Nonprofit Hospitals
Variation in Standards and Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements Gao ID: GAO-08-880 September 12, 2008Nonprofit hospitals qualify for federal tax exemption from the Internal Revenue Service (IRS) if they meet certain requirements. Since 1969, IRS has not specified that these hospitals have to provide charity care to meet these requirements, so long as they engage in activities that benefit the community. Many of these activities are intended to benefit the approximately 47 million uninsured individuals in the United States who need financial and other help to obtain medical care. Previous studies indicated that nonprofit hospitals may not be defining community benefit in a consistent and transparent manner that would enable policymakers to hold them accountable for providing benefits commensurate with their tax-exempt status. GAO was asked to examine (1) IRS's community benefit standard and the states' requirements, (2) guidelines nonprofit hospitals use to define the components of community benefit, and (3) guidelines nonprofit hospitals use to measure and report the components of community benefit. To address these objectives, GAO analyzed federal and state laws; the standards and guidance from federal agencies and industry groups; and 2006 data from California, Indiana, Massachusetts, and Texas. GAO also interviewed federal and state officials, and industry group representatives. IRS stated that the report in general was accurate, but noted several concerns regarding the description of the community benefit standard. CMS did not have any comments.
IRS's community benefit standard allows nonprofit hospitals broad latitude to determine the services and activities that constitute community benefit. Furthermore, state community benefit requirements that hospitals must meet in order to qualify for state tax-exempt or nonprofit status vary substantially in scope and detail. For example, 15 states have community benefit requirements in statutes or regulations, and 10 of these states have detailed requirements. GAO found that among the standards and guidance used by nonprofit hospitals, consensus exists to define charity care, the unreimbursed cost of means-tested government health care programs (programs for which eligibility is based on financial need, such as Medicaid), and many other activities that benefit the community as community benefit. However, consensus does not exist to define bad debt (the amount that the patient is expected to, but does not, pay) and the unreimbursed cost of Medicare (the difference between a hospital's costs and its payment from Medicare) as community benefit. Variations in the activities nonprofit hospitals define as community benefit lead to substantial differences in the amount of community benefits they report. Even if nonprofit hospitals define the same activities as community benefit, they may measure the costs of these activities differently, which can lead to inconsistencies in reported community benefits. For example, standards and guidance vary on the level at which hospitals may report their community benefit (e.g., at an individual hospital level or a health care system level) and the method hospitals may use to estimate costs of community benefit activities. State data demonstrate that differences in how nonprofit hospitals measure charity care costs and the unreimbursed costs of government health care programs can affect the amount of community benefit they report. With the added attention to community benefit has come a growing realization of the extent of variability among stakeholders in what should count and how to measure it. At present, determination and measurement of activities as community benefit for federal purposes are still largely a matter of individual hospital discretion. Given the large number of uninsured individuals, and the critical role of hospitals in caring for them, it is important that federal and state policymakers and industry groups continue their discussion addressing the variability in defining and measuring community benefit activities.
GAO-08-880, Nonprofit Hospitals: Variation in Standards and Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements
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Report to the Ranking Member, Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
September 2008:
Nonprofit Hospitals:
Variation in Standards and Guidance Limits Comparison of How Hospitals
Meet Community Benefit Requirements:
Nonprofit Hospitals:
GAO-08-880:
GAO Highlights:
Highlights of GAO-08-953, a report to the Subcommittee on Financial
Institutions and Consumer Credit, Committee on Financial Services,
House of Representatives.
Why GAO Did This Study:
Basel II, the new risk-based capital framework based on an
international accord, is being adopted by individual countries. It
includes standardized and advanced approaches to estimating capital
requirements. In the United States, bank regulators have finalized an
advanced approaches rule that will be required for some of the largest,
most internationally active banks (core banks) and proposed an optional
standardized approach rule for non-core banks that will also have the
option to remain on existing capital rules. In light of possible
competitive effects of the capital rules, GAO was asked to examine (1)
the markets in which banks compete, (2) how new capital rules address
U.S. banks‘ competitive concerns, and (3) actions regulators are taking
to address competitive and other potential negative effects during
implementation. Among other things, GAO analyzed data on bank products
and services and the final and proposed capital rules; interviewed U.S.
and foreign bank regulators, officials from U.S. and foreign banks; and
computed capital requirements under varying capital rules.
What GAO Found:
Large and internationally active U.S.-based banks (core banks) that
will adopt the Basel II advanced approaches compete among themselves
and in some markets with U.S.-based non-core banks, investment firms,
and foreign-based banks. Non-core banks compete with core banks in
retail markets, but in wholesale markets core banks often compete with
investment firms and foreign-based banks. Because holding capital is
costly for banks, differences in regulatory capital requirements could
influence costs, prices, and profitability for banks competing under
different capital requirements.
The new U.S. capital rules addressed some earlier competitive concerns
of banks; however, other concerns remain. By better aligning the
advanced approaches rule with the international accord and proposing an
optional standardized approach rule, U.S. regulators reduced some
competitive concerns for both core and non-core banks. For example, the
U.S. wholesale definition of default for the advanced approaches is now
similar to the accord‘s. Core banks continue to be concerned about the
leverage requirement (a simple capital to assets calculation), which
they believe places them at a competitive disadvantage relative to
firms not subject to a similar requirement. Foreign regulators have
been working with U.S. regulators to coordinate Basel II implementation
for U.S. banks with foreign operations. The proposed standardized
approach addresses some concerns non-core banks raised by providing a
more risk sensitive approach to calculating regulatory requirements.
But other factors likely will reduce differences in capital for banks
competing in the United States; for example, the leverage requirement
establishes a floor that may exceed the capital required under the
advanced and standardized approaches.
Many factors have affected the pace of Basel II implementation in the
United States and, while the gradual implementation is allowing
regulators to consider changes in the rules and reassess banks‘ risk-
management systems, regulators have not yet taken action to address
areas of uncertainty that could have competitive implications. For
example, the final rule provides regulators with considerable
flexibility and leaves open questions such as which banks may be
exempted from the advanced approaches. Although the rule provides that
core banks can apply for exemptions and regulators should consider
these in light of some broad categories, such as asset size or
portfolio mix, the rule does not further define the criteria for
exemptions. Some industry participants we spoke with said that
uncertainties about the implementation of the advanced approaches have
been a problem for them. Moreover, regulators have not fully developed
plans for a required study of the impacts of Basel II before full
implementation. Lack of specificity in criteria, scope, methodology,
and timing will affect the quality and extent of information that
regulators will have to help assess competitive and other impacts,
determine whether there are any material deficiencies requiring future
changes in the rules, and determine whether to permit core banks to
fully implement Basel II.
What GAO Recommends:
GAO recommends that the U.S. bank regulators (1) clarify how they will
use regulatory flexibility built into the rules and (2) fully develop
plans, on a joint basis, for the required study of the impacts of Basel
II. The bank regulators generally agreed with our recommendations in a
joint response to this report.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-953]. For more
information, contact Orice M. Williams at (202) 512-8678 or
williamso@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
IRS's Standard Provides Broad Latitude for Nonprofit Hospitals to
Determine Community Benefit Activities; State Requirements Vary
Substantially in Scope and Detail:
Differences in the Activities Nonprofit Hospitals Define as Community
Benefit Substantially Affect the Amount of Community Benefits They
Report:
Differences in How Nonprofit Hospitals Measure Costs of Community
Benefit Activities Can Affect the Amount of Community Benefits They
Report:
Concluding Observations:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Other Activities That Benefit the Community Identified in
Industry Guidance:
Appendix III: State Community Benefit Requirements:
Appendix IV: States with Community Benefit Requirements Related to
Hospitals:
Appendix V: Examples of States with Licensure-Related Community Benefit
Provisions:
Appendix VI: Examples of States with Only Community Benefit Reporting
Provisions:
Appendix VII: Examples of States with Community Benefit Provisions
Located Outside of Statutes and Regulations:
Appendix VIII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Number of Nonprofit Hospitals and Their Average Total
Operating Expenses in Selected States, 2006:
Table 2: Charity Care and Bad Debt as Community Benefit--Analysis of
Selected Government Agency and Industry Group Standards and Guidance:
Table 3: Government Health Care Programs as Community Benefit--Analysis
of Selected Government Agency and Industry Group Standards and
Guidance:
Figures:
Figure 1: Geographic Distribution of Nonprofit Hospitals in 2006:
Figure 2: State Community Benefit Requirements:
Figure 3: Average Percentage of Total Operating Expenses Devoted to
Charity Care Costs and Bad Debt among Nonprofit Hospitals in Selected
States, 2006:
Figure 4: Average Percentages of Total Operating Expenses Devoted to
Charity Care Costs, Bad Debt, and the Unreimbursed Costs of Medicaid
and Medicare among Nonprofit Hospitals in Selected States, 2006:
Figure 5: Average Percentages of Total Operating Expenses Devoted to
the Unreimbursed Costs of Other Activities That Benefit the Community
among Nonprofit Hospitals in Selected States, 2006:
Figure 6: Charity Care Costs, Bad Debt, Unreimbursed Cost of Medicaid
and Medicare, and Other Activities That Benefit the Community as
Percentages of Their Sum among Nonprofit Hospitals in Selected States,
2006:
Figure 7: Average Percentages of Total Operating Expenses Devoted to
the Unreimbursed Cost of Medicaid and to the Unreimbursed Cost of
Medicaid Net of DSH Payments among Nonprofit Hospitals in Selected
States, 2006:
Abbreviations:
AHA: American Hospital Association:
BBRA: Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999:
CBO: Congressional Budget Office:
CCR: cost-to-charge ratio:
CHA: Catholic Health Association of the United States:
CMS: Centers for Medicare & Medicaid Services:
DSH: disproportionate share hospital:
EIN: employer identification number:
HFMA: Healthcare Financial Management Association:
IRS: Internal Revenue Service:
JCT: Joint Committee on Taxation:
MedPAC: Medicare Payment Advisory Commission:
United States Government Accountability Office:
Washington, DC 20548:
September 12, 2008:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
Dear Senator Grassley:
In 2006, there were about 2,900 nonprofit hospitals in the United
States.[Footnote 1] These hospitals qualify for federal tax exemption
from the Internal Revenue Service (IRS) if they meet certain
requirements.[Footnote 2] The exemption is based on the principle that
the government's loss of tax revenues is offset by its relief from
financial burdens that it would otherwise have to meet with
appropriations from public funds, and by the benefits resulting from
the promotion of general welfare.[Footnote 3] In addition to federal
income tax exemption, these hospitals also have access to charitable
donations that are tax deductible to the donor and tax-exempt bond
financing. Nonprofit hospitals may also be exempt under state law from
state and local income, property, and sales taxes. The Joint Committee
on Taxation (JCT)--a nonpartisan committee that assists Congress with
tax legislation--estimated that in 2002, nonprofit hospitals received
tax benefits of $12.6 billion at the federal, state, and local
levels.[Footnote 4]
To qualify for tax-exempt status, IRS requires nonprofit hospitals to
be organized and operated exclusively for a charitable purpose. Before
1969, IRS specified that hospitals must provide charity care to meet
this requirement.[Footnote 5] Since 1969, however, IRS has not
specified that nonprofit hospitals have to provide charity care to meet
this requirement, but they must provide a benefit to the community.
This has become known as the community benefit standard and has
remained substantially unchanged since 1969. In addition to charity
care, services and activities that can qualify as community benefits
include the provision of health education and screening to specific
vulnerable populations within the community and activities that benefit
the greater public good, such as education for health professionals and
medical research.
Many of these community benefit activities--especially charity care--
are intended to benefit individuals who need financial and other help
to obtain medical care. In 2006, there were approximately 47 million
uninsured individuals in the United States.[Footnote 6] These
individuals are more likely than insured individuals to rely on
hospital emergency rooms for medical care.[Footnote 7] Some of these
individuals with serious illness or injuries are admitted as inpatients
to the hospital, incurring substantial treatment costs.[Footnote 8]
Because uninsured individuals may lack the ability to pay for their
medical care, hospitals absorb some of the costs associated with
providing uncompensated care--either through a charity care program or
as expenses written off as bad debt.[Footnote 9],[Footnote 10] Given
the benefits available to tax-exempt hospitals, policymakers have been
interested in determining the extent to which hospitals share the
burden of caring for uninsured individuals.
In 2005, we reported on the amount of uncompensated care that
nonprofit, for-profit, and government hospitals provided.[Footnote 11]
We found that nonprofit hospitals devoted only slightly more of their
patient operating expenses to uncompensated care, on average, than
their for-profit counterparts. We also found that the burden of
uncompensated care was not evenly distributed among nonprofit
hospitals--a small number of nonprofit hospitals provided substantially
more uncompensated care than other hospitals receiving the same tax
preference. In 2006, the Congressional Budget Office (CBO) also
reported wide variation in the provision of uncompensated care among
nonprofit hospitals.[Footnote 12] These studies indicated that
nonprofit hospitals may not be defining community benefit in a
consistent manner that would enable policymakers to hold them
accountable for providing benefits commensurate with their tax-exempt
status.
Congress has since continued to raise questions about whether nonprofit
hospitals sufficiently accept and share the burden of uncompensated
care. As part of this effort, in 2007, you distributed a paper
discussing potential reforms to the community benefit
standard.[Footnote 13] Among other things, you sought feedback on
whether hospitals should be required to devote a minimum percentage of
patient operating expenses or revenues (whichever is greater) to
charity care in order to continue to qualify for federal tax exemption.
You also expressed interest in gaining a better understanding of
nonprofit hospitals' provision of community benefits in relation to
their tax-exempt status, and raised concerns about the extent to which
nonprofit hospitals define, measure, and report community benefits in a
consistent and transparent manner.
To obtain more information on these topics, you asked us to describe
IRS's community benefit standard and the states' community benefit
requirements, and to examine guidelines nonprofit hospitals use to
define, measure, and report the components of community benefit. In
this report, we (1) determine the community benefit standard and
requirements that IRS and the states have established; (2) examine the
standards and guidance nonprofit hospitals use to define community
benefit activities and their effects on reported community benefits;
and (3) examine the standards and guidance nonprofit hospitals use to
measure the costs of community benefit activities and their effects on
reported community benefits.
To determine the community benefit standard that IRS has established,
we examined relevant provisions of the Internal Revenue Code, IRS
regulations, revenue rulings, and federal case law. To review states'
community benefit requirements, we examined codified statutes and
regulations of the states.[Footnote 14]
To examine what activities are defined as community benefit, we
reviewed standards and guidance from the following government agencies
and industry groups: the Centers for Medicare & Medicaid Services
(CMS), IRS, the American Hospital Association (AHA), the Catholic
Health Association of the United States (CHA), VHA Inc.,[Footnote 15]
and the Healthcare Financial Management Association (HFMA). CMS, the
agency that administers Medicare,[Footnote 16] requires cost
information--including charity care costs and bad debt expenses--from
hospitals that participate in Medicare.[Footnote 17] AHA officials
stated that it represents over three-fourths of the hospitals in the
nation, including nonprofit hospitals. CHA represents Catholic health
care organizations, including hospitals, and is the nation's largest
group of nonprofit health care sponsors, systems, and facilities. VHA
represents about 28 percent of the nation's community-owned, nonprofit
hospitals. In 2006, CHA and VHA jointly released a set of detailed
community benefit guidelines--A Guide for Planning and Reporting
Community Benefit.[Footnote 18] HFMA represents health care financial
management executives and leaders in all areas of health care,
including hospitals. In 2006, the organization issued financial
reporting guidance on community benefit activities, including details
on charity care and bad debt. In addition to examining standards and
guidance from these organizations, we interviewed their officials and
representatives. We also interviewed representatives from the
Association of American Medical Colleges, which represents medical
schools, teaching hospitals, and their faculty, residents, and
students, as well as academic and professional societies; the
Federation of American Hospitals, which represents for-profit community
hospitals and health systems; the National Association of Children's
Hospitals; state hospital associations and state health officials from
California, Indiana, Massachusetts, and Texas; and seven nonprofit
health care systems.[Footnote 19]
To examine the effects of including or excluding various community
benefit activities on reported community benefit, we analyzed 2006
state data from California, Indiana, Massachusetts, and Texas. We
selected these four states because they represent diverse areas both
geographically and in the percentage of hospitals that are nonprofit,
and because they collected data on nonprofit hospitals' community
benefits, which not many states maintain.[Footnote 20] The state data
were also the most recent available at the time of our analysis. We
limited our analysis to nonprofit, nongovernmental, acute care, general
hospitals that reported gross patient revenues and total operating
expenses. We calculated and compared a variety of hospital expenses,
including charity care costs, bad debt, unreimbursed costs of
government health care programs,[Footnote 21] and the costs of other
activities that benefit the community, as percentages of total
operating expenses. To assess the reliability of the state data from
California, Indiana, Massachusetts, and Texas, we reviewed relevant
documentation for each of the data sets and interviewed knowledgeable
state officials about the accuracy of the data. Based on this
information we determined that the state-collected data were reliable
for the purposes of this report.
To examine practices nonprofit hospitals use to measure community
benefit activities, we reviewed the standards and guidance from CMS,
IRS, AHA, CHA and VHA, and HFMA. To examine the effects of these
practices on reported community benefit, we analyzed 2006 state data
from California, Indiana, Massachusetts, and Texas. Specifically, we
compared the different ways hospitals calculate expenses, including
charity care costs and the unreimbursed cost of Medicaid,[Footnote 22]
as percentages of total operating expenses. Appendix I contains a more
complete description of our methodology. We conducted our work from
July 2007 through August 2008 in accordance with generally accepted
government auditing standards.
