Update archive.

Acknowledgements: Support for this work was provided by the New England States Consortium Systems Organization and the Robert Wood Johnson Foundation. The views expressed here do not necessarily reflect the views of the foundation.

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