New Reporting Requirements Highlight Hospitals' Community Benefit Spending

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Debate continues about the adequacy of community benefits provided by nonprofit hospitals. Critics argue hospitals should be required to meet a specified minimum threshold of community benefits and that their tax relief should be reduced. Hospital administrators challenge those critics. As the economic downturn creates greater health care burdens on individuals, hospitals are becoming increasingly stretched in their efforts to provide care to those unable to pay for it. 

In a 1969 ruling, the IRS established the community benefit standard by which nonprofit hospitals qualify for federal tax exemption. The standard was comprised of five factors: (1) operation of an emergency room open to all members of the community without regard to ability to pay; (2) a governance board composed of community members; (3) the use of surplus revenue for facilities improvement, patient care, and medical training, education, and research; (4) the provision of inpatient hospital care for all persons in the community able to pay, including those covered by Medicare and Medicaid; and (5) an open medical staff with privileges available to all qualifying physicians. The IRS added the factors were not determinative, rather that a hospital's tax-exempt status would be determined based on relevant facts and circumstances.¹ 

Earlier this year, the IRS released a report of an analysis of 500 tax-exempt hospitals. The aim of the project was to help the IRS and public better understand how nonprofit hospitals benefit their communities, which is the basis for hospitals' federal tax exemption.² The IRS concluded that administering community benefit standards have proven difficult. Yet, they suggest that attempts to revise the current exemption standards “would seriously impact the existing tax exempt hospital sector because of the hospitals' varying practices and financial capabilities.” Removing or restricting hospitals' tax exemptions could, for example, result in hospitals' reducing their accounting profits in order to reduce their tax burden.³ Accordingly, the IRS determined that discussions about the community benefit standard should continue as policymakers gather more accurate and complete data through revised reporting requirements.⁴

Starting in 2010, nonprofit hospitals will be required to comply with new community benefit reporting requirements. Specifically they will be required to report more details on the level and type of community benefits they provide. The IRS changes are designed to provide greater transparency and accountability by hospitals.⁵ With more detailed information, policymakers will be better able to assess whether a hospital is in compliance with the law and also to develop policies to ensure communities are adequately served. The enhanced reporting from hospitals will also address concerns raised by the U.S. Government Accountability Office in 2008, including the latitude hospitals currently have in determining which services and activities constitute community benefits.⁶

The failing economy has increased the number of individuals without health insurance, with an attendant growth in hospital emergency room visits.⁷ Hospital administrators argue that their facilities play a vital role in their communities and placing greater restraints on them will only make it more difficult to provide care, education, and assistance to the most vulnerable in their communities.⁸ In a study which examined payment pressures on private California hospitals, HCFO researcher Glenn Melnick, Ph.D., of the University of Southern California, found that hospitals facing increased fiscal pressures reduced their level of uncompensated care.⁹

There are many unknowns, including how long the economic downturn will last, and the uncertain prospects for new jobs with health benefits. Another significant unknown is the structure of health reform; whether those currently without insurance will be covered and whether hospitals will see relief from the financial burden of caring for those who cannot pay. Finally, there is uncertainly about delivery system reform, and the likelihood of integrated delivery systems, which may include multi-hospital systems.¹⁰ Regardless, there will likely remain some portion of the population without any coverage or sufficient coverage and community benefits provided by nonprofit hospitals will likely continue to play a role in the health care of individuals. 

HCFO researcher Bradford Gray, Ph.D., Urban Institute, has examined Maryland 's experience in providing and reporting on nonprofit hospitals' charitable activities. He describes the variability in community spending activity across hospitals but cautions against instituting charitable threshold requirements until more is learned through the new reporting requirements.¹¹

The juxtaposition of the new reporting requirements, the economic flux, and changes that will be brought about under health reform will likely create more intense focus and scrutiny by policymakers and the public on the charitable expectations of hospitals.

For related HCFO-sponsored research, see the grants listed below or visit www.hcfo.org.