Results in Brief:
IRS's community benefit standard allows nonprofit hospitals broad
latitude to determine the services and activities that constitute
community benefit. Furthermore, state community benefit requirements
that hospitals must meet in order to qualify for state tax-exempt or
nonprofit status vary substantially in scope and detail. For example,
15 states have community benefit requirements in statutes or
regulations, and 10 of these states have detailed requirements.
Among the standards and guidance used by nonprofit hospitals, consensus
exists to define charity care, the unreimbursed cost of means-tested
government health care programs (programs for which eligibility is
based on financial need, such as Medicaid), and many other activities
that benefit the community as community benefit. However, consensus
does not exist to define bad debt and the unreimbursed cost of Medicare
as community benefit. Variations in the activities nonprofit hospitals
define as community benefit lead to substantial differences in the
amount of community benefits they report.
Even if nonprofit hospitals define the same activities as community
benefit, they may measure the costs of those activities differently,
which can lead to inconsistencies in reported community benefits. For
example, standards and guidance vary on the level at which hospitals
may report their community benefit (e.g., at an individual hospital
level or a health care system level); the method hospitals may use to
estimate costs of all community benefit activities; and the methods
hospitals may use to measure costs of charity care, government health
care programs, and other activities that benefit the community. State
data demonstrate that differences in how nonprofit hospitals measure
charity care costs and the unreimbursed costs of government health care
programs can affect the amount of community benefit they report.
With the added attention to community benefit has come a growing
realization of the extent of variability among stakeholders in what
should count and how to measure it. At present, determination and
measurement of activities as community benefit for federal purposes are
still largely a matter of individual hospital discretion. Given the
large number of uninsured individuals, and the critical role of
hospitals in caring for them, it is important that federal and state
policymakers and industry groups continue their discussion addressing
the variability in defining and measuring community benefit activities.
An encouraging prospect for the future is the potential availability of
two national data sources derived from mandatory reporting to IRS and
CMS. National data should be helpful in standardizing reporting on
community benefit activities and informing public policy on the
community benefit standard. However, the data from these two sources
will not be available for analysis for several years, and it remains to
be seen whether the data will be consistent and reliable.
CMS and IRS reviewed a draft of this report. CMS stated that it did not
have any comments. IRS stated that the report in general was accurate,
although the agency noted several concerns regarding the description of
the community benefit standard. We addressed IRS's concerns as
appropriate.
Background:
In 2006, the majority--59 percent--of the roughly 4,900 nonfederal,
acute care general hospitals in the United States were nonprofit. The
rest included government hospitals (25 percent) and for-profit
hospitals (17 percent).[Footnote 23] States varied--generally by region
of the country--in their percentages of nonprofit hospitals (see fig.
1). States in the Northeast and Midwest had relatively high
concentrations of nonprofit hospitals, whereas the concentration was
relatively low in the South. For example, 88 percent of Massachusetts'
hospitals were nonprofit, whereas only 32 percent of Texas' hospitals
were nonprofit.
Figure 1: Geographic Distribution of Nonprofit Hospitals in 2006:
This figure is a map of the United States showing geographic
distribution of nonprofit hospitals in 2006.
[See PDF for image]
Source: GAO analysis of 2008 CMS data; Map Resources (map).
Note: Hospitals include nonfederal, acute care, general hospitals.
[End of figure]
Among nonprofit hospitals we examined in California, Indiana,
Massachusetts, and Texas, the average size of these hospitals, as
measured by total operating expenses, varied (see table 1). For
example, the average total operating expenses of nonprofit hospitals in
Massachusetts were 98 percent higher than average total operating
expenses of nonprofit hospitals in Indiana.
Table 1: Number of Nonprofit Hospitals and Their Average Total
Operating Expenses in Selected States, 2006:
California;
Number of hospitals: 166;
Average total operating expenses (in millions): $201.3.
Indiana;
Number of hospitals: 78;
Average total operating expenses (in millions): 141.3.
Massachusetts;
Number of hospitals: 64;
Average total operating expenses (in millions): 279.6.
Texas;
Number of hospitals: 119;
Average total operating expenses (in millions): 148.9.
Source: GAO analysis of 2006 California, Indiana, Massachusetts, and
Texas data.
Note: Nonprofit hospitals include nongovernmental, acute care, general
hospitals.
[End of table]
Federal Tax-Exemption Criteria for Nonprofit Hospitals:
Federal tax exemption for charitable organizations has been in
existence since the beginning of federal income tax law. This exemption
is based on the principle that the government's loss of tax revenue is
offset by its relief from financial burdens that it would otherwise
have to meet with appropriations from public funds, and by the benefits
resulting from the promotion of general welfare. Nonprofit hospitals
have never been expressly categorized as tax-exempt organizations under
section 501(c)(3) of the Internal Revenue Code. However, these
hospitals are able to qualify for federal tax exemption under section
501(c)(3) of the Internal Revenue Code since IRS and courts have
recognized the promotion of health for the benefit of the community--
where medical assistance is afforded to the poor or where medical
research is promoted--as a charitable purpose.[Footnote 24]
Specifically, nonprofit hospitals must be organized and operated
exclusively for the promotion of health, ensuring that no part of their
net earnings inure to the benefit of any private individual, and may
not participate in political campaigns on behalf of any candidate or
conduct substantial lobbying activities.[Footnote 25]
IRS has also issued revenue rulings specifying how nonprofit hospitals
can meet the requirements of federal tax exemption.[Footnote 26] In a
1956 revenue ruling, IRS required tax-exempt hospitals to provide
charity care to the extent of their financial abilities, which was
known as the financial ability standard.[Footnote 27] However, through
another revenue ruling in 1969, IRS established the community benefit
standard, which modified the charity care-based financial ability
standard as to how hospitals could qualify for tax-exempt
status.[Footnote 28] The community benefit standard specified that
nonprofit hospitals were not required to provide charity care to
qualify for federal tax exemption, but they must provide a benefit to
the community.[Footnote 29] Therefore, nonprofit hospitals could
qualify for tax-exempt status so long as they benefited the community
in a way that relieved a governmental burden and promoted general
welfare, even if not every member of the community received a direct
benefit.
In the 1969 revenue ruling that established the community benefit
standard, IRS recognized five factors that would support a nonprofit
hospital's tax-exempt status. These five factors were (1) the operation
of an emergency room open to all members of the community without
regard to ability to pay;[Footnote 30] (2) a governance board composed
of community members; (3) the use of surplus revenue for facilities
improvement, patient care, and medical training, education, and
research; (4) the provision of inpatient hospital care for all persons
in the community able to pay, including those covered by Medicare and
Medicaid; and (5) an open medical staff[Footnote 31] with privileges
available to all qualifying physicians. IRS further stated that tax-
exempt status would be determined based on the facts and circumstances
of each case, and that neither the absence of particular factors set
forth in the 1969 revenue ruling nor the presence of other factors
would be necessarily conclusive.
Nonprofit hospitals that qualify for tax-exempt status are exempt from
federal income taxation, have access to bond financing that generates
tax-free interest earnings for the bondholder--allowing these hospitals
to borrow funds at a lower cost than nonexempt entities--and are
eligible to receive contributions that are tax deductible for the
donors. In addition, these hospitals may also be exempt under state law
from state and local income, property, and sales taxes, which in some
cases are of a greater value than the federal income tax exemption.
Reporting of Community Benefit Information:
Once nonprofit hospitals have applied for and are granted tax-exempt
status by IRS, they must file Form 990 with IRS on an annual
basis.[Footnote 32] Form 990 collects information such as revenues and
expenses, and program service accomplishments. In December 2007, IRS
released a revised Form 990 to include a schedule specific to
hospitals--Schedule H--that requires nonprofit hospitals to report
their provision of activities that benefit the community in specified
categories: charity care, bad debt, unreimbursed cost of government
health care programs, and other activities that benefit the
community.[Footnote 33] The new hospital schedule will be mandatory
starting in filing year 2010 for tax year 2009, and IRS officials have
stated that complete data from the schedule may not be available until
2011, at the earliest.[Footnote 34]
In addition to meeting IRS's community benefit reporting requirements,
hospitals that participate in the Medicare program--including nonprofit
hospitals--must file hospital cost reports with CMS.[Footnote 35] The
required cost report includes Worksheet S-10, which collects revenue
and cost information on Medicaid, state and local indigent care
programs, the State Children's Health Insurance Program,[Footnote 36]
and other uncompensated care--defined by CMS as charity care and bad
debt--provided by the hospitals. CMS, in consultation with the Medicare
Payment Advisory Commission (MedPAC),[Footnote 37] is revising
Worksheet S-10 as part of broader efforts to update the Medicare
hospital cost report.
Beyond these two federal requirements, some states also require
hospitals to report their provision of community benefits using state-
specific reporting instruments. In addition, when requested, some
hospitals also report their community benefits to the state hospital
associations or other trade organizations to which they belong.
IRS's Standard Provides Broad Latitude for Nonprofit Hospitals to
Determine Community Benefit Activities; State Requirements Vary
Substantially in Scope and Detail:
IRS's community benefit standard to qualify for tax-exempt status
allows nonprofit hospitals broad latitude to determine the services and
activities that constitute community benefit. Furthermore, state
community benefit requirements that hospitals must meet in order to
qualify for state tax-exempt or nonprofit status vary substantially in
scope and detail.
IRS's Community Benefit Standard Provides Broad Latitude to Nonprofit
Hospitals:
IRS's community benefit standard that hospitals must meet to qualify
for federal tax exemption provides broad latitude to the hospitals in
determining the nature and amount of the community benefits they
provide.[Footnote 38] Specifically, IRS, in a 1969 revenue ruling that
established the current community benefit standard, modified the
existing tax-exemption requirement that focused primarily on the level
of charity care that a hospital provided. This 1969 revenue ruling also
listed the five factors that demonstrated how a nonprofit hospital
could benefit the community in a way that relieved governmental burden
and promoted general welfare.[Footnote 39] While IRS recognized these
five factors as supportive of a nonprofit hospital's tax-exempt status,
it also stated that a nonprofit hospital seeking exemption need not
meet all five factors to qualify for tax-exempt status; instead, the
determination is based on all the facts and circumstances, and the
absence of a particular factor may not necessarily be conclusive. As
stated by the Commissioner of Internal Revenue, some of the five
factors are now common practice in the hospital community and are less
relevant in distinguishing tax-exempt hospitals from their for-profit
counterparts.[Footnote 40] For example, having an open medical staff,
participating in Medicare and Medicaid, and treating all emergency
patients without regard to ability to pay are common features of both
tax-exempt and for-profit hospitals.
Although the focus of IRS policy is no longer the level of charity care
that hospitals provide, the 1956 revenue ruling remains relevant, and
IRS and various courts have continued to take into account the extent
to which a hospital provides charity care when determining an
organization's tax-exempt status. For example, among the factors that
the Tax Court and several United States Courts of Appeals have
considered in determining whether an organization met IRS's tax
exemption requirements were existence of a charity care
policy,[Footnote 41] provision of free or below-cost services to
individuals financially unable to make the required payments,[Footnote
42] and provision of additional community benefit--other than making
hospital services available to all in the community--that either
further the function of government-funded institutions or would not
likely be provided within the community without a hospital
subsidy.[Footnote 43]
State Community Benefit Requirements That Nonprofit Hospitals Must Meet
Vary Substantially in Scope and Detail:
State community benefit requirements that hospitals must meet in order
to qualify for state tax-exempt or nonprofit status vary substantially
in scope and detail. Specifically, 15 of the states have community
benefit requirements in statutes or regulations and 36 do not (see fig.
2).[Footnote 44] Of the 15 states with requirements, 5 states--Alabama,
Mississippi, Pennsylvania, Texas, and West Virginia--specify a minimum
amount of community benefits required in order for hospitals to be
compliant with state requirements. Another 4 of the 15 states--
Illinois, Indiana, Maryland, and Texas--have penalties for hospitals
that fail to comply with their community benefit requirements.[Footnote
45] Appendixes III, IV, V, VI, and VII contain more information on
state community benefit requirements and other related provisions.
Figure 2: State Community Benefit Requirements:
This figure is a map of the United States showing state community
benefit requirements.
[See PDF for image]
Source: GAO analysis of state statues and regulations; Map Resources
(map).
[End of figure]
In addition to the variation in scope among state community benefit
requirements, the level of detail among such requirements also varies
substantially. Specifically, of the 15 states with community benefit
requirements, 10 states have detailed requirements and 5 states have
less-detailed requirements.[Footnote 46],[Footnote 47] The community
benefit requirements of the 10 detailed states typically include some
combination of the following factors: a definition of community
benefit, requirements for a community benefit plan that sets forth how
the hospital will provide community benefits, community benefit
reporting requirements, and penalties for noncompliance. For example,
California requires its nonprofit hospitals to adopt and annually
update a community benefit plan, and annually submit a description of
community benefit activities provided and their economic values, among
other things.[Footnote 48] Similarly, Illinois requires its hospitals
to develop an organizational mission statement and a community benefits
plan for serving the community's health care needs, and to submit an
annual report of its community benefits plan, including a disclosure of
the amount and types of community benefits actually provided.[Footnote
49] These states also typically define community benefit using examples
of, and guidance on, the types of activities considered to be community
benefit. For example, Illinois defines community benefit using examples
of activities that the state considers to be community benefit and
Maryland defines community benefit using both examples and
guidance.[Footnote 50] In contrast, the remaining five states with less-
detailed requirements either only require the provision of charity care
or do not provide guidance on what counts as community benefit. For
example, Alabama's requirement only provides that charity care must
constitute at least 15 percent of a hospital's business in order for
the hospital to be exempt from property tax; and Wyoming's requirement
does not specify which activities its nonprofit hospitals must provide,
but makes clear that hospitals must provide benefit to the community to
obtain or maintain tax-exempt status.
Differences in the Activities Nonprofit Hospitals Define as Community
Benefit Substantially Affect the Amount of Community Benefits They
Report:
Variations in the activities nonprofit hospitals define as community
benefit lead to substantial differences in the amount of community
benefits they report. Among the government standards and industry
guidance used by nonprofit hospitals, consensus exists to define many
activities and their associated expenses--charity care, the
unreimbursed cost of means-tested government programs, and many other
activities that benefit the community--as community benefit. However,
consensus does not exist to define bad debt and the unreimbursed cost
of Medicare--each of which represents a substantial cost for nonprofit
hospitals, according to the state data we analyzed--as community
benefit.
Community Benefits May Include Charity Care, Bad Debt, Government
Health Care Programs, and Other Activities That Benefit the Community:
Activities that benefit the community and their associated expenses, as
defined by the community benefit standards and guidance that nonprofit
hospitals use, generally fall into one of four categories: charity
care, care for patients whose accounts result in bad debt (referred to
as bad debt for the rest of the report), care for beneficiaries of
government health care programs and their associated unreimbursed
costs, and other activities that benefit the community. In these
standards and guidance, charity care is generally defined as care
provided to patients whom the hospital deems unable to pay all or a
portion of their bills. Bad debt is generally defined as the
uncollectible payment that patients are expected to, but do not, pay.
The unreimbursed cost of government health care programs is generally
defined as the shortfall created when a facility receives total
payments that are less than the total costs of caring for public
program beneficiaries. Government health care programs include both
means-tested programs for which eligibility is based on financial need,
such as Medicaid, and non-means-tested programs for which eligibility
is not based on financial need, such as Medicare. Lastly, other
activities that benefit the community typically include activities that
address a community need, and exclude activities that generate revenue
for the hospital or are provided primarily for marketing purposes.
These other activities generally fall into one of seven groups that the
CHA and VHA guidance has identified, such as health professions
education and medical research. Appendix II contains descriptions and
examples of all seven groups.
While Consensus Exists to Define Charity Care as Community Benefit,
Disagreement Exists over Bad Debt, Which Is a Substantial Cost for
Nonprofit Hospitals:
Consensus exists among the standards and guidance that nonprofit
hospitals use to define charity care as community benefit.
Specifically, among the five government and industry guidance documents
we examined, four--IRS, AHA, CHA and VHA, and HFMA--define charity care
as community benefit, as did all four state hospital associations we
interviewed. While CMS does not have a position on community benefit,
its reporting instrument collects information on uncompensated care and
defines the term to include charity care.[Footnote 51] In addition, of
the 15 states with community benefit requirements, 14 either explicitly
define community benefit to include charity care or, in the absence of
a definition, mention charity care as an example of community benefit.
However, consensus does not exist among the standards and guidance that
nonprofit hospitals use to define bad debt as community benefit. Among
the five government and industry guidance documents we examined, two--
CHA and VHA, and HFMA--specify that bad debt should not be defined as
community benefit. CHA and VHA state that hospitals have the
responsibility to better identify patients eligible for charity care,
and thus distinguish charity care from bad debt.[Footnote 52] Citing
the difficulty of obtaining appropriate documentation to determine
charity care eligibility, HFMA, while it does not define bad debt as
community benefit, has stated that hospital charity care policies
should address how to determine eligibility when patients do not
provide sufficient information to formally make a
determination.[Footnote 53] In contrast, AHA defines bad debt as
community benefit, as do three of the four state hospital associations
we interviewed. AHA asserts that it should be defined as community
benefit because the majority of bad debt is attributable to low-income
patients who would qualify for charity care if hospitals were able to
obtain the necessary documentation to formally make this determination.
