Editor’s note: Health Affairs will also publish a health policy brief on Nonprofit Hospitals’ Community Benefit Requirements in early 2016.

The requirement that nonprofit hospitals earn their tax-exempt status by benefiting their communities is enshrined in U.S. tax policy. This expectation reflects the substantial financial value conferred by tax-exempt status of about $24.6 billion in 2011, according to the most recent estimate.

The significant reduction in the proportion of uninsured Americans as a result of the Affordable Care Act’s (ACA) health insurance expansions, coupled with the greater focus on community health planning under the ACA’s reforms governing tax-exempt hospitals, has increased interest among hospitals in how they might expand the traditional community benefit concept into a newer and larger force for health and society.

One such health care delivery system example detailed in this post is Trinity Health’s Transforming Communities initiative. Trinity Health is focusing on Community Health and Well-Being as a way to empower low-income, disadvantaged, and underserved populations and communities while also addressing the social determinants of health.

Going forward, an important question becomes whether national health policies applicable to tax-exempt hospitals should be further revised to more actively encourage investments that improve health on a community-wide basis.

What Are ‘Community Benefits’?

Beginning in 2009, following extensive congressional oversight hearings into the conduct and practices of tax-exempt hospitals, the Internal Revenue Service (IRS) adopted a detailed and formal definition of community benefit. This definition, an outgrowth of the agency’s original 1969 community benefit policy, is found in Schedule H.

Schedule H is a special reporting tool that accompanies Form 990, which all charitable, tax-exempt organizations, including hospitals, must file. Schedule H is designed to capture information on a range of regulatory matters including information about hospital community benefit spending and organizational compliance with provisions of the Internal Revenue Code that include community-wide health planning. It also bars excessive charges and unreasonable billing and collection practices. Because all tax-exempt hospitals must complete Schedule H, it provides insight into overall hospital practices.

Not surprisingly, the IRS definition of community benefit (Schedule H, Part I) focuses on health care and certain hospital-centered activities that can be thought of as both integral to hospital operations and of broader social value, such as health professions education, training, and research. In effect, the modern community benefit definition encompasses actions that hospital organizations take to ensure that services are accessible to the community, or to enhance health care in communities, or strengthen the health care enterprise overall.

To this end, IRS policy specifies certain classes of expenditures, such as financial assistance at cost for uninsured or underinsured patients, participation in Medicaid and other means-tested insurance programs that may create “shortfalls” when payments are less than the cost of care, subsidized health services such as regional burn units, health professions education, training, and research, and certain “community health improvement” expenditures.

Community Health Improvement Versus Community Building

The term “community health improvement” is further defined as “activities or programs subsidized by the health care organization, carried out or supported for the express purpose of improving community health” and that “do not generate inpatient or outpatient revenue.” In 2011, financial assistance and Medicaid shortfalls accounted for 55 percent of all community benefit spending according to the IRS in its 2015 Report to Congress on private tax-exempt hospitals. Hospitals allocated the remainder across all other community benefit activities. IRS figures show that in 2011, hospitals allocated slightly less than $2.7 billion out of nearly $62.5 billion in community benefit spending to community health improvement.

This definition of community health improvement might capture subsidized health care supported by hospital grants to local community health centers, school-based health clinics, or health fairs organized by a hospital. However, especially when coupled with the prohibition against generating revenues from community health improvement activities, the term “improving community health” could be broad enough to encompass activities that do not involve health care but that lead to health improvement on a community-wide basis.

At the same time, however, the IRS juxtaposes this potentially broad reading of community health improvement against a distinct category of hospital spending known as “community building” (Schedule H, Part II). Unlike “community health improvement,” community-building activities are distinct from, and fall outside, the agency’s legal definition of community benefit. Community building consists of expenditures such as physical improvements and housing, economic development, community support, and environmental improvements that research has consistently linked to improvements in population health. Indeed, the legal presumption created by separating community building from community benefit is that community building activities are somehow separate from and external to community health improvement, and thus, to community benefit.

IRS policy does permit hospitals to allocate community building expenditures to community benefit activities and thus realize credit for these activities. In order to do so, however, hospitals need to be able to separately justify such expenditures as ones that promote community health. The justification process is unclear, nor do Schedule H reporting instructions specify the standard of review that the agency will use.

The IRS recently again indicated its willingness to consider such investments as community health improvement. But as with the Schedule H instructions themselves, this more recent clarification failed to indicate either the level of proof required or the process by which such proof will be considered.

