The annual tax exemption for nonprofit hospitals under the Affordable Care Act hit $24.6 billion as of 2011, according to a new report, putting pressure on these systems to use the savings to create more benefits for their communities.
That exemption package is more than double what is was in 2002, when the Joint Committee on Taxation estimated that it was $12.6 billion annually.
The ACA “brings a new focus on community benefit activities by requiring tax-exempt hospitals to engage in community-wide planning efforts to improve community health,” said Sara Rosenbaum, the Harold and Jane Hirsh Professor of Health Law and Policy at George Washington University, in a new report in Health Affairs. “The magnitude of the tax exemption, coupled with ACA reforms, underscores the public’s interest not only in community benefit spending generally but also in the extent to which nonprofit hospitals allocate funds for community benefit expenditures that improve the overall health of their communities.”
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The ACA requires tax-exempt hospitals in 2012 to perform community health needs assessments every three years created with both community and public health expert input, and to establish annual implementation strategies for community needs.
The Internal Revenue Service defined community benefit as participation in Medicaid and means-tested public health insurance programs, unreimbursed research, health professions training, subsidized shock and trauma units and community building efforts such as housing and environmental improvements.
In 2011, according to the report, tax-exempt hospitals allocated $62.4 billion to community benefit spending, with 32 percent claimed in offsets for Medicaid and 24 percent claimed in offsets for uninsured patients. Around 36 percent was devoted to health professions education, research and subsidized services like shock/trauma units. About $2.7 billion, 4 percent, was devoted to community health improvement and slightly less than $2.0 billion,3 percent, went to cash and in-kind contributions to community groups, Rosenbaum and colleagues found.
These numbers place a “spotlight on the underlying question of the value of the tax exemption, because it is the taxpayer investment in qualifying hospitals that creates this community accountability,” they wrote.
Researches said the figures raise two questions: Will the ACA planning requirement “result in a greater community benefit allocation to community health improvement? [And] will the emphasis on community health improvement lead hospitals to increase their financial support—as part of their community benefit spending—for organizations capable of undertaking the types of health improvement activities that hospitals generally are not equipped to do, such as housing and environmental improvements?”
Rosenbaum and colleagues argue that the concept of community health improvement should be broadened and that its meaning for the purposes of the tax exemption be redefined. The IRS’s Form 990 draws a distinction between “community building” and “community health improvement,” the former referring to activities that help communities but are not necessarily tied to health—so called non-healthcare determinants of health.
If hospitals want to invest in community building, they have to give the IRS additional documentation on the benefits for community health, which could discourage investments, the report said.
The report claims the IRS could use evidence compiled by the Centers for Disease Control and Prevention and other organizations on investments such as group walking programs, “increased accessible areas for safe recreation,” remediation efforts to reduce asthma triggers and interventions for fall-prone seniors.
The IRS should also rewrite its definition of community health improvement, because it is “both overly broad and overly narrow,” the report said.
“On the one hand, the definition allows hospitals to count fundraising and compliance costs tied to community health planning as community health improvement. On the other hand, as noted, the IRS excludes many types of community building activities that have an evidence base in health improvement,” according to the report.. “A more refined definition that focused on evidence-based community health improvement and excluded compliance expenditures would be more consistent with the concept of community benefit.”
The Catholic Health Association said the IRS could broaden the concept of community health improvement, although it’s not that large a barrier to social and environmental investments, said Julie Trocchio, the group’s senior director of community benefit and continuing care.
A number of the CHA’s member hospitals are working to address a range of indirect health problems, she said.
Bon Secours Health System is investing in housing and education, particularly in Baltimore, while Avera Health helped funding walking trails in Pierre, South Dakota, and Mercy Medical Center in Iowa supported local parks and trails. St. Mary’s, in Lewiston, Maine, supports a community garden program and nutrition counseling.
Some of the more expansive community interventions — such as pedestrian path and housing remediation — could be made easier to document with the IRS, and they could also be something that hospitals target with other institutions and local governments, Trocchio said.