IRS, on the other hand, has not taken a position on whether to define
bad debt as community benefit (see table 2). The agency recognizes the
divergence of practices and views in this area and, as stated by its
officials, would like more information on the amount of bad debt
attributable to low-income patients. As a result, IRS's community
benefit reporting instrument--Form 990, Schedule H--will collect data
on bad debt separately from the list of hospital activities that are
traditionally included as community benefit, permit hospitals to
explain why certain portions of bad debt should be defined as community
benefit, and allow hospitals to estimate how much bad debt is
attributable to low-income patients. CMS does not have a position on
community benefit; however, its reporting instrument collects
information on uncompensated care and defines the term to include bad
debt. State community benefit requirements vary in whether they define
bad debt as community benefit. Of the 15 states with community benefit
requirements, 3 states explicitly include bad debt as community
benefit, 2 states explicitly exclude bad debt, and 10 states do not
specify.
Table 2: Charity Care and Bad Debt as Community Benefit--Analysis of
Selected Government Agency and Industry Group Standards and Guidance:
Government agencies: CMS;
Charity care: No position on whether to define as community benefit[A];
Bad debt: No position on whether to define as community benefit[A].
Government agencies: IRS;
Charity care: Defined as community benefit;
Bad debt: No position on whether to define as community benefit.
Industry groups: AHA;
Charity care: Defined as community benefit;
Bad debt: Defined as community benefit.
Industry groups: CHA/VHA;
Charity care: Defined as community benefit;
Bad debt: Defined as not community benefit.
Industry groups: HFMA;
Charity care: Defined as community benefit;
Bad debt: Defined as not community benefit.
Source: GAO analysis of government agency and industry group standards
and guidance.
[A] CMS does not have a position on community benefit; however, its
reporting instrument collects information on uncompensated care and
defines the term to include both charity care and bad debt.
[End of table]
Whether nonprofit hospitals define bad debt as community benefit has an
important effect on the resulting amount of community benefit reported.
Specifically, nearly all of the nonprofit hospitals in the four states
we examined reported bad debt,[Footnote 54] and the amounts were
typically substantial when compared to charity care (see fig. 3). For
example, in 2006 in California, the average percentage of total
operating expenses devoted to bad debt was 7.4 percent--almost five
times the average percentage devoted to charity care costs. Moreover,
the amounts of hospitals' bad debt varied widely across hospitals. For
example, among nonprofit hospitals in Texas, which had the most
variation, the middle 50 percent of hospitals reported bad debt ranging
from 7.4 to 19.1 percent of total operating expenses in 2006. Among the
middle 50 percent of nonprofit hospitals in Massachusetts, which had
the least variation, the span was still notable with bad debt ranging
from 2.2 to 4.6 percent of total operating expenses in 2006.
Figure 3: Average Percentage of Total Operating Expenses Devoted to
Charity Care Costs and Bad Debt among Nonprofit Hospitals in Selected
States, 2006:
This figure is a combination bar graph showing average percentage of
total operating expenses devoted to charity care costs and bad debt
among nonprofit hospitals in selected states, 2006. The X axis
represents the state, and the Y axis represents the percentage. One bar
represents charity care costs, and the other represents bad debt.
State: California;
Bad debt: 7.4;
Charity care costs: 1.5.
State: Indiana;
Bad debt: 6.2;
Charity care costs: 3.6.
State: Massachusetts;
Bad debt: 3.6;
Charity care costs: 2.9.
State: Texas;
Bad debt: 14.7;
Charity care costs: 5.3.
[See PDF for image]
Source: GAO analysis of 2006 California, Indiana, Massachusetts, and
Texas data.
Notes: Nonprofit hospitals include nongovernmental, acute care, general
hospitals. Percentages are calculated only among those hospitals that
reported having charity care costs and bad debt expenses. Ninety-six
percent of hospitals in California, 81 percent of hospitals in Indiana,
97 percent of hospitals in Massachusetts, and 100 percent of hospitals
in Texas reported charity care costs. Ninety-nine percent of hospitals
in California, 99 percent of hospitals in Indiana, 97 percent of
hospitals in Massachusetts, and 91 percent of hospitals in Texas
reported bad debt.
[End of figure]
While Consensus Exists to Define Means-Tested Programs, Such as
Medicaid, as Community Benefit, the Unreimbursed Cost of Medicare,
Which Is a Sizable Cost for Hospitals, Remains Contentious:
Consensus exists among the standards and guidance nonprofit hospitals
use to define the unreimbursed cost of means-tested government health
care programs, such as Medicaid, as community benefit. Among the five
government and industry guidance documents we examined, four--IRS, AHA,
CHA and VHA, and HFMA--define the unreimbursed cost of such programs as
community benefit, as did all four state hospital associations we
interviewed. While CMS does not have a position on community benefit,
its reporting instrument collects information on uncompensated care and
includes the unreimbursed cost of such programs as a type of
uncompensated care. In addition, state community benefit requirements
generally include the unreimbursed cost of such programs as community
benefit. Specifically, of the 15 states with community benefit
requirements, 9 states explicitly include the unreimbursed cost of
means-tested government health care programs as community benefit, none
of the states explicitly exclude this cost, and 6 states do not
specify.
Consensus does not, however, exist to define the unreimbursed cost of
Medicare as community benefit. Among the five government agencies and
industry groups we examined, only the CHA and VHA guidance specifies
that the unreimbursed cost of Medicare should not be defined as
community benefit because, among other reasons, Medicare losses for
some hospitals may be associated with inefficiency and not
underpayment.[Footnote 55] CHA and VHA also note that all hospitals
compete to attract Medicare beneficiaries, and CHA further stated that
serving Medicare beneficiaries is not a differentiating feature of
nonprofit hospitals.
In contrast, AHA defines the unreimbursed cost of Medicare as community
benefit, and HFMA states that hospitals should decide, based on their
circumstances, whether the unreimbursed cost of Medicare should be
defined as community benefit.[Footnote 56] AHA asserts that the
unreimbursed cost of Medicare should be defined as community benefit
because Medicare does not fully compensate hospitals for the cost of
providing hospital care to Medicare beneficiaries. AHA also notes that
Medicare, like Medicaid, serves a large number of low-income
beneficiaries. HFMA states that the unreimbursed cost of Medicare can
be an important issue for many providers and that such losses can be
material to the facility's financial status; therefore, each hospital
should decide, based on its circumstances, whether to report these
costs as community benefit. Similarly, all four state hospital
associations we interviewed stated that they define the unreimbursed
cost of Medicare as community benefit.
IRS has not taken a position on whether to define the unreimbursed cost
of Medicare as community benefit (see table 3). Its officials have
stated that, similar to IRS's position on bad debt, IRS's community
benefit reporting instrument will collect revenue and cost information
related to hospitals' Medicare beneficiaries separately from the list
of hospital activities that are traditionally included as community
benefit, and permit hospitals to explain why they believe all or a
portion of these costs should be defined as community benefit. CMS,
which does not have a position on community benefit, does not collect
information on the unreimbursed cost of Medicare. State community
benefit requirements vary in whether the unreimbursed cost of Medicare
should be included as community benefit. Of the 15 states with
community benefit requirements, 6 states explicitly include the
unreimbursed cost of Medicare as community benefit,[Footnote 57] none
of the states explicitly exclude this cost, and 9 states do not
specify.
Table 3: Government Health Care Programs as Community Benefit--Analysis
of Selected Government Agency and Industry Group Standards and
Guidance:
Government agencies: CMS;
Unreimbursed cost of means-tested government health care programs, such
as Medicaid: No position on whether to define as community benefit[A];
Unreimbursed cost of Medicare program: No position on whether to define
as community benefit[A].
Government agencies: IRS;
Unreimbursed cost of means-tested government health care programs, such
as Medicaid: Defined as community benefit;
Unreimbursed cost of Medicare program: No position on whether to define
as community benefit.
Industry groups: AHA;
Unreimbursed cost of means-tested government health care programs, such
as Medicaid: Defined as community benefit;
Unreimbursed cost of Medicare program: Defined as community benefit.
Industry groups: CHA/VHA;
Unreimbursed cost of means-tested government health care programs, such
as Medicaid: Defined as community benefit;
Unreimbursed cost of Medicare program: Defined as not community
benefit.
Industry groups: HFMA;
Unreimbursed cost of means-tested government health care programs, such
as Medicaid: Defined as community benefit;
Unreimbursed cost of Medicare program: Defined as community benefit[B].
Source: GAO analysis of government agency and industry group standards
and guidance.
[A] CMS does not have a position on community benefit; however, its
reporting instrument collects information on uncompensated care and
includes the unreimbursed cost of means-tested government health care
programs, but not Medicare, as a type of uncompensated care.
[B] HFMA asserts that hospitals should decide, based on their
circumstances, whether the unreimbursed cost of Medicare should be
defined as a community benefit.
[End of table]
Whether nonprofit hospitals define the unreimbursed cost of Medicare as
community benefit has an important effect on the resulting amount of
community benefit reported. Specifically, most of the nonprofit
hospitals in the four states we examined--over 90 percent in Texas and
over 80 percent in California, Indiana, and Massachusetts--reported
having unreimbursed costs of Medicare, and the amounts were typically
substantial compared to charity care costs and the unreimbursed cost of
Medicaid (see fig. 4). For example, in all four states the unreimbursed
cost of Medicare as a percentage of total operating expenses was at
least 86 percent more than charity care costs as a percentage of the
same expenses. Similarly, the unreimbursed cost of Medicare as a
percentage of total operating expenses was at least 54 percent more
than the unreimbursed cost of Medicaid as a percentage of the same
expenses. Moreover, the amount of hospitals' unreimbursed cost of
Medicare varied widely across hospitals. For example, among nonprofit
hospitals in Indiana, which had the most variation, the middle 50
percent of hospitals reported unreimbursed costs of Medicare ranging
from 4.9 to 13.4 percent of total operating expenses in 2006. Among the
middle 50 percent of nonprofit hospitals in Massachusetts, which had
the least variation, the span was still notable with unreimbursed costs
of Medicare ranging from 2.4 to 8.0 percent of total operating expenses
in 2006.
Figure 4: Average Percentages of Total Operating Expenses Devoted to
Charity Care Costs, Bad Debt, and the Unreimbursed Costs of Medicaid
and Medicare among Nonprofit Hospitals in Selected States, 2006:
This figure is a combination bar graph showing average percentages of
total operating expenses devoted to charity care costs, bad debt, and
the unreimbursed costs of Medicaid and Medicare among nonprofit
hospitals in selected states, 2006.
State: California;
Unreimbursed cost of Medicare: 7.4;
Unreimbursed cost of Medicaid: 4.8;
Bad debt: 7.4;
Charity care costs: 1.5.
State: Indiana;
Unreimbursed cost of Medicare: 9.3;
Unreimbursed cost of Medicaid: 6;
Bad debt: 6.2;
Charity care costs: 3.6.
State: Massachusetts;
Unreimbursed cost of Medicare: 5.4;
Unreimbursed cost of Medicaid: 1.9;
Bad debt: 3.6;
Charity care costs: 2.9.
State: Texas;
Unreimbursed cost of Medicare: 13.3;
Unreimbursed cost of Medicaid: 5;
Bad debt: 14.7;
Charity care costs: 5.3.
[See PDF for image]
Source: GAO analysis of 2006 California, Indiana, Massachusetts, and
Texas data.
Notes: Nonprofit hospitals include nongovernmental, acute care, general
hospitals. Percentages are calculated only among those hospitals that
reported having charity care costs, unreimbursed costs of Medicaid or
Medicare, or bad debt expenses. Ninety-six percent of hospitals in
California, 81 percent of hospitals in Indiana, 97 percent of hospitals
in Massachusetts, and 100 percent of hospitals in Texas reported
charity care costs. Ninety-nine percent of hospitals in California, 99
percent of hospitals in Indiana, 97 percent of hospitals in
Massachusetts, and 91 percent of hospitals in Texas reported bad debt.
Eighty-one percent of hospitals in California, 88 percent of hospitals
in Indiana, 89 percent of hospitals in Massachusetts, and 87 percent of
hospitals in Texas reported unreimbursed costs of Medicaid. Eighty-four
percent of hospitals in California, 83 percent of hospitals in Indiana,
81 percent of hospitals in Massachusetts, and 93 percent of hospitals
in Texas reported unreimbursed costs of Medicare.
[End of figure]
Consensus Exists to Define Most Other Activities That Benefit the
Community as Community Benefit:
Consensus exists among the standards and guidance nonprofit hospitals
use to define six of the seven groups of other activities as community
benefit: cash and in-kind contributions,[Footnote 58] community benefit
operations,[Footnote 59] community health improvement
services,[Footnote 60] health professions education,[Footnote 61]
medical research,[Footnote 62] and subsidized health services.[Footnote
63] State community benefit requirements on these activities vary. For
example, 13 of the 15 states with community benefit requirements cite
additional activities--other than charity care, bad debt, or government
health care programs--as community benefit. For these states, the most
commonly cited type of activity appears to be subsidized health
services, although the exact term used varies among the states.
In contrast, consensus does not exist to define the seventh group of
activities--community-building activities--as community
benefit.[Footnote 64] AHA, CHA and VHA, and HFMA define community-
building activities as community benefit because these activities
provide opportunities to address the underlying causes of health
problems, such as poverty, homelessness, and environmental problems.
IRS, however, has not taken a position on whether to define community-
building activities, which include activities such as physical
improvements and housing programs, economic development, and
environmental improvements, as community benefit. The agency recognizes
that there appears to be widespread support for including these
activities, and while the agency believes that certain of these
activities might constitute community benefit, more data and study are
required. CMS also does not comment on what other activities should be
defined as community benefit.
While data are not available to evaluate the effect of defining
community-building activities as community benefit, data on groups of
other activities that benefit the community indicate that they
represent a relatively small proportion of total operating expenses for
hospitals.[Footnote 65] Only two of the four states we examined--
Indiana and Texas--collect data on other activities that benefit the
community, though even these states do not collect any data on two of
the seven categories of other activities that benefit the community.
For the five groups of other activities with data, fewer hospitals in
Indiana and Texas generally reported having unreimbursed costs for
these activities when compared with other types of community benefits,
such as charity care, and the unreimbursed costs of most activities
account for less than 1 percent each of total operating expenses, on
average (see fig. 5). For example, more hospitals in these two states
reported having unreimbursed costs for community health improvement
services than for the other four groups--over two-thirds of Indiana
nonprofit hospitals and almost three-quarters of Texas nonprofit
hospitals reported having these costs. Among Texas and Indiana
nonprofit hospitals, the unreimbursed costs of these services averaged
only 0.6 percent in 2006. In contrast, few hospitals reported having
unreimbursed costs for medical research--less than 15 percent of
nonprofit hospitals in both states reported these costs. Among Indiana
nonprofit hospitals reporting these costs, the unreimbursed costs of
medical research averaged only 0.1 percent of total operating expenses
in 2006. In Texas, however, these costs averaged 0.8 percent, and the
top quarter of hospitals had unreimbursed costs at least twice the
average--at 1.7 percent in 2006.
Figure 5: Average Percentages of Total Operating Expenses Devoted to
the Unreimbursed Costs of Other Activities That Benefit the Community
among Nonprofit Hospitals in Selected States, 2006:
This figure is a combination bar graph showing average percentages of
total operating expenses devoted to the unreimbursed costs of other
activities that benefit the community among nonprofit hospitals in
selected states, 2006. The X axis represents the state, and the Y axis
represents percentage.
State: Indiana;
Cash and in-kind contributions: 0.6;
Community health improvement services: 0.6;
Health professions education: 1.2;
Research: 0.1;
Subsidized health services: [A].
State: Texas;
Cash and in-kind contributions: 0.2;
Community health improvement services: 0.6;
Health professions education: 0.8;
Research: 0.8;
Subsidized health services: 2.1.
[See PDF for image]
Source: GAO analysis of 2006 California, Indiana, Massachusetts, and
Texas data.
Notes: Nonprofit hospitals include nongovernmental, acute care, general
hospitals that reported these other activities. We did not include
California and Massachusetts because they do not collect data on these
activities. Percentages are calculated only among those hospitals that
reported having unreimbursed costs of that activity. Cash and in-kind
contributions to others include cash donations, grants, and in-kind
donations made to individuals or the community at large. Community
health improvement services include programs for community health
education, community-based clinical services, and health care support
services. Health professions education includes education for
physicians, medical students, nurses, nursing students, and other
health professionals, and scholarships and funding for professional
education. Medical research includes both clinical and community-health
research. Subsidized health services are clinical services provided
despite a financial loss and subsidized by the hospital; examples
include emergency services and burn units. Fifty percent of Texas
hospitals reported unreimbursed costs of subsidized health services;
Indiana does not collect data on these costs. Sixty-nine percent of
Indiana hospitals and 75 percent of Texas hospitals reported
unreimbursed costs of community health improvement services Fifty-four
percent of Indiana hospitals and 60 percent of Texas hospitals reported
unreimbursed costs of cash and in-kind contributions. Thirteen percent
of Indiana hospitals and 9 percent of Texas hospitals reported
unreimbursed costs of research. Fifty percent of Indiana hospitals and
58 percent of Texas hospitals reported unreimbursed costs of health
professions education.
[A] Indiana does not collect data on subsidized health services.
[End of figure]
In addition to representing a small proportion of total operating
expenses, the costs of other activities that benefit the community are
generally smaller than the costs of other types of activities that
benefit the community, such as charity care, bad debt, and the
unreimbursed costs of Medicaid and Medicare (see fig. 6). For example,
among nonprofit hospitals in Texas that incurred costs for providing
other community benefits, the average cost of these activities--at 11
percent--is the smallest of the different groups of community benefits.
