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Encouraging Nonprofit Hospitals To Invest In Community Building: The Role Of IRS ‘Safe Harbors’



February 11th, 2014

Hospitals as public health actors.  A notable development in public health policy is the growing emphasis on community health improvement as part of the community benefit activities required of nonprofit hospitals that seek federal tax exempt status under §501(c)(3) of the Internal Revenue Code.  Key industry leaders, such as the Catholic Health Association, have sought to increase the role of hospitals as public health actors.  A report by the Hilltop Institute recognizes the potential link between hospitals’ community benefit expenditure activities and community health and describes states that have sought to involve hospitals in health planning to improve public health.

Two important policy developments have breathed further life into the effort to emphasize public health investments as part of a community benefit strategy. This post reviews these policy advances and proposes that the Internal Revenue Service (IRS) establish “safe harbors” describing in advance certain evidence-based investments by nonprofit hospitals in their communities that will automatically count as required community benefit activities.

Schedule H.  The first advance was the adoption of a major, standardized, nationwide reporting system first introduced in 2009 by the Internal Revenue Service (IRS). The purpose of this standardized reporting tool (filed as Schedule H to nonprofit hospitals’ annual Form 990s) is to capture more reliable and complete information about community benefit activities by clarifying the meaning of “community benefit” under federal law and defining the term in a manner that allows reliable and comparable information across the country. This policy reform essentially breathes life into the concept of community benefit, which was first introduced into federal tax policy in 1969 by Revenue Ruling 69-545 .

The 1969 ruling moved away from traditional and more specific measures of what constituted charitable activities (such as emergency departments that served the entire community regardless of ability to pay at the time services were rendered, as well as the provision of uncompensated care to patients unable to pay) and opened the door to a more amorphous “community benefit” standard; this enabled hospitals to shift from a strict, hospital-centered and health care-driven definition toward activities that could be considered of benefit to the community, such as support for community services, education and training, and research.

Beginning in the early part of this century, nonprofit hospitals’ community benefit obligations began to receive intense focus from both Congress and the Administration, especially as evidence of outlandish charges and harsh collection practices by some major hospitals and health care systems began to build. In 2008 the IRS first published a special tax filing supplement (Schedule H), which was designed to accompany hospitals’ Form 990 annual tax filing. Formally implemented in 2009, Schedule H offers a definition of what constitutes a community benefit expenditure. The definition encompasses not only hospital-based care, training, and research, but also “community health improvement” activities furnished directly by a hospital or through the provision of support to community-based organizations such as community health centers or school-based health clinics.

Schedule H includes an additional group of expenditures known as “community building” activities.  While not treated as community health improvement expenditure per se (and thus not automatically counted as a community benefit expenditure) community building activities encompass an array of expenditure categories that have the potential to improve community health:  Physical improvements and housing; economic development; community support; environmental improvements; leadership development and training for community members; coalition building; community health improvement advocacy; workforce development; and others.

In its Instructions accompanying the 2011 Schedule H, the IRS made it possible for hospitals to report some community building activities as community health improvement activities, and thus, as countable community benefits.  In introducing this policy, the IRS noted that “[s]ome community building activities may also meet the definition of community benefit. . . . An organization . . . must describe . . . how its community building activities promote the health of the communities it serves”.  This policy has been continued to the present, with instructions for the 2013 tax year enabling hospitals to report as community benefit expenditures those community building investments whose purpose is to improve community health and safety.

Community health needs assessments (CHNAs).  The second major policy advance related to community health improvement came in the form of revisions to the Internal Revenue Code itself, as part of amendments under the Affordable Care Act (ACA). These amendments (ACA §9007) clarify the obligations of nonprofit hospitals that seek tax-exempt status, establishing basic responsibilities in the areas of financial assistance, reform of billing and collection practices, adherence to the Emergency Medical Treatment & Labor Act (EMTALA), and community health planning.  The 2010 community health planning amendments require that hospitals undertake a triennial “community health needs assessment” (CHNA), and develop and annually update an implementation strategy that details how each facility will invest in health and health care priorities identified through the CHNA process.

Emphasizing the link between community benefit and public health, the CHNA provisions provide for consultation with public health experts, a requirement reflected in proposed rules released in 2013.  In advance of publication of final rules, the IRS issued in January 2014 additional corporate compliance guidance to hospitals regarding their community benefit activities, including their CHNA processes.   