In recent years, as the ACA’s insurance reforms have begun to pay dividends in the form of reduced levels of uncompensated care at hospitals, hospitals have shown increased interest in community-wide health investments rather than in maintaining a more narrow focus on health care or on strengthening the health care enterprise. Additionally, some have begun to turn their attention to underlying factors that affect population health.

Trinity Health’s Transforming Communities Initiative

Trinity Health is one of the largest multi-institutional Catholic health care delivery systems in the nation. It serves people and communities in 21 states with 91 hospitals, 126 continuing care locations—including home care, hospice, PACE, and senior living facilities—that provide nearly 2.5 million visits annually. With annual operating revenues of about $15.8 billion and assets of about $20.4 billion, the organization returns almost $1 billion to its communities annually in the form of charity care and other community benefit programs.

As part of its People-Centered 2020 strategy, Trinity Health is focusing on Community Health and Well-Being as a way to empower low-income, disadvantaged, and underserved populations and communities. Given this focus, it is not surprising that Trinity Health is also addressing the social determinants of health such as housing, food and nutrition, community safety, active communities, and early childhood development as part of its core activities.

According to Trinity Health’s Community Health and Well-Being strategy, achieving these goals rests on three pillars comprised of clinical services through the Trinity Health system for those living in poverty, community engagement through wraparound services focusing on poor and vulnerable populations, and of particular relevance to this post, community transformation focusing on the built environment, economic revitalization, and other social determinants of health.

In other words, through its strategic plan, Trinity Health quite deliberately and specifically aims to knock down the wall separating Schedule H Parts I and II, in recognition of the continuum between health and health care and bringing community-building activities squarely into the community health improvement orbit. This recommendation to integrate Parts I and II, which has been echoed by other hospital leaders in the past, would effectively broaden the definition of community health improvement to fully incentivize activities that can lead to long-term population health improvement, which is a central and enduring goal of public health.

A significant manifestation of Trinity Health’s strategic focus on health, not just health care, can be found in its November 19, 2015 announcement of a five-year, $80 million initiative consisting of grants, loans, technical support, community matching funds, and other activities all aimed at community health and well-being. Unlike the IRS’ core definition of community benefit, which concentrates on a hospital’s health care relationship to its community and to society as a whole, Trinity Health’s Transforming Communities initiative, to be coupled with Trinity Health’s Community Health Coordinators program, aims to position the hospital system on a broader health plane. There, it can act as a capital and supporting investment partner that brings collaborative funding, flexible capital, and technical assistance to community-based enterprises whose expertise lies in areas that hospitals’ simply do not, which is tackling underlying social and economic conditions that make people sick.

Trinity Health’s initiative focuses on three principal areas including obesity (especially childhood obesity), tobacco-free living, and social determinants that affect current and future health outcomes. The goal is not simply to support the immediate grantees who qualify for awards, but also to ensure the investment promotes the types of system and policy changes that are possible when numerous entities that share health as a goal come together to create collective impact strategies. In other words, while the initiative will support specific community activities throughout the country, it aims higher to achieve a level of solidarity in action that can bring health to all policies on a larger scale.

Other hospitals and hospital and health care systems such as Kaiser Permanente and Ascension Health have similarly sought to define their place in society beyond the traditional health care-focused concepts of the role of hospitals. What makes Trinity Health so striking is its deliberate effort to tie this central aim of redefining hospitals as a force for community health directly into its nationwide strategic plan. In effect, Trinity Health has explicitly recognized that its plan to become a health actor cannot succeed without partners. In order to find and create sustainable partnerships, it must apply community benefit spending to its strategic health planning goal.

As leading hospital systems seek to expand their traditional charity care mission with a broader, public health-focused community health improvement strategy centered on populations rather than on patients alone, the wall between Schedule H Parts I and II hopefully will begin to fall away. This elimination of the artificial barrier between community building and community health improvement might be helped immeasurably by a change in policy that merges Parts I and II of Schedule H into a unified whole, fully incorporating community building activities into the definition of community health improvement, without separate proof or legal distinction.

Understandably, such a change in policy would require careful policy development given the continued high demand for financial assistance in thousands of communities nationwide. In our view, however, the two aims of ensuring that hospitals continue to advance community health care access through charitable services, while at the same time encouraging hospitals to become a greater health presence, can be reconciled. Given the broader community-wide health improvement and cost reduction goals of health system transformation, there is no better time than the present for undertaking a strategic rethinking of community benefit policy.