Figure 6: Charity Care Costs, Bad Debt, Unreimbursed Cost of Medicaid
and Medicare, and Other Activities That Benefit the Community as
Percentages of Their Sum among Nonprofit Hospitals in Selected States,
2006:
This figure is a combination of two pie graphs showing charity care
costs, bad debt, unreimbursed cost of medicaid and medicare, and other
activities that benefit the community as percentages of their sum among
nonprofit hospitals in selected states, 2006.
Indiana:
Unreimbursed costs of other activities that benefit the community: 9%;
Charity care costs: 13%;
Bad debt: 22%;
Unreimbursed cost of Medicaid: 22%;
Unreimbursed cost of Medicare: 34%.
Texas:
Unreimbursed costs of other activities that benefit the community: 11%;
Charity care costs: 12%;
Bad debt: 34%;
Unreimbursed cost of Medicaid: 12%;
Unreimbursed cost of Medicare: 31%.
[See PDF for image]
Notes: Nonprofit hospitals include nongovernmental, acute care, general
hospitals. We did not include California and Massachusetts because they
do not collect data on other activities that benefit the community.
Percentages are calculated only among those hospitals that reported
having charity care costs; unreimbursed costs of Medicaid, Medicare, or
other activities that benefit the community; or bad debt expenses.
Other activities that benefit the community include cash and in-kind
contributions to others, community health improvement services, health
professions education, medical research, and subsidized health
services. Eighty-one percent of hospitals in Indiana and 100 percent of
hospitals in Texas reported charity care costs. Ninety-nine percent of
hospitals in Indiana and 91 percent of hospitals in Texas reported bad
debt. Eighty-eight percent of hospitals in Indiana and 87 percent of
hospitals in Texas reported unreimbursed costs of Medicaid. Eighty-
three percent of hospitals in Indiana and 93 percent of hospitals in
Texas reported unreimbursed costs of Medicare. Fifty percent of Texas
hospitals reported unreimbursed costs of subsidized health services;
Indiana does not collect data on these costs. Sixty-nine percent of
Indiana hospitals and 75 percent of Texas hospitals reported
unreimbursed costs of community health improvement services. Fifty-four
percent of Indiana hospitals and 60 percent of Texas hospitals reported
unreimbursed costs of cash and in-kind contributions. Thirteen percent
of Indiana hospitals and 9 percent of Texas hospitals reported
unreimbursed costs of research. Fifty percent of Indiana hospitals and
58 percent of Texas hospitals reported unreimbursed costs of health
professions education.
[End of figure]
Differences in How Nonprofit Hospitals Measure Costs of Community
Benefit Activities Can Affect the Amount of Community Benefits They
Report:
Nonprofit hospitals may use a variety of practices to measure the costs
of community benefit activities, and differences in these practices can
affect the amount of community benefits they report. For example,
standards and guidance used by nonprofit hospitals specify a variety of
levels at which hospitals can report their community benefit.
Specifically, IRS requires hospitals to report community benefit on
Form 990 by employer identification number (EIN) because tax exemption
is determined by EIN[Footnote 66]. An EIN may cover a single hospital,
several hospitals, or other aggregates. In contrast, CMS requires
hospitals to submit cost reports, which include Worksheet S-10 with
data on uncompensated care, at an individual hospital level. Industry
stakeholders, such as AHA and CHA, have stated that hospitals should
have the choice to report community benefits on a health care system
level or as individual hospitals. CHA has stated that hospitals should
have this option because, for example, they may also have established
foundations or free health clinics as separate taxable entities through
which they provide community benefit; hospitals should therefore have
the option to include this community benefit in their reports. HFMA
does not specify the level at which hospitals should report community
benefit. The percentage of expenses devoted to community benefit could
differ for hospitals that belong to a system depending on whether they
reported at a system or individual level, because reporting at a system
level aggregates the percentages of each hospital. One official from a
state hospital association noted that because individual hospital
percentages would be aggregated when community benefits are reported at
a system level, there is a potential for a health care system as a
whole, and not necessarily each individual hospital, to meet a
community benefit standard.
Data are not available that would allow us to evaluate the impact of
differences in the level at which nonprofit hospitals report community
benefit. IRS's forthcoming Form 990, Schedule H, which will collect
community benefit data, will be of limited use for comparing individual
hospitals' reported community benefits because, as noted, hospitals may
report community benefit as a single hospital or a larger aggregate,
such as a health care system. CMS's Worksheet S-10 collects data on an
individual hospital level, but we have found the data to be unreliable.
MedPAC has stated that Worksheet S-10 should be improved, calling
specifically for differentiating charity care and bad debt.[Footnote
67],[Footnote 68] Although Worksheet S-10 could yield reliable data in
the future, it does not currently collect data on all the activities
IRS includes as community benefit, such as medical research or
subsidized health services.
Standards and guidance used by nonprofit hospitals also differ in how
they instruct hospitals to estimate costs of community benefit
activities. Specifically, CHA and VHA and HFMA advocate calculating
costs, if possible, using a cost-accounting system.[Footnote 69]
However, one state hospital association we spoke with stated that
smaller hospitals may not be able to use this method. In contrast, CMS
instructs hospitals to estimate costs on Worksheet S-10 using a cost-
to-charge ratio (CCR).[Footnote 70] CHA and VHA also suggest using a
CCR when a cost-accounting system cannot be used. There are, however,
many methods of calculating a CCR; CMS and CHA and VHA specify how
hospitals should calculate the CCR used to determine charity care
costs, but their formulas differ. AHA does not specify how to estimate
costs, but supports the CHA and VHA guidance. IRS instructs hospitals
to use a cost-accounting system, a CCR, or another cost-accounting
method, whichever is most accurate in estimating costs. Data are not
available that would allow us to evaluate the impact of the different
practices hospitals use to estimate costs on the amount of reported
community benefit.
In addition to the different practices on reporting levels and
methodologies for estimating costs, which affect every aspect of
reported community benefit, standards and guidance used by nonprofit
hospitals also specify a variety of practices to measure the costs of
charity care, government health care programs, and other activities
that benefit the community, which can lead to inconsistent reporting of
these activities.
Measurement Practices for Charity Care:
Consensus does not exist on whether to add to charity care costs a
nonprofit hospital's contributions to uncompensated care pools or
programs,[Footnote 71] or whether to offset charity care costs by
payments to hospitals from uncompensated care pools or programs. AHA
and CHA and VHA instruct hospitals to add their contributions and
subtract the payments they receive to calculate charity care costs, but
CMS and HFMA do not.[Footnote 72] IRS instructs hospitals to account
for revenue from uncompensated care pools or programs as offsetting
either charity care costs, the unreimbursed cost of Medicaid, or both,
depending on the state's primary purpose for the revenue. If the
state's primary purpose is unclear, IRS instructs hospitals to allocate
portions of the revenue as offsetting either charity care costs or the
unreimbursed cost of Medicaid, based on a reasonable estimate of the
portions that are intended for charity care and Medicaid.
Differences in how nonprofit hospitals calculate charity care costs can
have an important effect on the resulting amount of community benefit a
hospital reports. For nonprofit hospitals in Massachusetts in
2006,[Footnote 73] the average percentage of total operating expenses
devoted to charity care would increase from 2.9 to 3.9 percent--a 34
percent increase--if hospital contributions to uncompensated care pools
were added to charity care costs. If payments Massachusetts hospitals
receive from uncompensated care pools are then subtracted from the sum,
the average percentage of total operating expenses devoted to charity
care would decrease from 3.9 to 1.8 percent, a 54 percent reduction.
Measurement Practices for Government Health Care Programs:
Consensus does not exist on how nonprofit hospitals are instructed to
offset community benefit costs by Medicaid disproportionate share
hospital (DSH) payments.[Footnote 74] CHA and VHA specify that
hospitals can account for these payments as offsetting either charity
care costs or the unreimbursed cost of Medicaid. IRS instructs
hospitals to account for Medicaid DSH payments as offsetting either
charity care costs, the unreimbursed cost of Medicaid, or both
depending on the state's primary purpose for the payment. If the
state's primary purpose is unclear, IRS instructs hospitals to allocate
portions of the payments as offsetting either charity care costs or the
unreimbursed cost of Medicaid based on a reasonable estimate of the
portions that are intended for charity care and Medicaid. CMS does not
specify whether these payments should offset any specific costs. AHA
and HFMA do not specify whether to include these payments, but support
the CHA and VHA guidance.
Differences in how nonprofit hospitals calculate the unreimbursed cost
of Medicaid can have an effect on the resulting amount of community
benefit a hospital reports (see fig. 7). For example, in Texas, the
unreimbursed cost of Medicaid (5.0 percent of total operating expenses)
is 32 percent more than the unreimbursed cost of Medicaid net of DSH
payments (3.8 percent of total operating expenses). In Massachusetts,
however, the unreimbursed cost of Medicaid is the same as the
unreimbursed cost of Medicaid net of DSH payments--1.9 percent of total
operating expenses.[Footnote 75]
Figure 7: Average Percentages of Total Operating Expenses Devoted to
the Unreimbursed Cost of Medicaid and to the Unreimbursed Cost of
Medicaid Net of DSH Payments among Nonprofit Hospitals in Selected
States, 2006:
This figure is a combination bar graph showing the average percentages
of total operating expenses devoted to the unreimbursed cost of
medicaid and to the unreimbursed cost of medicaid net of DSH payments
among nonprofit hospitals in selected states, 2006. One bar represents
unreimbursed cost of Medicaid, and the other represents unreimbursed
cost of Medicaid net of DSH payments among nonprofit hospitals in
selected states, 2006. The X axis represents the state, and the Y axis
represents the percentage.
State: California;
Unreimbursed cost of Medicaid: 4.8;
Unreimbursed cost of Medicaid net of DSH payments: 4.1.
State: Indiana;
Unreimbursed cost of Medicaid: 6;
Unreimbursed cost of Medicaid net of DSH payments: 5.2.
State: Massachusetts;
Unreimbursed cost of Medicaid: 1.9;
Unreimbursed cost of Medicaid net of DSH payments: 1.9.
State: Texas;
Unreimbursed cost of Medicaid: 5;
Unreimbursed cost of Medicaid net of DSH payments: 3.8.
[See PDF for image]
Source: GAO analysis of 2006 California, Indiana, Massachusetts, and
Texas data.
Notes: Nonprofit hospitals include nongovernmental, acute-care, general
hospitals. Medicaid provides health care coverage to eligible low-
income people and is jointly financed by the federal government and the
states. DSH payments are meant to compensate those hospitals that care
for a disproportionate number of low-income patients. Average
unreimbursed costs of Medicaid are calculated only among those
hospitals that reported having unreimbursed costs of Medicaid: 81
percent of hospitals in California, 89 percent of hospitals in Indiana,
89 percent of hospitals in Massachusetts, and 87 percent of hospitals
in Texas.
[End of figure]
Moreover, consensus does not exist on whether nonprofit hospitals
should add provider taxes, which are used to match funds for federal
Medicaid resources, to the unreimbursed cost of Medicaid.[Footnote 76]
CHA and VHA instruct hospitals to include "Medicaid taxes" as a cost of
Medicaid, describing these taxes as the provider fees that are used to
match federal funds. In contrast, IRS instructs hospitals to account
for these taxes as an element of charity care costs, the unreimbursed
cost of Medicaid, or both, depending on the state's primary purpose for
payments to hospitals from an uncompensated care pool or Medicaid DSH
program. HFMA officials stated that provider taxes for Medicaid should
be defined as community benefit because they are assessed for a means-
tested program. CMS does not specify whether to include these taxes.
AHA does not specify whether to include these taxes either, but
supports the CHA and VHA guidelines. State data we obtained did not
contain information that would allow us to analyze the impact of
including these taxes as part of the unreimbursed cost of Medicaid.
Measurement Practices for Other Activities That Benefit the Community:
While consensus exists to define most other activities as community
benefit, the calculation of their costs using differing or nonexistent
instructions may foster inconsistency. For example, the unreimbursed
costs of subsidized health services may overlap with other reported
community benefits. To account for this overlap, IRS, CHA and VHA, and
HFMA specify that when reporting subsidized health services costs,
hospitals should subtract the portion already counted as part of
charity care costs and the unreimbursed costs of Medicaid. AHA does not
specify whether these costs should be subtracted, but supports the CHA
and VHA guidelines. CMS does not state which other activities it
considers community benefit and therefore does not have guidance on
measuring their costs. State data we obtained did not contain
information that would allow us to analyze the effect of this overlap
for measuring the cost of subsidized health services.
Concluding Observations:
Since we last reported on the provision of uncompensated care by
hospitals in 2005, both policymakers and the hospital industry have
devoted considerable time and effort to the issue of community benefit.
In particular, distinguishing between charity care and bad debt--two
expenses that have historically been considered together as
uncompensated care due to the difficulty of obtaining documentation
necessary to distinguish patients unable to pay from those unwilling to
pay--has emerged as a key technical issue whose resolution will go far
in harmonizing positions in the policy debate.
With the added attention to community benefit has come a growing
realization of the extent of variability among stakeholders in what
should count and how to measure it. At the national level, in
particular, there is substantial divergence of opinion on whether
hospitals should be permitted to include bad debt and the unreimbursed
cost of Medicare as community benefit. States vary considerably in the
extent to which they have community benefit requirements, the nature of
the requirements, and instructions on how to measure the components of
community benefit. At present, determination and measurement of
activities as community benefit for federal purposes are still largely
matters of individual hospital discretion.
Given the large number of uninsured individuals, and the critical role
of hospitals in caring for them, it is important that federal and state
policymakers and industry groups continue their discussion addressing
the variability in defining and measuring community benefit activities.
An encouraging prospect for the future is the potential availability of
two national data sources derived from mandatory reporting to IRS and
CMS. National data should be helpful in standardizing reporting on
community benefit activities and informing public policy on the
community benefit standard. However, the data from these two sources
will not be available for analysis for several years, and it remains to
be seen whether the data will be consistent and reliable.
Agency Comments and Our Evaluation:
CMS and IRS reviewed a draft of this report. CMS stated that it did not
have any comments. The director of the Exempt Organizations Division of
IRS provided us with oral comments, which are summarized below. IRS
stated that the report in general was accurate, although the agency
noted that it did not review GAO's analysis of state community benefit
requirements for accuracy.
IRS Comments:
IRS stated that the phrase "broad latitude to determine community
benefit" overstates the looseness of the IRS standard and that such
formulation is not supported by case law or published guidance.
Specifically, IRS stated that the fact that hospitals may in practice
exercise broad latitude does not make that the accepted IRS standard.
In addition, IRS stated that the 1969 revenue ruling lists a specific
set of factors, and court cases have closely followed the set of
factors listed in that ruling. IRS stated that a correct
characterization would be "some latitude" or "some flexibility," citing
Geisinger Health Plan v. Comm'r, 985 F.2d 1210, 1217 (3rd Cir. 1993).
We believe that because the standard affords considerable discretion to
hospitals in both the determination and measurement of activities that
demonstrate community benefit for federal purposes, the IRS standard
allows nonprofit hospitals broad latitude to determine community
benefit.
IRS commented that in the concluding observations section, the phrase
"at present, determination and measurement of activities as community
benefit for federal purposes are still largely matters of individual
hospital discretion" was unclear as to whether the statement that
follows "at present" refers to the state of things before or after IRS
released the new Schedule H. IRS further stated that while in the years
prior to IRS's Form 990, Schedule H, the determination and measurement
of community benefit was largely a matter of individual hospital
discretion, the new Schedule H provides clear standards. Specifically
these clear standards cover (1) the types of activities reportable or
not reportable as community benefit; (2) the fact that community
benefit must be reported at cost rather than charges or otherwise; (3)
the fact that community benefit must be reported by EIN (not by
hospital or by system); and (4) the fact that bad debt, the
unreimbursed cost of Medicare, and community-building activities cannot
be included in the Part I quantifiable community benefit table,
although they are reported elsewhere on Schedule H and IRS allows
hospitals to explain what they think should count as community benefit.
IRS stated that, going forward with Schedule H reporting requirements,
there will be very little or no discretion regarding these measurement
points. IRS further stated that the area where Schedule H provides
individual organizations discretion is in whether the organization
estimates the cost of community benefit activities using a CCR, a cost-
accounting system, or a blend, so long as it is the most accurate
information the organization has available. We believe that while
Schedule H provides guidance with respect to the types of activities
reportable as community benefit, it does not provide clear guidance on
whether these activities do or do not count as community benefit for
purposes of complying with IRS's community benefit standard. Schedule H
indicates that bad debt, the unreimbursed cost of Medicare, and
community-building activities cannot be included in the Part I
quantifiable community benefit table; however, IRS has not clearly
indicated whether it considers these items as counting toward meeting
the community benefit requirement.
IRS noted that because its Form 990, Schedule H, requires reporting of
bad debt and the unreimbursed cost of Medicare separately from items
identified as community benefit, it is misleading to include these two
items in the list along with charity care following the phrase
"activities that benefit the community" because the phrase sounds like
"community benefit," and Schedule H does not treat these items on par
with Part I community benefit items such as charity care or
unreimbursed cost of Medicaid. We agree with IRS's concern and have
modified our text to clarify this distinction.
