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Financial Implications of Community Benefit

Karen Minich-Pourshadi, for HealthLeaders Media, October 13, 2010
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Most hospital and health system leaders are now continually tracking and reporting the value of their facilities to the community. But apart from the legal necessity in some states to keep tax-exempt privileges, doing so also supports a facility's mission and can even extend beyond the tax benefits and help in terms of selling points for a merger or partnership.

"Typically the hospitals looking at joint venture or a partnership for capital needs are going to focus on the hospital valuation," explains Jeff A. Nelson, partner at Atlanta-based Tatum, an executive services firm that provides operational expertise to hospitals. "However, when another hospital wants more insight into an organization, they are looking to partner with, they look at many different factors, including the community health assessment to see how well the hospital is addressing key issues in the community."

 

Moreover, he notes, if a for-profit is looking to purchase a not-for-profit hospital, the community benefit assessment can help with the justification process when the state attorney general reviews the proposal to determine the impact on the community.

 

For instance, Nelson was acting as the interim CEO at the not-for-profit Empire Health Services, a two-hospital system in Spokane, WA, and effected a "fair market value" bidding process. As a result of EHS' solicitation process, for-profit Community Health Systems based in Nashville, negotiated and purchased Empire Health. The transaction required and gained approval by the State of Washington since Empire Health was converted to a for-profit enterprise as part of CHS. The results of the sale of Empire Health to CHS included the injection of capital to purchase the system, plus an additional $100 million to Empire Health Services, and helped retain the two hospitals for a defined period of time and the funding of an $83 million not-for-profit foundation dedicated to helping the area residents with their healthcare needs.

Meeting the mission

But for most not-for-profit hospitals, the tax benefits are not the driving force for the community benefit assessment. "The motivation for this is to see how successful the faith-based mission of the organization is; it's not for the purposes of being defensive. It's really more a look at the effectiveness of the health system to meet the needs of the community through its mission," explains Scott Wooten, senior vice president and chief financial officer at Alegent Health in Omaha, NE, which consists of 10 hospitals and more than 100 sites of service in eastern Nebraska and southwestern Iowa.

Though charity care costs are a consistent draw on hospital finances, all not-for-profit hospitals are clear that it is their mission to provide care to those who cannot afford it, as well as to those who can. In doing so, hospitals not only meet their mission, but they also are able to maintain their nonprofit tax status. In recent years, more and more hospitals and health systems have been asked to justify their nonprofit status, and they have done so through the use of a community benefit assessment.

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