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Community Benefit: Ready For A Punch To The Gut?

Philip Betbeze, for HealthLeaders News, August 6, 2007

Ending months of waiting, a new IRS report was released last week summarizing responses by almost 500 hospitals to a questionnaire about community benefit. The report and the response to it by ranking Senate Finance Committee member Chuck Grassley, R-IA, has finally provided some clarity on where the committee is leaning regarding uniform community benefit reporting standards for the IRS's form 990. Some hospitals and hospital systems may fear the effect on their margins from clarifying the rules for tax exemption. According to the survey's results and Grassley's response, maybe they should be afraid.

New reporting standards would end the murky business of whether spending on community benefit by hospitals justifies their huge tax exemptions. Better still, it would codify what "community benefits" actually are.

I've been hearing for years that the only difference between investor-owned hospitals and "nonprofits" is that one group pays taxes and another one doesn't. While certainly an exaggeration, the survey's results indicate there is a kernel of truth to that old saw--that some nonprofit hospitals are doing much more than others to justify the billions worth of tax exemptions granted to nonprofit hospitals. For a few, the tax exemption serves as little more than a competitive advantage in the hospital business. Certainly, some hospital leaders are nervous about the endgame for which the survey serves as the starter's pistol.

Some findings:

1. Uncompensated care accounted for 56 percent of the total community benefit expenditures for the 487 hospitals that completed the survey, but significant variations were found in how hospitals reported uncompensated care.

2. The definition of uncompensated care varied widely. Fifty-six percent reported they did not include bad debt in the calculations, with 44 percent saying at least some bad debt was included.

3. Hospitals varied widely on whether they used cost or charges to calculate uncompensated care.

4. A number of hospitals reported such expenditures as medical education and research, community programs, costs of producing publications or newsletters, medical screenings and public educational programs as community benefit expenses.

If reaction from Grassley's office is any indication, any further codification of the qualifications for the standard will likely hit the bottom line of many of these organizations. Grassley notes that the numbers are self-reported and often include "inflated costs or bad debt." From the rhetoric, is seems he is not a fan of the inclusion of such expenses. He also notes that 22 percent of nonprofit hospitals spend less than 1 percent of total revenue on uncompensated care, and that 21.6 percent reported spending less than 2 percent of total revenue on community benefit programs.

Conversely, some 20 percent of hospitals provide more than 10 percent of revenue for uncompensated care. While there's nothing illegal about what these hospitals have done--since there's no rule on what level of expenditure qualifies them for a federal tax exemption--clearly Grassley feels there's a need for clarification and new rules so that a bright line exists between the tax-exempt and the taxable.

"We need common terms and measurements so taxpayers can have confidence that nonprofit hospitals are providing benefits commensurate with the billions of dollars in tax breaks they receive every year," Grassley says in his response to the report.

Further, the IRS is circulating a draft "Schedule H" (for hospitals) addendum to the regular Form 990 that all nonprofit organizations must file. The new schedule would require hospitals to provide detailed information on their charity care policies, revenue profiles, bad debt expenses, collection practices and "certain other activities."

Certainly the hospitals that are truly making a good-faith effort to live up to their charitable missions are being painted with a broad brush, but hospitals that do their fair share and more should be happy that the regulations on qualifying for federal tax exemption may soon be spelled out.

The survey was a crucial first step in a bipartisan fact-finding mission to quantify the range of benefits hospitals are providing to their communities in return for their significant tax breaks. Now let's hope that new, fair regulations on qualifying for tax exemptions are forthcoming that will require all nonprofit hospitals to compete on a level playing field.


Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.

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