IRS stated that it would be an overstatement of the law to say
uncategorically that a hospital need not meet all five factors to
qualify for tax-exempt status.[Footnote 77] IRS suggested that "the
determination is based on all the facts and circumstances, and the
absence of a particular factor may not necessarily be determinative,"
and cited the 1969 revenue ruling and IHC Health Plans, Inc. v. Comm'r,
325 F.3d 1188 (10th Cir. 2003). We agree with IRS's concern and have
modified our text accordingly.
IRS also provided technical comments, which we incorporated as
appropriate.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issuance date. At the time, we will send copies to the Acting
Administrator of CMS, the Commissioner of Internal Revenue, and
interested congressional committees. We will also provide copies to
others on request. The report is also available at no charge on GAO's
Web site at http://www.gao.gov.
If you or your staff have any questions, please contact me at (202) 512-
7114 or steinwalda@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this
report are listed in appendix VIII.
Sincerely yours,
Signed by:
A. Bruce Steinwald:
Director, Health Care:
[End of section]
Appendix I: Scope and Methodology:
In conducting this study, we examined codified federal and state
statutes and regulations. In addition, we analyzed state data on
community benefits from California, Massachusetts, Indiana, and Texas.
We selected these four states because they represent diverse areas
geographically, and they collect data on nonprofit hospitals' community
benefits, which not all states maintain.[Footnote 78] We interviewed
officials from the Internal Revenue Service (IRS) and the Centers for
Medicare & Medicaid Services (CMS). We also interviewed representatives
from the American Hospital Association (AHA); Association of American
Medical Colleges; Catholic Health Association of the United States
(CHA); Federation of American Hospitals; Healthcare Financial
Management Association (HFMA); National Association of Children's
Hospitals; VHA, Inc; and state hospital associations and state health
officials from California, Indiana, Massachusetts, and Texas. In
addition, we interviewed representatives from seven nonprofit health
care systems,[Footnote 79] including health care systems in each of the
four analyzed states that were referred to us by representatives from
the state hospital associations.
To determine the community benefit standards IRS has established, we
examined relevant provisions of the Internal Revenue Code, IRS
regulations, revenue rulings, and federal case law. To review states'
community benefit requirements, we defined "community benefit
requirement" as a legal standard that expressly obligates a hospital to
provide health care services or benefits to the community served by the
hospital as a condition of maintaining tax-exempt status or qualifying
as a nonprofit hospital. It is generally something that hospitals are
required to do beyond their role of providing care for the sick and
injured in exchange for remuneration or compensation. We considered the
requirement to be one applicable to hospitals only if it either
expressly referred to hospitals or expressly referred to care or
services of the nature and type that one would reasonably expect to be
provided by or performed primarily at acute care hospitals. We also
limited our research concerning community benefit requirements to acute
care, general hospitals. We looked only for codified state statutes and
regulations that impose this type of requirement. If a statute or
regulation described an activity that would fall into one of the
commonly recognized "community benefit" categories identified by IRS,
we considered it to present a community benefit activity.
We searched only for state statutes or regulations that require
hospitals to perform relevant activities in order to maintain tax
exemption or nonprofit status.[Footnote 80] Thus, we excluded statutes
and regulations that require hospitals to perform activities that
benefit the community as a condition of obtaining hospital licensure,
or that have the indirect effect of benefiting the community, such as
state analogues to the Emergency Medical Treatment and Active Labor
Act[Footnote 81] and state vaccination provisions. We excluded
standards that are very general, such as Hawaii's requirement that
hospitals be "maintained to serve, and—do serve the public" in order to
be exempt from property tax, although we did include requirements that
specified that nonprofit hospitals do more than provide health care in
exchange for compensation or remuneration. An example of the latter is
Wyoming, which provides that "[t]he fundamental basis for [exemption
from ad valorem taxation] is the benefit conferred upon the public by
schools, orphan asylums and hospitals, and the consequent relief, to
some extent, of the burden upon the state to educate, care and advance
the interests of its citizens."
We limited our search to codified state statutes and regulations. In
performing our search of state codes and regulations, we used some
search terms, namely "community benefit," "charity care," "gift to the
community," and "community service plan," but we did not limit our list
of states with community benefit requirements to states that use only
these terms. We then searched selected parts of state codes and
administrative codes, limiting our search to the subject areas of
hospitals, public health, tax, and corporations, to find community
benefit requirements that do not use readily searchable terms. If we
found one provision in a state code or regulation that imposed a
community benefit requirement, we did not continue searching that
state's authorities for additional or related provisions. Some state
codes and regulations provided penalties for failing to comply with
community benefit requirements. We noted penalty provisions only if the
penalty provision made a direct and express reference to failure to
comply with the community benefit requirement as the basis for the
penalty.
We did not include in our scope state statutes and regulations that
address community benefits but do not amount to requirements. These
states include those whose statutes explicitly state that having a
community benefits program is voluntary (Connecticut[Footnote 82]) and
those that require that hospitals report on the community benefits that
they provide but do not actually require that they provide any
community benefits (Connecticut,[Footnote 83] Georgia,[Footnote 84]
Minnesota,[Footnote 85] Nevada,[Footnote 86] and Oregon[Footnote 87]).
Although we did not include these states in our count, we noted them in
the report.
Due to our selection criteria, we included some states that
organizations such as CHA, VHA, and Community Catalyst do not list in
their compendia of states with community benefit laws, guidelines, and
standards, and excluded some states that those organizations do
include. We chose to use a broader definition of community benefit
requirement, one that encompasses state statutes and regulations that
may not use common community benefit terms, but nonetheless encompasses
the same goals and types of activities as states that do use those
terms. This reasoning led us to include Alabama, Colorado, Mississippi,
North Dakota, and Wyoming.
We excluded provisions dealing with hospital conversions, mergers, or
sales. These provisions often require that hospitals going through one
of these processes take steps to ensure that levels of community
benefits are maintained or safeguarded. We feel that such provisions
should not be included in a general compendium of state community
benefit requirements.[Footnote 88] This means that we excluded some
provisions that actually use the term "community benefit" and may even
provide a detailed definition. We did this because such provisions
apply in a limited context. They apply only to a limited number of
hospitals (those that are going through conversion, merger, or sale),
and they apply for a limited amount of time.
We excluded provisions granting tax exemption by merely incorporating
by reference the standard contained in section 501(c)(3) of the
Internal Revenue Code and provisions that used section 501(c)(3)-like
language restricting nonprofit hospital activities. However, we did
include provisions that by their language incorporated the 501(c)(3)
standard and had a reporting requirement. An example of the latter is
Idaho, which grants property tax exemption only to hospitals that have
received tax exemption from IRS pursuant to section 501(c)(3).[Footnote
89] In addition, Idaho hospitals granted tax exemption must annually
submit a community benefits report.[Footnote 90] An example of the
former is Arizona, which grants tax exemption to organizations that are
exempt from federal income tax.[Footnote 91]
To examine what activities are defined as community benefits among the
standards and guidance used by nonprofit hospitals, we reviewed the
standards and guidance of federal agencies and industry
groups.[Footnote 92] To examine the effects of these standards and
guidance on reported community benefit, we analyzed 2006 state data
from California, Indiana, Massachusetts, and Texas. The state data were
the most recent available at the time of our analysis. We limited our
analysis to nonprofit, nongovernmental, acute care, general hospitals
that reported gross patient revenues and total operating expenses. We
calculated and compared a variety of hospital expenses, including
charity care costs, bad debt, unreimbursed costs of government health
care programs, and the costs of other activities that benefit the
community, as percentages of total operating expenses. Charity care is
generally defined as care provided to patients who the hospital deems
unable to pay all or a portion of their bills. Bad debt is generally
defined as the uncollectible payment that the patient is expected to,
but does not, pay. The unreimbursed costs of government health care
programs are generally defined as the shortfall created when a facility
receives payments that are less than the costs of caring for public
program beneficiaries. Other activities that benefit the community
include health professions education and medical research. Not all of
the four states we examined had data on all of these expenses;
therefore, we calculated each expense as a percentage of total
operating expenses whenever possible. We reduced charges to costs where
possible in the data from all four states using cost-to-charge ratios.
We did not reduce bad debt expenses because we found that hospitals did
not consistently report bad debt in costs or charges.
To examine practices nonprofit hospitals use to measure community
benefit activities, we reviewed the standards and guidance from IRS,
CMS, AHA, CHA and VHA, and HFMA. To examine the effects of these
practices on reported community benefit, we analyzed 2006 state data
from California, Indiana, Massachusetts, and Texas. We compared the
different ways hospitals calculate expenses, including charity care
costs and the unreimbursed cost of Medicaid,[Footnote 93] as
percentages of total operating expenses. Not all of the four states had
data to compare the different practices to measure all of these
expenses; therefore, we calculated each expense as a percentage of
total operating expenses whenever possible.
We assessed the reliability of the state data from California, Indiana,
Massachusetts, and Texas in two ways. First, we performed tests of data
elements for all four states. For example, we examined the values for
total operating expenses and gross patient revenues to determine
whether these data were complete and reasonable. Second, we interviewed
state officials knowledgeable about the data and reviewed documentation
related to the data. We determined that all four states employed
various data consistency checks, including outlier and trend analysis
and targeted follow-up with hospitals on a case-by-case basis, to
assess the quality of the data they collected. We determined that the
data we used in our analyses were sufficiently reliable for our
purposes.
We conducted our work from July 2007 through August 2008 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II Other Activities That Benefit the Community Identified in
Industry Guidance:
Table 4:
Groups of other activities that benefit the community[A]: Cash and in-
kind contributions;
Description: Donations and grants provided to individuals or the
community at large, and fundraising for community programs;
Examples of activities included in the group: * Contributions provided
to charity events and individuals for emergency assistance;
* Program, operating, and education grants;
matching grants;
and event sponsorship;
* Meeting room overhead and space for nonprofit or community groups,
emergency medical care at a community event, and provision of facility
parking vouchers for patients and families in need;
* Grant writing and other fundraising efforts specific to community
programs;
Examples of activities not included in the group: * Employee-donated
funds and fees for sporting event tickets;
* Employee community involvement when activities are on employees' own
time and volunteer hours by employees on own time.
Groups of other activities that benefit the community[A]: Community
benefit operations;
Description: Community benefit strategic planning and operations;
Examples of activities included in the group: * Staff costs to
coordinate community benefit volunteer programs;
* Community health needs assessment and community asset assessments,
such as a youth asset survey;
Examples of activities not included in the group:
* Volunteer time of individuals for community benefit volunteer
programs;
* Market share assessment or marketing survey process.
Groups of other activities that benefit the community[A]: Community-
building activities;
Description: Activities intended to enhance the development of
community health programs and partnerships;
Examples of activities included in the group: * Community gardens,
neighborhood improvement, and revitalization projects;
* Small business development and participation in an economic
development council or chamber of commerce;
* Neighborhood watch groups and child care for community residents with
qualified need;
* Lead or radon programs and efforts to reduce community environmental
hazards;
* Training in conflict resolution, cultural skills, civics skills, or
language skills, and community leadership development;
* Hospital representation at community coalitions;
* Local, state, and national advocacy related to access to health care
and public health issues;
* Recruitment of health professionals for areas identified by the
government as medically underserved;
Examples of activities not included in the group: * Housing for
employees and health facility construction and improvements, such as a
meditation garden or parking lot;
* Routine financial investments;
* Routine and mandated disaster preparedness;
* Interpreter training programs for hospital staff as required by law;
* Advocacy specific to hospital operations and financing;
* Programs that address only the workforce needs of the health care
organization rather than community-wide issues.
Groups of other activities that benefit the community[A]: Community
health improvement services;
Description: Programs for community health education, community-based
clinical services, and health care support services;
Examples of activities included in the group: * Prenatal and childbirth
classes serving at-risk and low-income persons, public service
announcements with health messages, support groups, and self- help
programs;
* Screenings, one-time or occasionally held clinics, clinics for
underinsured and uninsured persons, and mobile units used to deliver
primary care services;
* Information and referrals to community services and assistance with
enrollment in government health care programs;
Examples of activities not included in the group: * Health education
classes designed to increase market share, support given to patients
and families in the course of their hospital visits, and employee
wellness and health promotion provided as an employee benefit;
* Screenings provided primarily for public relations or marketing,
screenings and clinics for which a fee is charged and a profit is
realized, volunteers' time, and mobile units that provide specialty
care that is an extension of the hospital's outpatient department;
* Routine discharge planning and enrollment assistance services
designed to increase facility revenue.
Groups of other activities that benefit the community[A]: Health
professions education;
Description: Education for physicians, medical students, nurses,
nursing students, and other health professionals, and scholarships and
funding for professional education;
Examples of activities included in the group: * Internships,
clerkships, and residencies;
* Providing a clinical setting for undergraduate training or vocational
training to students enrolled in an outside organization, and the costs
of high school student job shadowing and mentoring projects;
* Nursing scholarships or tuition payments for professional education
to non-employees and volunteers;
Examples of activities not included in the group: * Continuing medical
education restricted to members of the medical staff;
* Education required of nursing staff and staff time spent delivering
care that is concurrent with job shadowing;
* Tuition reimbursement provided as an employee benefit.
Groups of other activities that benefit the community[A]: Medical
research;
Description: Clinical and community-health research to be shared with
persons outside the organization;
Examples of activities included in the group: * Research development,
using formal research protocols; studies on therapeutic protocols;
evaluation of innovative treatments; and research papers prepared by
staff for professional journals;
* Studies on health issues for vulnerable persons, community health,
and innovative health care delivery models;
Examples of activities not included in the group: * Research where
findings are used only internally.
Groups of other activities that benefit the community[A]: Subsidized
health services;
Description: Clinical services provided despite a financial loss, even
after removing the effects of charity care and unreimbursed cost of
Medicaid. If no longer offered, these services would either be
unavailable in the area or fall to the responsibility of government or
another nonprofit organization;
Examples of activities included in the group: * Subsidies provided to
maintain the availability of these clinical services;
* Emergency and trauma services, neonatal intensive care, burn units,
women's and children's services, renal dialysis services, subsidized
continuing care, behavioral health services, and palliative care;
Examples of activities not included in the group: * Charity care, bad
debt, and unreimbursed cost of Medicaid;
* Services provided in order to attract physicians or health plans;
* Routine pain control program.
Source: Catholic Health Association of the United States, A Guide for
Planning and Reporting Community Benefit (St. Louis, 2006).
[A] Activities that benefit the community, as defined by the standards
and guidance used by nonprofit hospitals, generally fall into one of
four categories: charity care, bad debt, unreimbursed costs of
government health care programs, and other activities that benefit the
community.
[End of table]
[End of section]
Appendix III: State Community Benefit Requirements:
As of March 2008, 15 states require that hospitals provide community
benefits in order to receive tax exemption or achieve nonprofit status.
However, state community benefit requirements[Footnote 94] vary greatly
in scope and level of detail (see app. IV).[Footnote 95]
States with Detailed Community Benefit Requirements:
Of the 15 states with community benefit requirements, 10 have detailed
community benefit requirements.[Footnote 96] We considered states to
provide a "detailed" definition if they provided some combination of
the following: a definition of community benefit, requirements for a
community benefits plan that sets forth how the hospital will provide
community benefits, reporting requirements, and penalties for
noncompliance. These states typically set forth a detailed definition
of community benefit, specifying numerous categories of activities that
qualify, and are consistent with the level of detail of community
benefit definitions used by the Catholic Health Association of the
United States and other similar entities (see app. II). Illinois, for
example, includes the unreimbursed cost of providing charity care,
language assistant services, government-sponsored indigent health care,
donations, volunteer services, education, government-sponsored program
services, research, subsidized health services, and collecting bad
debts.[Footnote 97] Illinois specifically excludes the cost of paying
taxes or other governmental assessments. Maryland defines community
benefit as "an activity that is intended to address community needs and
priorities primarily through disease prevention and improvement of
health status, including...[h]ealth services provided to vulnerable or
underserved populations such as Medicaid, Medicare, or Maryland
Children's Health Program enrollees.[f]inancial or in kind support of
public health programs.[d]onations of funds, property, or other
resources that contribute to a community priority.[h]ealth care cost
containment activities; and.[h]ealth education, screening, and
prevention services."[Footnote 98]
These 10 states also tend to have very detailed instructions on how
community benefits should be provided and reported. They may include a
description of the required elements of and the process by which a
hospital should compose its community benefits plan and the required
elements to be provided in a hospital's annual report to the relevant
authority. A typical example is California, which requires each of its
nonprofit hospitals to have a mission statement that requires that
hospital's policies to integrate and reflect the public interest in
meeting its responsibilities as a nonprofit organization; complete a
community needs assessment in consultation with community groups and
government officials; update its community needs assessment every 3
years; adopt and annually update a community benefits plan for
providing community benefits either alone or in conjunction with other
entities; and annually submit its community benefits plan, including a
description of the activities undertaken and the economic value of
community benefits provided.[Footnote 99]
Other States with Community Benefit Requirements:
The remaining five states with community benefit requirements have
provisions that are less detailed.[Footnote 100] Alabama requires that
charity care constitute at least 15 percent of a hospital's business in
order for it to be exempt from property tax.[Footnote 101] Wyoming
provides that "[t]he fundamental basis for [exemption from ad valorem
taxation] is the benefit conferred upon the public by schools, orphan
asylums and hospitals, and the consequent relief, to some extent, of
the burden upon the state to educate, care and advance the interests of
its citizens."[Footnote 102] States such as Wyoming do not specify
activities that their nonprofit hospitals must provide, but their
provisions make clear that, in order to receive tax exemption or
achieve nonprofit status, hospitals must provide benefit to the
community. In contrast to the 10 detailed states, these 5 states
typically either require the provision of a certain amount of charity
care without mentioning other categories of community benefit or do not
give guidance as to what counts as a community benefit. For the latter
states, such as Wyoming, it is not always clear what types of community
benefit activities would fulfill a hospital's obligations.
