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Hospital Community Benefit Expenditures: Looking Behind The Numbers



June 11th, 2013

Community benefit investments have been an obligation of nonprofit hospitals as a condition of their federal tax-exempt status for decades, and most states impose similar expectations.  The financial advantage that accrues to the nonprofit hospital industry as a result of their special tax-favored status was valued by the Joint Committee on Taxation at $12.6 billion in 2002 alone.  Neither Congress nor the IRS has established a minimum expenditure level for valuing the community benefit; indeed, the IRS allows hospitals “broad latitude” in determining their activities and contributions.  However, in the wake of increasing scrutiny by Congress, the IRS established a nationwide reporting system that enables a deeper dive into the question of nonprofit hospital community investment.

Two recent studies – one released by the hospital industry, the other, by academic researchers — provide a look behind the numbers. The industry study offers up a deceptively rosy spin, but a close look at both studies reveals strikingly small levels of true community benefit spending by many hospitals – particularly in states where hospitals are not required to report spending levels to state regulators.

The All-Important Schedule H

First developed in 2007, Schedule H became mandatory for nonprofit hospitals beginning in 2009. Submitted as part of the 990 Form, which is applicable to nonprofit corporations, Schedule H standardizes hospital reporting across a range of issues including but not limited to community benefit spending.  Schedule H standardizes the definition of what constitutes a community benefit, an enormous advance in light of the fact that, as our own research has shown, state community benefit laws exhibit wide variability in their definitional and reporting provisions, which prohibits meaningful comparison.

Schedule H, along with its reporting instructions, can be found online, and its community benefit definition is relatively rigorous definition.  The agencies define community benefit to include financial assistance to patients, unreimbursed costs associated with Medicaid and other means-tested public programs, and “other” community benefits that include community health improvement activities, health professions education, research, subsidized health care, and cash and in-kind support to community groups and organizations.

Conspicuously missing from the IRS community benefit definition are expenditures associated with bad debt (uncollectable amounts that remain either before or after any financial assistance that may be provided) and expenditures reflecting the difference between a hospital’s total allowable Medicare costs and its Medicare revenues. In other words, financial assistance in the form of discounts rendered at the time of care is a community benefit while writing off a bad debt after collection efforts is not. Medicaid participation is a community benefit; Medicare participation – a core business activity for virtually all U.S. hospitals – is not.

The Affordable Care Act has had a significant impact on the information about hospitals collected on Schedule H. The ACA further strengthens nonprofit hospitals’ accountability by amending the Internal Revenue Code (PPACA §9007) to introduce a community health needs assessment (CHNA) process that begins with evidence-based planning and a prioritization process and concludes with an implementation strategy to guide hospital investment.  The CHNA process becomes mandatory in 2012, and the information captured about the process through Schedule H ultimately will offer insight – for the first time and in a single location – into hospitals’ community benefit expenditure decisions and the evidentiary considerations on which those expenditures rest.

Both Schedule H and the Form 990 to which it is attached are publicly accessible. However, the sheer volume of hospitals subject to the reporting requirement (there are more than 2,900 U.S. nonprofit hospitals), along with the skills needed to extract, aggregate, and interpret the information these forms hold, means that comparative information about hospital performance typically is available only through specialized studies, since the government itself does not routinely prepare reports on hospital performance for community use.

A Deeper Dive Into Schedule H

The American Hospital Association’s Schedule H report.  On April 15, the AHA released Results from 2009 and 2010 Tax-Exempt Hospitals’ Schedule H Community Benefit Reporting.  The data used by the AHA and prepared by Ernst and Young consists of Schedule H forms voluntarily provided to its Ernst and Young researchers by member hospitals. The 2009 sample included 571 Schedule H forms, representing 900 hospitals of various sizes, locations and types. The 2010 sample included 524 Schedule H forms representing 972 hospitals. The two respondent groups represented 33 percent and 30 percent of all nonprofit AHA members, respectively.

In a sleight of hand, the AHA study reports that hospitals reported 11.3 percent of their total annual expenditures as “benefits to the community.” We say “sleight of hand,” because in both years, approximately one quarter of these “benefits to the community” involved either Medicare losses or bad debt – two types of expenditures explicitly excluded, as noted, from the IRS definition of community benefit. As Table 4 of the study reveals, slightly more than 8 percent (8.2 percent of hospital expenditures in 2010, to be exact) satisfied the IRS definition of “community benefit.” The remainder was business write-offs in the form of Medicare losses and bad debts, two types of expenditures specifically excluded from the scope of the community benefit definition by the IRS because they simply are part of the business of being a hospital.

The New England Journal of Medicine Study.  A far truer picture emerges in a landmark study published in the New England Journal of Medicine on April 18.  The study provides a far more comprehensive and reliable view of the current state of hospital community benefit investments. A team of researchers at Northeastern University, the University of Chicago, and the University of Michigan created a database consisting of more than 1,800 hospital tax filings – about 2/3 of all nonprofit hospitals that filed in 2009.

Instead of the misleading “benefits to the community” classification used by the AHA, the researchers followed the IRS classifications and determined that hospitals devoted 7.5 percent of their 2009 expenditures to community benefit. Like the AHA, the research team determined that the lion’s share of community benefit spending went to offset reported Medicaid losses (more than 45 percent of all community benefit expenditures), while 1.9 percent of total spending went to true charity care, that is, financial assistance to patients (as opposed to after-the-fact write-offs). Slightly more than 2.2 percent of total hospital spending – about 20 percent of all community benefit expenditures – went into other community benefits such as community health improvement.

Furthermore, researchers concluded, the level of community benefit expenditures ranged wildly, and these wild swings could not be explained by the underlying level of community poverty, profitability, or lack of health insurance among community residents.  Strikingly, only the simple presence of at least some level of state reporting law explained the difference in expenditure levels.

Looking Behind The Future Numbers

The New England Journal of Medicine study, the first to impartially utilize Schedule H to produce robust nationwide findings on hospitals’ community benefits, offers crucial insight into hospital investment patterns and the factors that may – or may not – spur hospital investments in their communities. This study hopefully will lead to many more examining investment patterns in a more detailed manner and on an ongoing basis, as the ACA’s CHNA provisions take full effect in the 2012 tax year. The paradoxical appearance of the AHA study and the New England Journal of Medicine study in the same week also drives home the unmatched value of rigorous and impartial research that adheres to official reporting standards rather than manufactured definitions of what constitutes a community benefit.

The New England Journal of Medicine article should also demonstrate the importance of more transparency around Schedule H. It is a truly fortunate thing that a group of acclaimed researchers came together to produce real knowledge for policymaking. But it is unfortunate that despite the existence of Schedule H, with its wealth of information about hospital investments and accountability, ordinary communities really have no way to gain access to the information unless they are fortunate enough to have a well-funded research group at their disposal to replicate an entire evidentiary database, merge that database with other key information (such as geographic information on poverty and health insurance coverage) and produce useful information about the performance of community hospitals. When information like this is freely available to communities across the country, we will know that we have advanced in the quest for health information transparency.

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