Title: The Provision and Reporting of Community Benefits by Hospitals: Lessons from Maryland 
Institution: Urban Institute 
Principal Investigator: Bradford Gray, Ph.D. 
Grant Duration: November 2007 – April 2009 

The researchers will examine factors at the hospital and community level that underlie variations in the amount of hospitals' charity care and other community benefit activities. Through a series of interviews and quantitative analysis the researchers will provide a critical account of the practical realities, advantages, and disadvantages of Maryland 's experience providing and reporting on not-for-profit hospitals' charitable activities. The Maryland approach is a working public model of the acclaimed Catholic Heath Association's (CHA) guidelines that measure and document the charity care it provides to communities. The researchers will develop benchmarks for the amount and variation of charity care and other community benefit activities. The objective of the study is to provide policymakers evidence-based information as they make decisions about requirements for hospitals' provision of charity care, as well as the accountability of nonprofit hospitals. 

Title: The Effects of Health Plan Concentration on Hospital Prices, Costs, Capacity, Charity Care, and Outcomes 
Institution: RAND 
Principal Investigator: Glenn Melnick, Ph.D. 
Grant Duration: February 2006 – January 2009 

Do differences in health plan concentration affect hospital performance in important areas, including prices, costs, staffing, capacity, charity care, and patient outcomes? In particular, they will address the following questions: 1) Do increases in health plan concentration slow hospital price growth? 2) Does increased health plan concentration lead to lower hospital growth? 3) Do increases in health plan concentration lead to reduced capacity in terms of closure or reductions of specialty units in hospitals (such as ER or trauma center) and/or reduced hospital staffing? 4) Do increases in health plan concentration affect patient outcomes? 5) Do hospitals reduce charity care in response to increased health plan concentration? 6) Do any of the above observed effects of health plan concentration differ depending on the level of managed care penetration, differences in dominant form of managed care (HMO vs. PPO), or differences in markets dominated by for-profit compared to not-for-profit health plans? The objective of this project is to inform the policy debate about whether health plan consolidation is welfare decreasing or welfare increasing. 

Title: Hospital Pricing and the Uninsured 
Institution: RAND 
Principal Investigator: Glenn Melnick, Ph.D. 
Grant Duration: February 2006 – January 2008 

Are hospital prices to the uninsured systematically different from prices to the insured by examining the trends in charges (list prices), net revenues (net prices)? Is there a relationship between the two, while controlling for other factors that may affect prices at the hospital level? This study addressed the following questions: (1) Is there evidence that uninsured patients are charged more than insured patients for similar services? (2) Is there evidence that uninsured patients pay more than insured patients for similar services? (3) If uninsured patients pay higher prices than insured patients are the differences systematically related to factors such as type of hospital or financial status of the hospital? (4) For hospitals that are collecting higher prices from uninsured patients, what is the order of magnitude of these additional revenues and how important are these higher prices to overall profitability and financial status of the hospital? The objective of this project was to inform policymakers and hospital leaders about the effects and implications of current hospital pricing practices on the uninsured, on the future of high deductible health plans, and on hospital finances. 

Title: Hospital Uncompensated Care Under Managed Care, Competition and Fiscal Pressure 
Institution: University of Southern California 
Principal Investigator: Glenn Melnick, Ph.D. 
Grant Duration: July 1997 – March 2000 

To what extent do hospitals reduce provision of uncompensated care in response to fiscal pressure emerging from growth in managed care market share? This study produced simulations that predict how much uncompensated care hospitals provide under different managed care growth scenarios. The researchers constructed a core analysis file from two large national data sets, the American Hospital Association annual survey and HCFA's 100 percent MEDPAR file. They supplemented these data with additional managed care penetration data and CPS (Census) data. They estimated the effects of managed care penetration on hospital uncompensated care at the national and state levels. The objective of this study was to inform policy makers about what consequences their decisions related to promoting or discouraging managed care may have on hospitals' provisions of uncompensated care. 

Title: The Impact of Nonprofit Conversions on Community Benefit 
Institution: Boston University School of Public Health 
Principal Investigator: Gary J. Young, J.D., Ph.D. 
Grant Duration: September 1997 – August 1998 

How do hospital conversions from nonprofit to for-profit status affect the communities they serve? Researchers at Boston University examined both short-term and long-term impacts using several different measures of community benefit, including uncompensated care, provision of unprofitable services, price discounts, and community representation on governing boards. They also assessed the number of conversions that resulted in either hospital closures or changes in service orientation. The researchers studied hospital conversions in three states: California, Florida and Texas. California and Florida data will cover the period between 1979 and 1996; Texas data span 1988 through 1995 (1996 if available). They also examined Medicare Cost Reports and American Hospital Association survey data. The objective of the study was to assess whether, and how, hospital conversions from non-profit to for profit status affects the community that these hospitals serve. 