States without Community Benefit Requirements:
The remaining 36 states do not have community benefit requirements in
codified statutes or regulations that hospitals must meet to qualify
for tax-exempt or nonprofit status. Among these states are three groups
of states that address community benefit in some way but do not have
"community benefit requirements" as we define that term. Some states
apply their community benefits provisions to all hospitals, such as in
the context of hospital licensure, rather than to tax exemption or
nonprofit status (see app. V). Examples of states that fall into this
category are Massachusetts, New Mexico, and Rhode Island, and they
require all hospitals, both for-profit and nonprofit, to provide some
form of community benefits. A second group requires that hospitals
periodically report to the relevant authority the community benefits
that they provide but do not require that hospitals actually provide
any community benefits (see app. VI).[Footnote 103] A third group
discusses community benefit in sources other than codified statutes or
regulations, such as attorney general guidelines or property tax
exemption standards (see app. VII). One state, Utah, discusses
community benefit in a set of standards of practice for property tax
exemptions and through its case law.[Footnote 104] Although
Massachusetts has a statute requiring community benefits for licensure
purposes, the bulk of its community benefit discussion is found in a
set of attorney general guidelines.[Footnote 105] We did not include
these groups of states in our count of states with community benefit
requirements, and we provide information on these states as examples
rather than as the product of a comprehensive analysis of state
sources.
Penalties:
Hospitals may be penalized if they fail to comply with community
benefit requirements. Of the 15 states with community benefit
requirements, 4 have explicit penalties for failure to comply and 11
states do not specify a penalty.[Footnote 106] Examples of states with
explicit penalties include Indiana, Maryland, and Texas, where civil
penalties may be assessed against nonprofit hospitals that fail to
submit their annual reports in a timely fashion.[Footnote 107] Of the
11 states that do not specify a penalty, if the requirement is tied to
tax exemption, a nonprofit hospital could be denied tax exemption for a
period of time.
For states without community benefit requirements but with community
benefit provisions tied to hospital licensure requirements, a hospital
that has not complied with the community benefit provisions will not be
licensed (or its license may be suspended or revoked).[Footnote 108] In
addition, states may include explicit penalties for failure to comply
with community benefit provisions tied to hospital licensure
requirements. For example, in Rhode Island, a state that applies its
community benefits provisions to all hospitals through licensure
requirements, failure to comply with statewide standards for community
benefits may result in criminal penalties: the Superior Court may,
after notice and opportunity for a prompt and fair hearing, impose a
prison term of up to 5 years for a person who knowingly violates or
fails to comply with the requirements or willingly or knowingly gives
false or incorrect information in connection with its licensure
requirements.[Footnote 109]
Quantity:
Most states do not specify a minimum quantity of community benefits
that must be provided in order to satisfy requirements. Five states
require that hospitals provide a specified amount of community
benefit.[Footnote 110] Alabama requires that "[t]o be exempt from ad
valorem taxation, the treatment of charity patients must constitute at
least 15 percent of the business of the hospital,"[Footnote 111] while
Texas requires that its hospitals comply with one or more of three
standards: a level reasonable in relation to community needs; at least
100 percent of its tax-exempt benefits, excluding federal income tax;
or at least 5 percent of its net patient revenue (in which case charity
care and government-sponsored indigent care must be at least 4 percent
of net patient revenue).[Footnote 112] In other states, the required
minimum quantity is not a specified dollar amount or percentage. For
example, Mississippi requires that, to be exempt from property tax,
hospitals must maintain at least one ward for charity
patients.[Footnote 113] West Virginia requires that charitable
hospitals provide free and below-cost necessary medical services in an
amount determined by their boards of trustees consistent with their
ability to do so.[Footnote 114]
In addition to states that specify a minimum quantity of community
benefits that must be provided in order to satisfy community benefit
requirements, the remaining states--those without minimum quantity
requirements and those without community benefit requirements as we
define that term--tend to require the submission of community benefits
plans, annual reports, or both to relevant state authorities. Even
without an explicit requirement to provide community benefits, these
provisions may bring a measure of accountability as to quantity, since
relevant authorities have an opportunity to review hospital activities.
An example of a state without a minimum quantity requirement is
California, which provides that hospitals must annually report on the
economic value of community benefits provided in furtherance of their
community benefits plans.[Footnote 115]
[End of section]
Appendix IV: States with Community Benefit Requirements Related to
Hospitals:
Table 5:
State: Alabama;
Description of requirements: To be exempt from ad valorem taxation on
property up to $75,000, the treatment of charity patients must
constitute at least 15 percent of the business of the hospital;
(Ala. Code § 40-9-1);
Activities included in the definition of community benefit: * Charity;
* (Ala. Code § 40-9-1);
Penalties: None specified.
State: California;
Description of requirements: 1. Update community needs assessment at
least once every 3 years;
2. Annually adopt and update a community benefits plan, including
mechanisms to evaluate its effectiveness, measurable objectives, and
community benefits categorized into a specified framework;
3. Annually submit the community benefits plan, including activities
undertaken and economic value of community benefits provided;
4. (Cal. Health & Safety Code §§ 127350, 127355);
Activities included in the definition of community benefit: * Charity
care and unreimbursed costs of health care services;
* Community-oriented wellness and health promotion services;
* Prevention service (screenings, immunizations, disease counseling,
education);
* Adult day care and child care;
* Medical research and medical education;
* Nursing and other professional training;
* Home-delivered meals to the homebound;
* Sponsorship of free food, shelter, and clothing to the homeless;
* Outreach clinics in socioeconomically depressed areas;
* Financial or in-kind support of public health programs;
* Donations that contribute to a community priority;
* Health care cost containment;
* Enhancement of access to health care;
* Services offered without regard to financial return;
* Goods or services that help maintain a person's health;
* (Explicitly not limited to this list of activities.);
* (Cal. Health & Safety Code § 127345);
Penalties: None specified.
State: Colorado;
Description of requirements: Property must be owned and used solely and
exclusively for strictly charitable purposes;
(Colo. Rev. Stat. Ann. § 39-3-108);
Activities included in the definition of community benefit: * A gift
for the benefit of an indefinite number of persons by relieving their
bodies from disease, by assisting them to establish themselves in life,
or by erecting or maintaining public buildings or works, or otherwise
lessening the burdens of government;
(8 Colo. Code Regs. 1304-2);
Penalties: None specified.
State: Idaho;
Description of requirements: 5. Show that the hospital is organized as
a nonprofit corporation in Idaho or another state and has received an
exemption from taxation from IRS pursuant to § 501(c)(3) of the
Internal Revenue Code;
6. Exempt hospitals with at least 150 patient beds must prepare and
file an annual community benefits report that itemizes the community
benefits provided and indicates the process the hospital used to
determine general community needs;
7. (Idaho Code § 63-602D);
Activities included in the definition of community benefit:
* Charity care;
* Bad debt;
* Under-reimbursed care covered through government programs;
* Services and programs provided below actual cost;
* Donated time, funds, subsidies, and in-kind services;
* Additions to capital;
(Idaho Code § 63-602D);
Penalties: None specified.
State: Illinois;
Description of requirements: 8. Organization mission statement;
9. Community benefits plan;
10. Annual report of the community benefits plan;
11. Statement noting that the annual report is public information;
12. Provide the report as a matter of community information;
13. (210 Ill. Comp. Stat. 76/15, 76/20);
Activities included in the definition of community benefit: * Charity
care;
* Language assistant services;
* Government-sponsored indigent health care;
* Donations;
* Volunteer services;
* Education;
* Government- sponsored program services;
* Research;
* Subsidized health services;
* Bad debt;
Does not include the cost of paying taxes or other governmental
assessments;
(210 Ill. Comp. Stat. 76/10);
Penalties: The Attorney General may assess a late filing fee against a
nonprofit hospital that fails to file the annual report. The fee must
not exceed $100;
the Attorney General may grant extensions for good cause;
(210 Ill. Comp. Stat. 76/25);
Other rights and remedies available to the state are retained;
(210 Ill. Comp. Stat. 76/30).
State: Indiana;
Description of requirements: 14. Organization mission statement;
15. Community benefits plan;
16. Communitywide needs assessments in aid of community benefits plan;
17. Annual report of the community benefits plan;
18. Statement notifying the public that the annual report is public
information;
19. Written notice about any charity care program;
20. (Ind. Code §§ 16-21-9-4, -5, -6, -7);
Activities included in the definition of community benefit: * Charity
care;
* Government-sponsored indigent health care;
* Donations;
* Education;
* Government-sponsored program services;
* Research;
* Subsidized health services;
Does not include the cost of paying taxes or other governmental
assessments;
(Ind. Code § 16-21-9-1);
Penalties: The state department may assess a civil penalty against a
nonprofit hospital that fails to submit its annual report. The penalty
may not exceed $1,000 for each day a report is late;
(Ind. Code § 16-21-9-8).
State: Maryland;
Description of requirements: 21. Identify community health care needs;
22. Annual community benefits report, which includes the hospital's
mission statement, a list and costs of each community benefit
initiative, a description of efforts undertaken to evaluate the
effectiveness of each initiative, and a description of gaps in
availability of specialist providers to serve the uninsured;
23. (Md. Code Ann., Health-Gen. § 19-303);
Activities included in the definition of community benefit: * Health
services provided to vulnerable or underserved populations, such as
Medicaid, Medicare, or Maryland Children's Health Program enrollees;
* Financial or in-kind support of public health programs;
* Donations that contribute to a community priority;
* Health care cost containment activities;
* Health education, screening, and prevention services;
(Md. Code Ann., Health-Gen. § 19-303);
Penalties: For failure to file the community benefits report: civil
penalty of $100 per day unless an extension is granted. The Health
Services Cost Review Commission may refuse to grant a rate increase to
any hospital that does not file a required report. Any substantially
incomplete or inaccurate report may not be considered timely filed.
Institutions may request reasonable extensions of time to file required
reports;
(Md. Regs. Code tit. 10, § 37.01.03).
State: Mississippi;
Description of requirements: Must maintain one or more charity wards
for charity patients;
(Miss. Code Ann. § 27-31- 1(f));
Activities included in the definition of community benefit: * Charity;
(Miss. Code Ann. § 27-31-1);
Penalties: None specified.
State: New Hampshire;
Description of requirements: 24. Annual report of community benefits
plan, which includes a mission statement, community needs assessment,
community benefit activities expected to be undertaken or supported,
community benefit activities undertaken in the previous year and a
description of results or outcomes, means used to solicit community
views, an evaluation of the plan's effectiveness, an estimate of the
cost of each activity expected, and a report on the unreimbursed cost
of activities undertaken in the previous year;
25. Community needs assessment;
26. Make the community benefits plan available to the public;
27. (N.H. Rev. Stat. Ann. §§ 7.32-e, -f, -g);
Activities included in the definition of community benefit: * Charity
care;
* Financial or in-kind support of public health programs, including
support of recommendations in any state health plan;
* Allocation of resources that promote or support a healthier
community, enhanced access to health care or related services, health
education and prevention activities, or services to a vulnerable
population;
* Medical research and education and training of health care
practitioners, including the pooling of funds with other providers;
(Explicitly not limited to the listed activities.);
(N.H. Rev. Stat. Ann. § 7.32-d);
Penalties: None specified.
State: New York;
Description of requirements: 28. Issue an organizational mission
statement;
29. At least every 3 years:
-review and amend the mission statement,;
-solicit community views,;
- demonstrate operational and financial commitment to meeting community
health care needs, and;
-prepare and make available to the public a statement of the hospital's
financial resources and allocation to hospital purposes, including the
provision of free or reduced charge services;
30. Annually prepare and make available to the public an implementation
report;
31. File with the Commissioner of Health its mission statement, annual
implementation report, and 3-year report;
(N.Y. Pub. Health Law § 2803-l);
Activities included in the definition of community benefit: * Meeting
community health care needs;
* Charity care;
* Improving access to health care services by the underserved;
(N.Y. Pub. Health Law § 2803-l);
Penalties: None specified.
State: North Dakota;
Description of requirements: To receive sales and use tax exemptions,
must be organized and operated exclusively in providing services for
the purposes of preventing and alleviating human illness and injury;
(N.D. Cent. Code §§ 57-39.2-04, 57-40.2-04);
Activities included in the definition of community benefit: *
Education;
* Research;
* Community service;
* Direct patient services, income being derived solely from private
donations with some exceptions of a minimal membership fee;
(N.D. Cent. Code §§ 57-39.2- 04, 57-40.2-04);
Penalties: None specified.
State: Pennsylvania;
Description of requirements: 32. Must advance a charitable purpose;
33. Must donate or render gratuitously a substantial portion of its
services;
34. Must benefit a substantial and indefinite class of persons who are
legitimate subjects of charity;
35. Must relieve the government of some of its burden;
36. (10 Pa. Cons. Stat. § 375);
Activities included in the definition of community benefit: * Charity
care;
* Goods or services to individuals eligible for government programs;
* Donations to institutions of purely public charity or government
agencies;
* Uncompensated goods or services, including the difference between
full cost and fee received for all goods or services provided,
education and research programs, and unreimbursed costs of government
programs, including Medicare and Medicaid, and unreimbursed community
services;
* Reasonable value of volunteer assistance;
* Cost of goods or services provided to individuals who are unable to
pay, provided that reasonable and customary collection efforts have
been made;
* Services to the public that directly or indirectly reduce dependence
on government programs or relieve or lessen the burden borne by
government for the advancement of social, moral, educational, or
physical objectives;
(10 Pa. Cons. Stat. § 375);
Penalties: None specified.
State: Texas;
Description of requirements: 37. Provide health care services to the
community;
38. Comply with all federal, state, and local government requirements
for tax exemption in order to maintain such exemption;
39. Provide a specified minimum amount of community benefits;
40. Admission policy must provide for the admission of financially
indigent and medically indigent persons;
41. Organizational mission statement;
42. Community benefits plan;
43. Communitywide needs assessments to develop the community benefits
plan;
44. Annual report of the community benefits plan, including amount and
types of community benefits provided;
45. (Tex. Health & Safety Code Ann. §§ 311.043, 311.044, 311.045);
Activities included in the definition of community benefit: * Charity
care;
* Government- sponsored indigent health care;
* Donations;
* Education;
* Government-sponsored program services;
* Research;
* Subsidized health services;
* Does not include the cost of paying taxes or other governmental
assessments;
* (Tex. Health & Safety Code Ann. § 311.042;
25 Tex. Admin. Code § 13.13);
Penalties: A nonprofit hospital that fails to make a report of the
community benefits plan is subject to a civil penalty not exceeding
$1,000 per day. No penalty may be assessed against a hospital until 10
business days have elapsed after written notification to the hospital
of its failure to file a report;
(Tex. Health & Safety Code Ann. §§ 311.047, 311.048);
46. Subject to a civil penalty of not more than $1,000 for each day of
noncompliance;
47. If a nonprofit hospital/system does not submit a report of the
community benefits plan within the established reporting period, the
Department of Health may institute the following procedures:
A. Notify the entity that it is in noncompliance with the Department of
Health's reporting requirements and that the Commissioner of Health may
request that the Attorney General institute and conduct a suit in the
name of the state to recover civil penalties if the hospital fails to
submit the report to the Department of Health within 10 days of receipt
of the letter;
B. If the Department of Health does not receive the report of the
community benefits plan from the nonresponding hospital within the
specified time frame, the Commissioner of Health may notify the
Attorney General in writing of the entity's noncompliance. The
Department of Health will send a copy to the hospital;
(25 Tex. Admin. Code § 13.18).
State: West Virginia;
Description of requirements: 48. Must provide an amount of free and
below-cost necessary medical services as determined by its board of
trustees, consistent with other provisions, to those who are unable to
pay;
49. Charitable use (determined by an examination of several factors,
including charity care, promotion of health, relief of burdens of
government, and volunteer and community services);
50. Charity care plan that reflects specified minimum criteria;
51. Review charity care plan not less than every 2 years;
(W. Va. Code St. R. § 110-3-24);
Activities included in the definition of community benefit: * Charity
care;
* Activities that promote the health of the community and/or decrease
the burdens of state, county, and municipal governments;
* Shortfall between approved charges and payments received from
Medicaid and similar governmental programs;
* Volunteer and community services;
* Public education programs;
* Donations;
* Free, low-cost, or below-cost health screenings and assessments;
* Social services assistance/counseling;
* Free or reduced-charge medical clinics;
* Operation of poison control centers;
* Free or below-cost blood banking services;
* Free or below-cost assistance, material, equipment and training to
emergency medical services and ambulance services;
* Disaster planning;
* Unreimbursed costs for education and training;
(W. Va. Code St. R. § 110-3-24);
Penalties: None specified.
State: Wyoming;
Description of requirements: 52. The fundamental basis for ad valorem
tax exemption is the benefit conferred upon the public and the
consequent relief, to some extent, of the burden upon the state to
educate, care, and advance the interests of its citizens. Such
institutions thus confer a benefit upon the general citizenry of the
state and render an essential service for which they are relieved of
certain burdens of taxation;
53. Indigent care shall be afforded through admission to the
institution based on the clinical judgment of the physician, not upon
the patient's financial ability or inability to pay;
(Wyo. Stat. Ann. § 39-11-105;
Wyo. R. & Regs. Rev Gen Ch. 14 § 10);
Activities included in the definition of community benefit: * Benefit
conferred upon the public;
* Consequent relief of the burden upon the state;
* Indigent care;
* Promote health care;
* Provide health-related assistance to the general public;
(W.S. 1977 § 39-11- 105;
Wyo. R. & Regs. Rev Gen Ch. 14 § 10);
Penalties: None specified.