A move toward public health?  As the ACA expands health insurance coverage, the need for direct financial assistance might be expected to decline over time. This potential shift away from the need for community benefit investment in direct patient care may, in turn, enable hospitals to focus on community benefit investments that can improve community and patient health and reduce hospital readmissions and unnecessary use of emergency departments. The implementation of health reform also shines a light on the potential for hospitals to invest more significantly in community building activities with a documented impact on community health improvement.

To this end, the Centers for Disease Control and Prevention (CDC) has sought to translate the ACA’s CHNA provisions into active engagement between hospitals and public health by offering technical support tools and by articulating a basic set of principles to advance the public health/community benefit relationship.

Given the annual national value of the tax exemption (estimated at $12.6 billion in 2002 by the Joint Committee on Taxation), even a relatively modest investment in community health improvement through community building activities can yield important financial investments in public health.  Indeed, Chris Kabel, a Senior Program Officer at the Northwest Health Foundation, has estimated that were hospitals to shift 20 percent of their community benefit expenditures toward community health improvement efforts, the annual yield would be $2.2 billion in additional funds for prevention, an amount that surpasses annual spending under the Prevention and Public Health Fund created by the ACA.

Moving forward: creating “safe harbors” for hospital community benefit investments in health improvement.  As noted, the IRS permits hospitals to report community building activities as a form of community health improvement — and thus community benefit expenditure — with evidence showing the link between the community building activity and community health and safety. This approach represents a major advance in IRS policy, enabling hospitals to move more decisively in the direction of public health investment.  At the same time, the policy places the burden on hospitals to justify each community building expenditure on a case-by-case basis,  potentially leading to greater reporting burdens and a good deal of uncertainty over how the IRS may rule. As a result, hospital administrators and their counsel may be wary of shifting their expenditures out of concern that the IRS may ultimately refuse to recognize certain types of investments as community health improvement expenditures.

One strategy for reducing legal uncertainty in health care marketplaces subject to extensive regulation is through the use of “safe harbors.”  In the areas of tax, fraud and abuse, and antitrust law, safe harbors have emerged as an important tool for offering affected entities to ascertain in advance the types of standards and conduct that a regulatory agency will deem legally compliant. The existence of safe harbors does not preclude activities that differ from expressly sanctioned conduct, but safe harbors can clarify the types of practices that will be recognized as meeting legal compliance standards.

In the case of the IRS community-building policy, no such safe harbors as yet exist. At the same time, a wealth of evidence, drawn from various published governmental reports and studies — such as CDC’s The Guide to Community Preventive Services and the National Prevention Strategy — provide the basis for such a policy advance. Hospitals should be able to rely on these official governmental studies as conclusive evidence of the link between expenditure and community health improvement, given the fact that these documents are official government statements regarding evidence-based public health improvements.

A report released by Trust for America’s Health (TFAH) and the New York Academy of Medicine (NYAM) entitled A Compendium of Proven Community Based Prevention Programs provides further fuel for such a “safe harbor” initiative. The new report highlights 79 evidence-based disease and injury prevention programs across the country that have saved lives and improved health. It also includes an extensive review of peer-reviewed studies that evaluated the effectiveness of community-based prevention programs designed to reduce tobacco use, injuries, asthma, alcohol abuse, and sexually-transmitted infections; increase physical activity; and improve eating habits.

The TFAH/NYAM report clearly underscores the importance of investing in community building activities as an effective strategy for improving community health. The report also provides evidence of the fiscal return on investment that can be realized through such programs. For example, the report cites a cost-benefit analysis approach used to estimate the return on investment for a tobacco cessation program implemented by the State of Massachusetts. According to the report, administrative data indicated that program costs were about $183 per program participant (in 2010 dollars).  The study also estimated inpatient savings per participant of $571, meaning every $1 in program costs was associated with $3.12 in medical savings, for a $2.12 return on investment to the Medicaid program for every dollar spent.

This latest TFAH/NYAM report, coupled with formal government reports, offer the evidence base hospitals need to broaden their community benefit investments to include community building efforts. What could advance this critical public health reform further would be a series of safe harbors, developed by the IRS, with CDC input, that enable hospitals to rely on established evidence in the field to guide their community health improvement expenditures.

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