By Emilie Knieriem, CPA, Senior Manager at Blue & Co.
Tax-exempt hospitals provide community benefits for many reasons. In order to understand those reasons, we should first define what community benefits are and how they benefit community need. Community benefits are programs and services designed to improve health in communities and increase access to health care.
Based on the IRS Form 990, Schedule H instructions, community benefits are activities or programs that respond to community health needs and seek to achieve one or more of the following objectives:
- Improving access to health services
- Enabling low-income persons to afford health care
- Enhancing public health
- Advancing generalizable knowledge
- Educating health professionals
- Relieving the government burden to improve health
Why is it important to track the benefits?
Community benefits are one of the most powerful indicators of hospital contributions and the greatest declaration that the hospital’s tax-exemption is valuable, in addition to it also being a requirement to maintain their tax-exempt status. Under the Affordable Care Act, hospitals must report their community benefit spending, however there is technically no minimum amount that is required to be spent to maintain their tax exemption. As a result, the amount hospitals spend on community benefits is variable from hospital to hospital.
So why is it so important to track these benefits if there is no required minimum? Given the significant tax benefits that nonprofit hospitals receive, the IRS scrutinizes how hospitals benefit the community and provide the essential care, jobs, and other benefits. In a post-COVID-19 world we have seen new additional attention given to tax-exempt hospitals from the IRS, legislators and donors which is why it is essential for hospitals to comprehensively capture their benefits to the community.
In 2007, a Senate Finance draft paper recommended there be a requirement for exemption of spending at least five percent of operating expenses or revenue on charity care. In 2021, Florida repealed a law enacted in April 2020 that would have added certain community benefit reporting requirements for hospitals that apply for a property tax exemption. This law would have limited a tax-exempt hospital’s property tax exemption to the amount of community benefit the hospital provides.
Indiana looked into a similar law as Florida, but it did not gain any traction to bring to a vote. As you can see, government agencies are looking for ways to generate revenue and some of these ideas tie directly to community benefit expenditures.
What qualifies as charity care?
The IRS identifies eight categories of community benefits that are reportable on a tax-exempt hospitals’ IRS Form 990, Schedule H.
These categories include:
- Financial assistance at cost (prior to the Affordable Care Act this was generally known as charity care)
- Cost of other means-tested government programs
- Community health improvement services and community benefit operations
- Health professions education
- Subsidized health services
- Research funded by government and other tax-exempt sources
- Cash and in-kind contributions for community benefit
These benefits are valued on the basis of actual expense and includes both direct cost and indirect costs.
Direct costs include:
- Salaries and benefits
- Other expenses directly related to the actual conduct of each activity or program
Indirect costs would include costs that are shared by multiple activities or programs, such as facilities and administration costs related to the organization’s infrastructure (space, utilities, custodial services, security information systems, administration, material management and others).
Don’t forget Subsidized Health Services!
With so many categories of benefits how can it be that so many hospitals report very little spending related to community benefits? It is possible that this arises from a disconnect in the community benefit standard. It is important for tax-exempt hospitals to understand that community benefit spending does not have to be connected to community health needs.
Many systems offer “subsidized health services” – clinical services at a financial loss to organizations. The loss is measured after removing losses associated with bad debt, financial assistance, Medicaid and other means tested government programs. Subsidized health services meet an identified community need and must not be available to the extent needed unless provided by the health system. This could include inpatient/outpatient services, but also specialized ICU services, mental health programs, and physician clinics in certain rural or remote areas that wouldn’t be present otherwise.
There is a plethora of information to find that help organizations determine whether a program or activity should be reported as community benefit. Tax-exempt hospitals are urged to educate themselves on what would be considered community benefit and keep good records to facilitate reporting it accurately on the IRS Form 990, Schedule H.
In conclusion, the hospital community benefit has enormous potential to make a difference in community health and financial well-being. If all hospitals invested in financial assistance and community health programs, less medical debt burden and improved outcomes could be reached.
Eager to maximize your community benefits impact? Reach out your local advisor at Blue & Co. to explore how you can amplify your hospital’s contributions to community well-being, ensuring a healthier future for all.