Source: GAO analysis of Alabama, California, Colorado, Idaho, Illinois,
Indiana, Maryland, Mississippi, New Hampshire, New York, North Dakota,
Pennsylvania, Texas, West Virginia, and Wyoming statutes and
regulations.
Notes: We did not consider loss of tax exemption to be a penalty. We
considered only those states whose statutes or regulations require the
provision of community benefits for purposes of tax exemption or
nonprofit status to have community benefit requirements.
[End of table]
[End of section]
Appendix V: Examples of States with Licensure-Related Community Benefit
Provisions:
Table 6:
State: Massachusetts;
Description of requirements: Applicants for a license to establish or
maintain an acute-care hospital must agree to maintain or increase the
percentage of revenues allocated to free care and submit a plan for the
provision of community benefits;
(Mass. Gen. Laws Ann. ch. 111, § 51G);
Activities included in the definition of community benefit: *
Identification and provision of essential health services;
* Primary and preventive health care services;
(Mass. Gen. Laws Ann. ch. 111, § 51G);
Penalties: None specified.
State: New Mexico;
Description of requirements: 1. Acute-care or general hospitals can be
licensed only if they agree to provide emergency services and general
health care to nonpaying patients and low-income reimbursed patients in
the same proportion as the patients are treated in acute-care general
hospitals in the local community. The annual cost of this care shall
not exceed 5 percent of the hospital's annual revenue;
2. These hospitals must annually report the cost of care for emergency
and general health care to nonpaying and low-income reimbursed patients
and the number of nonpaying and low-income reimbursed patients treated;
(N.M. Stat. Ann. § 24-1-5.8(C);
N.M. Admin. Code tit. 7, § 7.2.8);
Activities included in the definition of community benefit: * Emergency
services and general health care provided to nonpaying patients and low-
income reimbursed patients;
(N.M. Stat. Ann. § 24-1-5.8(C);
N.M. Admin. Code tit. 7, § 7.2.8(D));
Penalties: Failure to provide proportional services to nonpaying and
low-income reimbursed patients in any year following licensure may
result in the Department of Health's imposition of one or more of the
following penalties:
3. an approved plan of correction that remedies the failure through the
additional provision of services in subsequent years,;
4. a civil monetary penalty not to exceed $500,000,;
5. suspension or revocation of the hospital's license, and; 6. referral
to CMS for sanctions under the Medicare and Medicaid programs; (N.M.
Admin. Code tit. 7, § 7.2.8(L)).
State: Rhode Island;
Description of requirements: As conditions of initial and continued
licensure, all licensed hospitals shall;
7. meet the statewide community standard for the provision of charity
care;
8. meet standards for uncompensated care;;
9. meet the statewide standards for the provision of community
benefits;
10. not discourage persons who cannot afford to pay from seeking
medical services;
11. not encourage persons who cannot afford to pay to seek essential
medical services from other providers;
12. must annually report on compliance with these conditions, including
(1) cost of charity care, (2) bad debt, (3) contract Medicaid
shortfalls, and (4) any additional information demonstrating compliance
with this section;
and;
13. must have a formal, Board-approved plan for the provision of
community benefits. The plan shall be updated and Board-approved at
least every 3 years;
(R.I. Gen. Laws §§ 23-17-43, 23-17.14-15;
R.I. Code R. 14 090 007, 14 090 028);
Activities included in the definition of community benefit: * Charity
care;
* Uncompensated care;
* Bad debt;
* Medicaid shortfall;
* Programs, procedures, and protocols that meet the needs of the
medically indigent;
* Linkages with community partners that focus on improving the health
and well-being of community residents;
* Non-revenue-producing services made available to the community, such
as fitness programs, health screenings, or transportation services;
* Public advocacy on behalf of community needs;
* Scientific or medical research, or educational activities;
(R.I. Gen. Laws §§ 23-17-43, 23-17.14-15;
R.I. Code R. 14 090 007, 14 090 028);
Penalties: If any person knowingly violates or fails to comply or
willingly or knowingly gives false or incorrect information the
Director of the Department of Health may, after notice and opportunity
for a prompt and fair hearing, deny, suspend, or revoke a license, or
may order the licensee to admit or provide health services to no
additional persons to the facility or to take corrective action
necessary to secure compliance under the act;
or the Superior Court may, after notice and opportunity for a prompt
and fair hearing, impose a fine of not more than $1,000,000 or impose a
prison term of not more than 5 years;
(R.I. Gen. Laws § 23-17.14-30);
If the Department of Health receives sufficient information indicating
that a licensed hospital is not in compliance with this section, the
Director of the Department of Health shall hold a hearing upon 10 days
notice to the licensed hospital and shall issue in writing findings and
appropriate penalties;
(R.I. Gen. Laws § 23-17.14-15).
[End of table]
Source: GAO analysis of Massachusetts, New Mexico, and Rhode Island
statutes and regulations.
Note: Although these states have community benefit provisions tied to
licensure requirements, we did not include them in our list of states
with community benefit requirements because their community benefit
provisions are not tied to tax exemption or nonprofit status.
[End of section]
Appendix VI Examples of States with Only Community Benefit Reporting
Provisions:
Table 7:
State: Connecticut;
Description of requirements: Biennial report on whether the hospital
has in place a community benefits program. If the hospital has chosen
to have a community benefits program, the report shall include a number
of specified elements;
(Conn. Gen. Stat. Ann. § 19a-27k);
Activities included in the definition of community benefit: *
Preventive care;
* Programs that improve the health status for working families and
populations at risk in the community;
(Conn. Gen. Stat. Ann. § 19a-127k);
Penalties: The Commissioner of Public Health may, after notice and
opportunity for a hearing, impose a civil penalty on any hospital that
fails to submit the required report by the specified date. Such penalty
shall be not more than $50 a day for each day after the required
submittal date that such report is not submitted;
(Conn. Gen. Stat. Ann. § 19a-127k(f)).
State: Georgia;
Description of requirements: Nonprofit hospitals must file an annual
community benefit report disclosing the cost of indigent and charity
care provided during the preceding year not later than 90 days after
the close of the fiscal or calendar year. The report shall include a
statement of the cost and type of indigent and charity care provided by
the authority, including the number of indigent persons served,
categorization of those persons by county of residence, as well as the
cost of indigent and charity care provided by the authority, including
the number of indigent persons served, categorization of those persons
by county of residence, as well as the cost of indigent and charity
care provided in dollars;
(Ga. Code Ann. §§ 14-3-305;
31- 7-90.1);
Activities included in the definition of community benefit: * Indigent
care;
* Charity care;
(Ga. Code Ann. § 31-7-90.1);
Penalties: None specified.
State: Minnesota;
Description of requirements: Annual report of services provided to
benefit the community;
(Minn. Stat. §§ 144.698, 144.699);
Activities included in the definition of community benefit: * Services
provided at no cost or for a reduced fee to patients unable to pay;
* Teaching and research activities;
* Community care;
* Underpayment for services provided under state health care programs;
* Research;
* Community health services;
* Financial and in-kind contributions;
* Community building activities;
* Community benefit operations;
* Education;
* Subsidized services;
Does not include bad debt and underpayment for Medicare services;
(Minn. Stat. Ann. §§ 144.698, 144.699);
Penalties: None specified.
State: Nevada;
Description of requirements: Each hospital with at least 100 beds must
file as required by the Director of the Department of Health and Human
Services but at least annually the expenses incurred for providing
community benefits, a statement of its policies and procedures for
providing discounted services to persons without health insurance, and
a statement of its policies regarding collection;
(Nev. Rev. Stat. § 449.490);
Activities included in the definition of community benefit: * Goods,
services, and resources provided by a hospital to a community to
address the specific needs and concerns of that community;
* Services provided by a hospital to uninsured and underserved persons;
* Training programs for employees;
* Health care services provided in areas that have a critical shortage
of such services;
(Nev. Rev. Stat. § 449.490);
Penalties: None specified.
State: Oregon;
Description of requirements: Within 90 days of filing a Medicare cost
report, a hospital must submit a community benefit report to the Office
for Oregon Health Policy and Research of the community benefits
provided by the hospital;
(2007 Or. Laws 3290 (effective Jan. 1, 2008));
Activities included in the definition of community benefit:
* Charity care;
* Losses related to Medicaid, Medicare, State Children's Health
Insurance Program, or other publicly funded health care program
shortfalls;
* Community health improvement services;
* Research;
* Financial and in-kind contributions to the community;
* Community-building activities affecting health in the community;
(2007 Or. Laws 3290 (effective Jan. 1, 2008));
Penalties: Any health care facility that fails to comply may be subject
to a civil penalty, not to exceed $500 per day of violation, determined
by the severity of the violation. Civil penalties may be remitted or
mitigated upon such terms and conditions as the Administrator of the
Office for Oregon Health Policy and Research considers proper and
consistent with the public health and safety;
(2007 Or. Laws 3290 (effective Jan. 1, 2008)).
Source: GAO analysis of Connecticut, Georgia, Minnesota, Nevada, and
Oregon statutes and regulations.
Notes: We did not consider these states to have community benefit
requirements because their community benefit provisions do not require
the provision of any community benefits. Connecticut's community
benefit provisions are voluntary. Georgia, Minnesota, Nevada, and
Oregon's community benefit provisions only require that hospitals
report their community benefits without explicitly requiring the
provision of community benefits.
[End of table]
[End of section]
Appendix VII: Examples of States with Community Benefit Provisions
Located Outside of Statutes and Regulations:
Table 8:
State: Massachusetts;
Description of requirements: Voluntary;
(The Attorney General's Community Benefits Guidelines for Non-Profit
Acute Care Hospitals at 1);
Activities included in the definition of community benefit: * Community
health education;
* Free preventive care or health screening services;
* Mobile health vans;
* Home care consistent with the definition of net charity care;
* Medical and clinical education and research;
* Support for and participation in community-oriented training
programs;
* Low-or negative-margin services offered in response to an identified
community need;
* Violence-reduction education and counseling;
* Anti-smoking education;
* Substance abuse education, prevention, and treatment;
* Domestic violence reduction education and training;
* Early childhood wellness programs;
* Expanded prescription drug programs;
* Volunteer services;
* Net financial assistance to community health centers;
* Unfunded services ancillary to Medicaid or Medicare services;
(The Attorney General's Community Benefits Guidelines for Non-Profit
Acute Care Hospitals at 10-11);
Penalties: None specified (program is voluntary).
State: Utah;
Description of requirements: "Gift to the community" standard for
property tax exemption: the hospital must establish that its total gift
to the community exceeds on an annual basis its property tax liability
for that year;
(Property Tax Exemptions Standards of Practice at 2-35);
Activities included in the definition of community benefit: * Indigent
care;
* Community education and service, including research and professional
education;
* Medical discounts, including unreimbursed care covered by Medicare,
Medicaid, or other similar government entitlement programs;
* Donations of time;
* Donations of money;
(Property Tax Exemptions Standards of Practice at 2-35-2-36);
Penalties: None specified.
Source: GAO analysis of the Massachusetts Attorney General's Community
Benefit Guidelines for Non-Profit Acute Care Hospitals and Utah's
Property Tax Exemptions Standards of Practice.
Note: Although these states have community benefit provisions outside
of codified statutes and regulations, we did not include them in our
list of states with community benefit requirements.
[End of table]
[End of section]
Appendix VIII: GAO Contact and Staff Acknowledgments:
GAO Contact:
A. Bruce Steinwald, (202) 512-7114 or steinwalda@gao.gov:
Acknowledgments:
In addition to the contact named above, Jenny Grover and Thomas Walke,
Assistant Directors; Joanna L. Hiatt; Xiaoyi Huang; Jessica T. Lee;
Drew Long; Kevin Milne; and Lisa Motley made major contributions to
this report.
[End of section]
Footnotes:
[1] For purposes of this report, nonprofit hospitals refer to
nongovernmental, acute care, general hospitals organized and operated
for a charitable purpose and not designed primarily for profit-making
purposes. Nonprofit hospitals qualify for tax-exempt status if they
meet the requirements of section 501(c)(3) of the Internal Revenue
Code.
[2] These requirements include restrictions on the entity's
organizational and operational structure, and political activities.
[3] See H.R. Rep. No. 1860, 75th Cong., 3d Sess., 19 (1938).
[4] JCT estimated the following values of exemptions for nonprofit
hospitals and their supporting organizations in 2002: $2.5 billion in
federal income tax, $1.8 billion in federal bond financing, $1.8
billion in federal charitable contributions, $500 million in state
corporate income tax, $2.8 billion in state and local sales taxes, and
$3.1 billion in local property tax. See Congressional Budget Office,
Nonprofit Hospitals and Tax Arbitrage (Washington, D.C.: December
2006).
[5] Charity care is generally defined as care provided to patients whom
the hospital deems unable to pay all or a portion of their bills.
[6] U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage
in the United States: 2006 (Washington, D.C., 2007). See also GAO, 21st
Century Challenges: Reexamining the Base of the Federal Government, GAO-
05-325SP (Washington, D.C.: Feb. 1, 2005), in which ensuring that all
Americans have access to a defined minimum core of essential health
services and allocating responsibility for financing such services are
identified as major health care challenges for the 21st century.
[7] The Emergency Medical Treatment and Active Labor Act applies to
hospitals participating in Medicare. See 42 U.S.C. § 1395dd (2000).
According to federal regulations, a hospital that provides emergency
services must medically screen all persons who come to the hospital
seeking emergency care to determine whether an emergency medical
condition exists. If the hospital determines that a person has an
emergency medical condition, the hospital must provide treatment
necessary to stabilize that person or arrange for an appropriate
transfer to another facility. See 42 C.F.R. § 489.24 (2007).
[8] Institute of Medicine, Hidden Costs, Values Lost: Uninsurance in
America (Washington, D.C.: National Academies Press, 2003).
[9] Hospitals may not absorb all the costs associated with caring for
the uninsured because they receive direct payments from different
government sources to help cover their unreimbursed costs, including
those for charity care, bad debt, and low-income patients. For example,
Medicare and Medicaid make payments to hospitals that serve a
disproportionate share of low-income patients under their respective
disproportionate share hospital programs. Other state payments may also
be available to hospitals, although their specific types vary widely.
For example, hospitals may receive payments from special revenues, such
as tobacco settlement funds; uncompensated care pools that are funded
by provider contributions; and payment programs targeted at certain
services, such as emergency services.
[10] Bad debt is generally defined as the uncollectible payment that
the patient is expected to, but does not, pay.
[11] For this study, we analyzed 2003 data from five geographically
diverse states--California, Florida, Georgia, Indiana, and Texas--with
substantial representation of the three ownership groups. For each
state, we determined the three ownership groups' percentages of total
uncompensated care costs and patient operating expenses devoted to
uncompensated care. See GAO, Nonprofit, For-Profit, and Government
Hospitals: Uncompensated Care and Other Community Benefits, GAO-05-743T
(Washington, D.C.: May 26, 2005).
[12] CBO found that, on average, nonprofit hospitals provided more
uncompensated care than otherwise similar for-profit hospitals,
although the ranges of uncompensated care provided by the two types of
hospitals largely overlapped. See Congressional Budget Office,
Nonprofit Hospitals and the Provision of Community Benefits
(Washington, D.C.: December 2006).
[13] U.S. Senate, Committee on Finance, minority staff, Tax-Exempt
Hospitals: Discussion Draft, July 19, 2007.
[14] For purposes of this report, unless otherwise apparent, "states"
refers to the 50 states and the District of Columbia.
[15] For the remainder of this report, we will refer to VHA Inc.,
formerly known as Voluntary Hospitals of America, as VHA.
[16] Medicare, financed by the federal government, provides health care
coverage to eligible individuals aged 65 years or older, certain
individuals with disabilities, and individuals with end-stage renal
disease.
[17] While CMS is not responsible for administering U.S. tax law, the
agency was directed by Congress to collect data on costs incurred by
hospitals for providing services for which the hospitals are not
compensated. Many of these services and their associated costs are
defined as community benefit by both IRS and industry groups.
[18] For purposes of this report, we refer to CHA and VHA in tandem
because they jointly issued the guidance.
[19] For purposes of this report, we refer to the nonprofit health
systems, hospital systems, and health care systems we interviewed as
"health care systems."
[20] Reliable, hospital-specific, nationwide data were not available.
[21] The unreimbursed costs of government health care programs--
commonly referred to by industry groups as "shortfalls"--are generally
defined as the difference created when a facility receives payments
that are less than the facility's costs of caring for public program
beneficiaries.
[22] Medicaid provides health care coverage to eligible low-income
people, and is jointly financed by the federal government and the
states.
[23] Percentage total is greater than 100 due to rounding.
[24] See, e.g., Geisinger Health Plan v. Comm'r, 985 F.2d 1210, 1216
(3rd Cir. 1993) (discussing IRS policy and cases construing exemption
provisions for hospitals).
[25] Harding Hospital, Inc. v. U.S., 505 F.2d 1068, 1071-72 (6th Cir.
1974).
[26] Revenue rulings are published IRS administrative decisions stating
how the agency applies provisions of tax law to a particular set of
circumstances.
[27] Rev. Rul. 56-185, 1956-1 C.B. 202.
[28] Rev. Rul. 69-545, 1969-2 C.B. 117.
