What should count as a community benefit for nonprofit hospitals?

Hospitals receive tens of billions in tax breaks for maintaining their nonprofit status. Given the opportunity cost of these funds — which would go to local schools, state social assistance programs, and other government initiatives– it’s important to ask, how much are nonprofit hospitals giving back to communities?

If you ask the hospital industry, they claim they give back far more than they receive in tax breaks. The American Hospitals Association recently reported that nonprofit hospitals give back 9 times what they receive in tax breaks. Contrast that estimate with the Lown Institute’s finding that nonprofit hospitals spend $18 billion less than what they give in charity care and community investment. How can these two estimates be so different?

The difference lies in how you define community benefit, Lown Institute senior policy analyst Judith Garber and Lown Institute president Vikas Saini explain in a new op-ed in Stat News.

The IRS allows hospitals to report several different categories of community benefit, but not all of these types of spending are equally meaningful for community health. When you think of activities to promote community health, you may imagine free clinics, food pantries, diabetes and asthma prevention programs, and the like. In reality, the majority of community benefit spending that hospitals report is for items that have little effect on community health: Medicaid shortfall, health professions training, and research. Garber and Saini write,

The fact that nonprofit hospitals care for Medicaid patients, train residents, and conduct research is undoubtedly a social good. But to justify their tax exemption, the focus should be on programs that address specific community health needs, not on spending for the general good, for which they are already being paid.

Read the full op-ed at Stat News!

Nonprofit hospital status being challenged

The question of what categories should count as a community benefit is not just an academic exercise — it has real weight in cases where a hospital’s nonprofit status is challenged.

Tower Health system in Pennsylvania is an interesting example. Last year, four of Tower Health’s hospitals were taken to court for not fulfilling the state’s requirements to be a tax-exempt charity. These lawsuits took place across two different counties and resulted in two different decisions — Pottstown Hospital was okayed for continued nonprofit status while Jennersville, Brandywine, and Phoenixville hospitals had their tax-exempt status revoked.

Now as both cases are being appealed, hospitals and community advocates are watching closely to see how judges might interpret the charitable requirement for nonprofit hospitals. There is real money on the line for these towns. Pottstown Hospital’s removal from the tax rolls cost the Pottstown School District about $924,000 a year in property tax revenue. The Phoenixville school district superintendent said the schools would gain nearly $1 million more per year if the local hospital paid property taxes.

It’s not surprising that Pennsylvania towns are taking an interest in this topic, as Pennsylvania has one of the largest combined fair share deficits in the country. In total, the state’s nonprofit hospitals received more than $2 billion in tax breaks than they spent on charity care and community investment.

Tower Health system appears to be emblematic of this statewide problem. According to the Lown Index, Tower Health is one of the lowest-ranking systems when it comes to community benefit spending. Each of the four hospitals involved in the court cases received 1 star on each community benefit metric. None of these hospitals spent even 1% of expenses on charity care and none exceeded the state average for Medicaid revenue as a share of patient revenue, according to their CMS hospital cost reports.

Tower Health’s fair share deficit also contributes to the large state total. For fiscal year 2019, Tower Health reported $14 million in charity care spending, $1.3 million in community health improvement activities, about $350,000 in contributions to community groups, and $40,000 in community building activities. (Tower Health filed IRS 990 forms for five hospitals as a group, which includes the four hospitals involved in the court cases.) That adds up to about $16 million, about $27.8 million less than the estimated value of their tax exemption at $43.8 million.

In his decision revoking the tax exemption of three Tower Health hospitals, Judge Jeffrey R. Sommer of the Chester County Court acknowledged the inadequacy of the criteria currently used to determine nonprofit hospital tax exemption. The existing laws “do not reflect the vast change in the American healthcare landscape from community-based charity-oriented hospitals to massive conglomerations of healthcare networks, doctor providers, surgical suites, and insurance plans,” he wrote.

We look forward to these appeals bringing further discussion about how nonprofit hospitals are serving their community benefit requirement — and how we can make these requirements better tailored to the needs of communities.