Practice Management News

$67.4B in Hospital Community Benefit Outweighs Tax Revenue Loss

The tax revenue forgone from non-profit hospitals and health systems totaled $6 billion in 2013, but the organizations contributed $67.4 billion in community benefits.

Hospital community benefit and non-profit hospitals

Source: Thinkstock

By Jacqueline LaPointe

- Non-profit hospitals and health systems delivered $67.4 billion in community benefit activities in 2013, representing a benefit 11 times greater than the value of the tax revenue forgone by the tax-exempt status of the healthcare organizations, a new Ernst and Young and American Hospital Association (AHA) report showed.

“Advancing the health and wellness of our patients and the communities we serve is a foundational mission for our nation’s hospitals,” stated Rick Pollack, AHA President and CEO. “Today, hospitals of all kinds — urban and rural, large and small — are demonstrating the value they provide and solidifying their commitment to making their communities healthier through strengthened community partnerships, health and wellness programs, and outreach activities designed to combat identified community needs.”

Using data from the most recent year for which community benefit information was available for about 3,000 non-profit general hospitals, researchers found that the estimated tax revenue foregone because of hospital and health system tax-exempt statuses totaled $6 billion in 2013.

Non-profit hospitals and health systems counteracted the lost tax revenue by providing financial assistance and community benefit activities. Out of the $67.4 billion in community benefits delivered, approximately $34.7 billion came from financial assistance, unreimbursed Medicaid, and other unreimbursed costs for means-tested government programs.

Providing financial assistance for services that hospital and system leaders do not expect to receive reimbursement for, care delivered at discounted costs, and bad debt represented a significant portion of the community benefits provided by non-profit healthcare organizations.

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Despite hitting the lowest level on record in 26 years, uncompensated care costs at both for- and non-profit hospitals still reached $35.7 billion in 2015, the AHA reported in January. Uncompensated care costs accounted for about 4.2 percent of total hospital spending.

In conjunction with financial assistance spending, hospitals across the industry also faced substantial Medicaid reimbursement shortfalls. The AHA also reported that Medicaid reimbursement in 2015 fell $16.2 billion short of actual hospital costs for treating Medicaid patients.

Medicare reimbursement was also $41.6 billion below actual hospital costs.

While a little over one-half of the community benefit provided by non-profit hospitals and health systems stemmed from charity care and covering federal healthcare payment shortfalls, the analyzed organizations also delivered $32.6 billion in other community benefits.

Community benefits include hospital activities that aim to alleviate care barriers, prevent disease, improve nutrition, and address behavioral, social, and environmental issues.

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As the Trump Administration considers tax reform, the AHA called on policymakers to consider that non-profit hospital and health system status brings valuable community benefits despite the lost tax revenue.

Non-profit hospitals have been at the center of some tax reform debates after a 2016 Health Affairs study showed that seven of the top ten most profitable hospitals were non-profits.

With stakeholders questioning non-profit hospital profitability, some states are increasing scrutiny of non-profit hospitals and health systems. In Illinois, a non-profit health system lost its tax exemption status from 2004 to 2011 despite reportedly providing medically necessary care to 31,000 patients, totaling $38 million in costs.

The health system’s charity care costs were about three times the property tax amount that year, meaning the system should have received tax exemption, the organization argued.

However, the state challenged the health system’s non-profit status based on state regulations that measure the level of charity care needed to qualify for tax exemptions.

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An unnamed commercial accountable care organization (ACO) faced a comparable situation when attempting to claim its tax exemption status last year. The IRS denied the ACO charitable tax-exempt status because the organization did not directly provide medical care or healthcare services to the general public.

The federal agency contended that the ACO was primarily created to execute contracts and negotiate deals with commercial payers. Therefore, the organization did not qualify for non-profit benefits.

The AHA challenged the IRS decision to deny the ACO a tax exemption designation, claiming the decision would impede value-based care and care coordination efforts.

“We are seriously concerned that the IRS has adopted a ruling position that means non-profit hospitals risk losing their tax exemption if they pursue a modern approach to clinically integrated healthcare that holds the greatest promise for improving outcomes and reducing costs,” wrote Melinda Reid Hatton, the AHA’s Senior Vice President and General Counsel.

While the association’s most recent analysis demonstrated that non-profit hospitals and health systems are delivering community benefits beyond the value of the lost tax revenue, leaders argued that adding social determinants of health activities as community benefits would increase the value even more.

“Guidance should clarify that hospitals are promoting health for the benefit of the community as a whole when they address housing, nutrition, transportation, and other social determinants of health,” the association stated. “A substantial body of research demonstrates that providing a clean, safe place to live, regular nutritious meals or more job opportunities has a profound and positive effect on health.”