[29] Specifically, the 1969 revenue ruling removed the 1956 revenue
ruling requirement relating to caring for patients without charge or at
rates below cost, and indicated that hospitals could qualify for
federal tax exemption if they provided a benefit to the community.
[30] In a 1983 revenue ruling, IRS provided that at least in the case
where a state health planning agency made an independent determination
that operation of an emergency room would be unnecessary and
duplicative, a hospital could still qualify for tax exemption even
though it did not operate an emergency room. Rev. Rul. 83-157, 1983-2
C.B. 94.
[31] All qualified physicians who meet the hospital's guidelines can be
part of the hospital staff.
[32] Starting in tax year 2008, exempt organizations with gross
receipts less than $25,000 will need to file Form 990-N. Those with
gross receipts less than $1,000,000 (to be reduced to $200,000 by tax
year 2010) and total assets less than $2,500,000 (to be reduced to
$500,000 by tax year 2010) will file Form 990-EZ, instead of the full
Form 990. Forms 990-N and 990-EZ are shorter than the full Form 990.
[33] We examined IRS's final version of the Form 990, which was pending
the Office of Management and Budget's approval at the time this report
was issued. Form 990's new Schedule H requires nonprofit hospitals to
report their provision of bad debt, the unreimbursed cost of Medicare,
and community-building activities in Parts II and III of the schedule,
but not as part of the Part I quantifiable community benefit table.
Prior to this revision, Form 990 did not collect and IRS did not have
information on hospitals' provision of activities that benefit the
community in specified categories. IRS officials indicated that for tax
years 2001 to 2006, none of the nonprofit hospital examinations the
agency conducted were selected specifically to ascertain whether these
hospitals complied with the community benefit standard. Rather, IRS
conducted these examinations in the course of the agency's other work.
These officials also told us that some of these examinations were full-
scale examinations where in addition to reviewing other issues, IRS
conducted a limited review of community benefit focusing on the five
factors listed in the 1969 revenue ruling.
[34] While Part V, Facility Information, of Schedule H is required for
tax year 2008, Parts I, II, III, IV, and VI do not become mandatory
until tax year 2009. Depending on when a hospital's fiscal year begins,
tax year 2009 can start on any date during calendar year 2009 and end
12 months later, which could be as late as November 30, 2010. IRS
officials have noted that hospitals have until 5 months after the end
of their fiscal year to file Form 990 and its schedules. Beyond this
filing deadline, hospitals may also obtain filing extensions for an
additional 6 months.
[35] Medicare-certified institutional providers are required to submit
an annual cost report. The cost report contains provider information,
such as facility characteristics, as well as utilization, cost, charge,
and financial statement data. For cost report periods beginning on or
after October 1, 2001, section 112(b) of the Medicare, Medicaid, and
SCHIP Balanced Budget Refinement Act of 1999 (BBRA) requires short
stay, acute care hospitals to submit cost reports containing data on
costs incurred by the hospital for providing inpatient and outpatient
hospital services for which the hospital is not compensated, including
non-Medicare bad debt, charity care, and charges for Medicaid and
indigent care. Pub. L. No. 106-113, App. F., § 112(b), 113 Stat. 1501,
1501A-330.
[36] The State Children's Health Insurance Program provides health care
coverage to uninsured children in families whose incomes exceed the
eligibility requirements of Medicaid. States have some flexibility in
how they design their programs.
[37] MedPAC was established by the Balanced Budget Act of 1997, § 4022,
42 U.S.C. § 1395b-6 (2000), to advise Congress on issues affecting the
Medicare program.
[38] See Geisinger Health Plan v. Comm'r, 985 F.2d 1210, 1217 (3d Cir.
1993) ("[N]o clear test has emerged to apply to nonprofit hospitals
seeking tax exemptions.").
[39] The five factors were (1) the operation of an emergency room open
to all members of the community without regard to ability to pay; (2) a
governance board composed of independent civic leaders; (3) the use of
surplus revenue for facilities improvement, patient care, and medical
training, education, and research; (4) the provision of inpatient
hospital care for all persons in the community able to pay, including
those covered by Medicare and Medicaid; and (5) an open medical staff
with privileges available to all qualifying physicians.
[40] Statement of Mark Everson, Commissioner of Internal Revenue,
testimony before the full House Committee on Ways and Means, May 26,
2005.
[41] Harding Hosp. Inc. v. United States, 505 F. 2d 1068, 1077 (6th
Cir. 1974).
[42] IHC Health Plans, Inc. v. Comm'r, 325 F.3d 1188, 1197 n.16 (10th
Cir. 2003) (citing Geisinger Health Plan v. Comm'r, 985 F.2d 1210, 1218
(3d Cir. 1993); Fed'n Pharmacy Serv., Inc. v. Comm'r, 625 F.2d 804, 807
(8th Cir. 1980); and Sound Health Ass'n v. Comm'r, 71 T.C. 158, 1978 WL
3393 (1978)).
[43] IHC Health Plans, Inc., 325 F.3d at 1197-98.
[44] Some of the 36 states that do not have community benefit
requirements have provisions or other resources related to community
benefit. Some states, including Massachusetts, New Mexico, and Rhode
Island, have community benefit provisions tied to their hospital
licensure requirements rather than requirements needed to obtain and
maintain tax-exempt or nonprofit status. At least five states--
Connecticut, Georgia, Minnesota, Nevada, and Oregon--require that
hospitals periodically report to the relevant authorities the community
benefits they provide but do not require that hospitals actually
provide any community benefits. At least two states--Massachusetts and
Utah--describe their community benefit provisions in sources other than
statutes or regulations, such as attorney general guidelines or
property tax exemption standards. We provide examples of states that
fall into these categories as anecdotal evidence; they do not represent
a comprehensive analysis of states without community benefit
requirements as we define that term.
[45] For state requirements tied to tax-exempt or nonprofit status, a
hospital can be assessed a civil penalty if it fails to comply with
state community benefit requirements. Hospitals in such states may also
be denied tax exemption, although we did not consider that to be a
penalty for purposes of this report. If a state has no community
benefit requirement but ties community benefit provisions to licensure,
such as Massachusetts, New Mexico, and Rhode Island, a hospital in that
state may be denied licensure for failure to comply with state
community benefit provisions (or if already licensed, its license can
be suspended or revoked). Some state requirements do not provide any
penalty for failure to comply.
[46] The 10 states with detailed requirements are California, Idaho,
Illinois, Indiana, Maryland, New Hampshire, New York, Pennsylvania,
Texas, and West Virginia.
[47] The five states with less-detailed requirements are Alabama,
Colorado, Mississippi, North Dakota, and Wyoming.
[48] Cal. Health & Safety Code §§ 127350, 127355 (2008).
[49] 210 Ill. Comp. Stat. 76/15, 76/20 (2008).
[50] Illinois defines community benefit to include the unreimbursed
cost of providing charity care, language assistant services,
government- sponsored indigent health care, donations, volunteer
services, education, government-sponsored program services, research,
subsidized health services, and collecting bad debts. Illinois'
definition explicitly excludes the cost of paying taxes or other
governmental assessments. Maryland defines community benefit as an
activity that is intended to address community needs and priorities
primarily through disease prevention and improvement of health status,
including health services provided to vulnerable or underserved
populations, such as Medicaid, Medicare, or Maryland Children's Health
Program enrollees; financial or in-kind support of public health
programs; donations of funds, property, or other resources that
contribute to a community priority; health care cost containment
activities; and health education, screening, and prevention services.
[51] CMS added this reporting instrument pursuant to section 112(b) of
the BBRA, which does not use the term "community benefit," but requires
short stay, acute care hospitals to submit data on costs incurred by
the hospital for providing services for which the hospital is not
compensated, including non-Medicare bad debt, charity care, and charges
for Medicaid and indigent care.
[52] Making such charity care determinations is based in large part on
information supplied by the patient or on the patient's behalf in the
form of documentation, such as federal tax returns, pay stubs, bank
statements, etc. There are many reasons that hospitals may be unable to
obtain the necessary documentation. For example, a hospital association
official we spoke with stated that hospitals are required to treat and
stabilize emergency patients before inquiring about the patients' need
for charity care, but patients may leave the hospital before hospital
officials can speak to them about financial assistance. Other reasons
include patient embarrassment or a lack of understanding of the
hospital's charity care policy.
[53] Specifically, HFMA stated that hospitals may refer to external
sources, such as credit reports, to help support charity care
determinations. Some of the hospital and hospital association officials
we spoke with are either using or exploring the possibility of using
external sources, such as zip codes in conjunction with per-capita
income data, credit reports, and migrant worker status, as proxies to
make charity care eligibility determinations in the absence of patient-
provided documentation. HFMA further stated that providers should make
every effort to determine charity care eligibility before or at the
time of service, but such determinations can also be made during a
specific time period following patient care.
[54] We did not reduce bad debt expenses to costs because we found that
hospitals did not consistently report bad debt in costs or charges.
[55] CMS has stated that Medicare payments to hospitals under the
prospective payment system cover the costs of an efficient provider.
[56] HFMA states that hospitals that choose to define the unreimbursed
cost of Medicare as community benefit should disclose that cost
separately from charity care, accompanied by detail and context to help
readers understand the reported cost.
[59] Texas considers the unreimbursed cost of non-means-tested
government health care programs, including Medicare, as community
benefit.
[58] Cash and in-kind contributions to others include cash donations,
grants, and in-kind donations made to individuals or the community at
large.
[59] Community benefit operations include dedicated staff, community
health needs assessments, and other resources.
[60] Community health improvement services include programs for
community health education, community-based clinical services, and
health care support services.
[61] Health professions education includes education for physicians,
medical students, nurses, nursing students, and other health
professionals, and scholarships and funding for professional education.
[62] Medical research includes both clinical and community health
research.
[63] Subsidized health services are clinical services provided at a
financial loss and subsidized by the hospital; common examples include
emergency and trauma services, and burn units.
[64] Community-building activities include physical improvements and
housing programs, economic development, community support,
environmental improvements, leadership development and leadership
training for community members, coalition building, community health
improvement advocacy, and workforce development.
[65] Although there is consensus to include community benefit
operations as community benefit, data are also not available to
evaluate the cost associated with this activity compared to other
community benefits.
[66] In EIN is an identification number used by IRS in the
administration of tax laws.
[67] Medicare Payment Advisory Commission, Report to the Congress:
Medicare Payment Policy (Washington, D.C., 2007).
[68] MedPAC has been consulting with CMS to revise Worksheet S-10 and
the accompanying instructions.
[69] Cost-accounting system is a continuous and systematic process
designed to accumulate and assign costs routinely or as desired by
management.
[70] CCRs are ratios applied to charges in order to estimate costs,
which are used in Medicare.
[71] Uncompensated care pools are a financing mechanism to
redistribute, within a state, hospitals' financial burdens of caring
for patients who do not have the ability to pay. Uncompensated care
programs can include, for example, programs outside the hospital that
provide health care services to financially indigent patients.
[72] HFMA specifies that while hospitals should not subtract payments
from uncompensated care pools from charity care costs, these payments
should be separately disclosed if they are of sufficient size. HFMA
does not specify how hospitals should treat their contributions to
uncompensated care pools.
[73] California, Indiana, and Texas state data did not have data on
both contributions to and payments from uncompensated pools or
programs. The uncompensated care pool in Massachusetts is primarily
funded by an assessment on hospitals, a surcharge on insurers, and an
annual appropriation from the general fund.
[74] DSH payments are meant to compensate those hospitals that care for
a disproportionate number of low-income patients.
[75] The percentages remain the same because only four nonprofit
hospitals reported Medicaid DSH payments in the Massachusetts state
data and the amount these hospitals reported was small in comparison to
the amount of unreimbursed cost of Medicaid.
[76] States may receive federal matching funds for provider taxes only
if such fees are broad-based (that is, imposed on all items or services
in the class of services or providers thereof); uniformly imposed (that
is, all items or services in the class or providers thereof pay the
same rate of tax); and do not result in any taxpayers being held
harmless (that is, receiving state funds to reduce the net payment to
the state to below the amount of the tax). 42 U.S.C. § 1396b(w)(3), (6)
(2000).
[77] These five factors are (1) the operation of an emergency room open
to all members of the community without regard to ability to pay; (2) a
governance board composed of community members; (3) the use of surplus
revenue for facilities improvement, patient care, and medical training,
education, and research; (4) the provision of inpatient hospital care
for all persons in the community able to pay, including those covered
by Medicare and Medicaid; and (5) an open medical staff with privileges
available to all qualifying physicians.
[78] Reliable, hospital-specific, nationwide data were not available.
[79] For purposes of this report, we refer to the nonprofit health
systems, hospital systems, and health care systems we interviewed as
"health care system."
[80] Examples of provisions that we excluded using this criterion
include vaccination mandates and newborn screening requirements.
[81] 42 U.S.C. § 1395dd (2000).
[82] Conn. Gen. Stat. Ann. § 19a-127k(a), (c) (West 2008).
[83] Conn. Gen. Stat. Ann. § 19a-127k(b) (West 2008).
[84] Ga. Code Ann. § 14-3-305(d) (2008).
[85] Minn. Stat. Ann. § 144.698, .699 (West 2008).
[86] Nev. Rev. Stat. 449.490(3)(b) (2008).
[87] 2007 Or. Laws 3290.
[88] This position is shared by Community Catalyst in developing its
compendium of state community benefit requirements. See Community
Catalyst, Health Care Community Benefits: A Compendium of State Laws
(Boston, 2007).
[89] Idaho Code § 63-602D(4) (Michie 2008).
[90] Idaho Code § 63-602D(7) (Michie 2008).
[91] Ariz. Rev. Stat. § 43-1201 (2008).
[92] We examined IRS's final version of the Form 990, which was pending
the Office of Management and Budget's approval at the time this report
was issued.
[93] Medicaid provides health care coverage to eligible low-income
people, and is jointly financed by the federal government and the
states.
[94] We defined "community benefit requirement" as a legal standard
that expressly obligates a hospital to provide health care services or
benefits to the community served by the hospital as a condition of
maintaining tax-exempt status or qualifying as a nonprofit hospital. It
is generally something that hospitals are required to do beyond their
role of providing care for the sick and injured in exchange for
remuneration or compensation. We considered the requirement to be one
applicable to hospitals only if it either expressly referred to
hospitals or expressly referred to care or services of the nature and
type that one would reasonably expect to be provided by or performed
primarily at acute care hospitals.
[95] For purposes of this report, unless otherwise apparent, "states"
refers to the 50 states and the District of Columbia.
[96] The 10 states with detailed community benefit requirements are
California, Idaho, Illinois, Indiana, Maryland, New Hampshire, New
York, Pennsylvania, Texas, and West Virginia.
[97] 210 Ill. Comp. Stat. 76/10 (2008).
[98] Md. Code Ann., Health-Gen. § 19-303(a)(3) (2008).
[99] Cal. Health & Safety Code § 127350 (West 2008).
[100] Those five states are Alabama, Colorado, Mississippi, North
Dakota, and Wyoming. These states typically do not use the term
"community benefit" or similar terms such as "community service" or
"gift to the community," although they may refer to "charity care" or
"charity patients." Rather, the language of their provisions
approximates the concept of community benefit, and so we consider them
to have community benefit requirements. See our definition of
"community benefit" in appendix I.
[101] Ala. Code § 40-9-1(2) (2008).
[102] Wyo. R. & Regs. Rev. Gen. Ch. 14 § 10(a) (2008).
[103] Examples of these states include Connecticut, Georgia, Minnesota,
Nevada, and Oregon. Oregon is the most recent state to pass a community
benefit law. Its law, passed in 2007, became effective on January 1,
2008. The law includes a detailed definition of community benefit,
directs the Office for Oregon Health Policy and Research to adopt a
cost-based community benefit reporting system for hospitals operating
in Oregon that is consistent with established national standards for
hospital reporting of community benefits, and sets forth civil
penalties for health care facilities that fail to comply with the
reporting system. 2007 Or. Laws 3290 (effective Jan. 1, 2008; to be
added to Or. Rev. Stat. Ch. 442).
[104] See Property Tax Division, Utah State Tax Commission, Property
Tax Exemptions Standards of Practice (2007).
[105] See Office of Attorney General, Commonwealth of Mass., The
Attorney General's Community Benefits Guidelines for Non-Profit Acute
Care Hospitals (2007).
[106] Some state codes and regulations provided penalties for failing
to comply with community benefit requirements. We noted penalty
provisions only if the penalty provision made a direct and express
reference to failure to comply with the community benefit requirement
as the basis for the penalty. We do not include statutory or regulatory
references to denial of tax exemption for failure to comply as a
penalty.
[107] Ind. Code 16-21-9-8 (2008); Md. Regs. Code tit. 10, § 37.01.03(N)
(2008); and Tex. Health & Safety Code Ann. § 311.047 (Vernon 2008).
[108] N.M. Admin. Code tit. 7, § 7.2.8(L) (2008) and R.I. Gen. Laws §
23-17.14-30 (2008).
[109] R.I. Gen. Laws § 23-17.14-30 (2008).
[110] These states include Alabama, Mississippi, Pennsylvania, Texas,
and West Virginia.
[111] Ala. Code § 40-9-1(2) (2008).
[112] Tex. Health & Safety Code Ann. § 311.045(b)(1) (Vernon 2008).
[113] Miss. Code Ann. § 27-31-1(f) (2008).
[114] W. Va. Code St. R. § 110-3-24.9.8 (2008).
[115] Cal. Health & Safety Code § 127350(d) (West 2008).
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