Title: Effects of Competition and Rate Regulation on Access to Physician Services and Uncompensated Care 
Institution: Western Consortium of Public Health/University of California 
Principal Investigator: Glenn A. Melnick, Ph.D. 
Grant Duration: November 1990 – April 1994 

This project extended a previous analysis of the impact of the New Jersey Uncompensated Care Trust Fund on access to and use of hospital services by the uninsured, and of the impact of reduced hospital financial status on the provision of uncompensated care in California. The New Jersey portion of the study examined whether observed differences in the type and quantity of services received by the uninsured were attributable to physician factors. Investigators examined whether: (1) uninsured patients receive care from different physicians than patients covered by Medicaid and private insurance; (2) patients from different payer groups are treated differently by the same physician; and (3) what role the individual physician plays in explaining differences in costs among similar patients from different payer groups. The California portion of the study assessed the effects of the recently-observed reduced financial status of hospitals associated with increased competition in the state on the provision of uncompensated care.

1 GAO Report 08-880, “Variation in Standards and Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements,” September 2008 www.gao.gov/new.items/d08880.pdf 
2 "IRS Nonprofit Hospital Study-Final Report," IRS.gov, February 2009. Also see www.irs.gov/charities/charitable/article/0,,id=203109,00.html  
3 CBO Paper, “Nonprofit Hospitals and the Provision of Community Benefits,” December 2006. Also see www.cbo.gov/ftpdocs/76xx/doc7695/12-06-Nonprofit.pdf 
4 "IRS Nonprofit Hospital Study-Final Report," IRS.gov, February 2009. Also see www.irs.gov/charities/charitable/article/0,,id=203109,00.html  
5 Steven T. Miller, IRS, Remarks Before the Office of the Attorney General of Texas, “Charitable Hospitals: Modern Trends, Obligations and Challenges,” January 12, 2009, www.irs.gov/pub/irs-tege/miller_speech_011209.pdf 
6 GAO Report 08-880, “Variation in Standards and Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements,” September 2008 www.gao.gov/new.items/d08880.pdf; see also CBO Paper, “Nonprofit Hospitals and the Provision of Community Benefits,” December 2006. Also see www.cbo.gov/ftpdocs/76xx/doc7695/12-06-Nonprofit.pdf 
7 Calvan, B.C. “Hospitals Footing More Bills,” The Sacramento Bee, July 28, 2009 (providing details on the increase over four years in charity care and bad debts being absorbed by California area hospitals) Also see www.sacbee.com/ourregion/story/2061111.html 
8 See generally, "Impact of the Economy on Health Care," HCFO Issue Brief, AcademyHealth, August 2009, publications/impact-economy-health-care-1 
9 Mann, J., et al., “Uncompensated Care: Hospitals' Responses to Fiscal Pressures,” Data Watch,  Health Affairs, Spring 1995 http://content.healthaffairs.org/cgi/reprint/14/1/263.pdf 
10 Alexander, J.A., et al. “How Do System-Affiliated Hospitals Fare in Providing Community Benefit?” Inquiry, Vol. 46, Issue 1, Spring 2009, pp. 72-91 (finding that “the level of community benefit varies depending on the type of community benefit examined and the structural characteristics of the system with which a hospital is affiliated”). 
11 Gray, B. and M. Schlesinger. “Charitable Expectations of Nonprofit Hospital: Lessons from the Maryland Community Benefit Reporting Requirement.” Health Affairs, Web Exclusive, Vol. 28, No. 5, July 23, 2009, w809-w821 http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.5.w809 ; Gray, B. and M. Schlesinger. “The Accountability of Nonprofit Hospitals: Lessons from Maryland 's Community Benefit Reporting Requirements.” Inquiry, Vol. 46, No. 2, Summer 2009, 122-139.