Health Reform and the Mission of Nonprofit Hospitals

flying cadeuciiEver since 1969, when the IRS established the “community benefit” standard for hospital tax exemption, nonprofit hospitals have been able to achieve federal tax exemption without any precise accountability for the benefits they provided.

The ACA’s passage, however, ushered in significant changes to federal tax-exemption standards for hospitals.

The new § 501(r) of the Internal Revenue Code requires hospitals to take numerous measures, including establishing written financial assistance policies, limiting the amount charged to patients eligible for financial assistance, and limiting their use of “extraordinary collection actions” against patients.

These requirements responded to concerns about how some purportedly “charitable” hospitals treated uninsured patients and, more generally, hospitals’ lack of transparency regarding indigent care.

They stop well short, however, of requiring hospitals to provide any particular quantum of free care to patients unable to pay.

Section 501(r) also incorporates a different tack, requiring that at least once every three years, a hospital conduct a “community health needs assessment” (CHNA) and adopt an “implementation strategy” to respond to the needs identified by the assessment.

The needs assessment requirement is novel as a matter of federal tax policy, but is similar to mandates previously existing in a number of states.

As announced in the statute and fleshed out in Proposed Regulations issued by the IRS in April 2013, the CHNA requirement entails a series of steps.

In identifying and prioritizing community health needs, a hospital must take into account “input from persons who represent the broad interests of the community served by the hospital facility, including those with special knowledge of or expertise in public health.”

Once the assessment is completed, the hospital must make a report on it “widely available to the public” and adopt an “implementation strategy” to meet the community health needs it identified.

Finally, it must report to the IRS how it is “addressing the needs identified” and “a description of any such needs that are not being addressed together with the reasons why such needs are not being addressed.”  As a result of this new requirement, sometime in the past few years most of the nearly 3000 nonprofit hospitals in the US have completed their inaugural CHNA.

The CHNA requirement reflects a conceptual shift in the quid pro quo required of hospitals in return for the substantial financial benefit of federal tax exemption.

In responding to the long-standing community benefit standard, hospitals mostly simply did what hospitals traditionally do (i.e., provide emergency and acute care services to patients), but provided those services for some patients who were uninsured and unable to pay and for patients whose insurance didn’t pay enough to fully cover the cost of hospital care (e.g., Medicaid and Medicare).

Today, by contrast, the CHNA requirement calls for hospitals to look beyond the acute care needs of their patients and to assess and respond to the health needs of their community.

It’s not entirely clear, though, what that change will mean in practice and how meaningful hospitals’ community-oriented activities will be.

Without a doubt, the specific steps that the ACA and the Proposed Regulations establish for conducting a CHNA are more definite than IRS guidance under the community benefit standard.

But when it comes to substance – what needs to identify and prioritize, how to respond to those needs, and how to evaluate the impact of a hospital’s response – hospitals are left with a great degree of leeway.

One concern is that a hospital could simply jump through the hoops of completing the CHNA process, but then prioritize needs in a way that is hospital-centric (rather than community-centric) and fail to evaluate seriously the impact of its activities.

Hospitals’ reluctance to do more than the law clearly requires is understandable, because some hospitals may see efforts to address community health needs – rather than the health needs of hospital patients – as lying outside their mission.

For example, the mission statement of one nonprofit hospital (pulled from the web) states: “The mission of ___ is to provide competent, innovative, and accessible emergency and acute care services for the residents of ____. We are caring people operating an extraordinary community hospital.”

This hospital’s mission clearly is to provide traditional hospital services to people in a particular community, but such a hospital may need to enlarge its articulated mission in order to encompass community health needs.

Nudging hospitals toward a deeper understanding of and greater responsibility for health in the communities they serve could prove to be an important component in health reform’s attempt to shift our country’s orientation from a system that responds to ill health to a system that promotes good health.

But it may not be an easy process for many hospitals, as they are called on to re-examine their missions and to adapt their own conceptions of their roles in the community.

Mary Crossley is a professor of law at the University of Pittsburgh. She is also a a Robert Wood Johnson Foundation Public Health Law Scholar in Residence, where she is currently serving as a Faculty Mentor for the Robert Wood Johnson Foundation Future of Public Health Law Education Faculty Fellowship Program. This post originally appeared in HealthLawProf Blog.

1 reply »

  1. There are some measurements in the amounts of charitable care these organizations provide however, some dispute that these organizations provide enough care to warrant the tax breaks they receive. I believe that this is the case as well. I have seen where these organization charge individuals without insurance higher prices and this goes towards their charity care or uncompensated care. There has been tax language that has effectively put a cap on this amount.

    A few weeks ago I was looking at the financial statement of Sherman Hospital. Where they reported about 10% of their revenue going towards bad debt. Then due to the medicaid assessment program this institution received about 35% of that bad debt back. This shifts their uncompensated care to a range of about 7% I’m not sure if the allowance for bad debts would be kind of the same thing but the ratio for Google a for profit company is at 6.63%

    Further the company in 2013 had used $30 million cash for investing. I’m not sure what all of this means but, I wonder how much value is being done by offering tax exemption in this instance. There is also the question of the true cost of services is the cost figured at the CMS reimbursement rates which means that the profit range is higher or is the true cost reflected in the billing? I’m not sure where to find this out yet but I imagine it is on the lower side of the equation.

    Medicaid assessment program http://www.ncleg.net/Sessions/2011/Bills/Senate/PDF/S32v4.pdf
    Sherman Hospital Financial information http://www.advocatehealth.com/documents/financialinformation/ShermanHealth2013_FINAL.pdf