Non-Profit Hospitals Provided $95B in Community Benefits in 2016

May 28, 2019 - The value of community benefits provided by non-profit hospitals significantly outweighed the federal revenue foregone due to tax exemption, according to a new analysis released by the American Hospital Association (AHA).

The analysis prepared by Ernst & Young LLP (EY) for the AHA finds that non-profit hospitals provided $95 billion in total benefits to their communities in 2016, the most recent year for which comprehensive data is available.

The value of community benefits translated to 13.7 percent of total hospital expenses in 2016, the AHA reports in an accompanying analysis. Half of the expenses resulted from financial assistance for patients and hospitals absorbing the losses from Medicaid and other government underpayments, the hospital group reports.

The value of community benefits provided in 2016 exceeded the value of their federal tax exemption by a factor of nearly 11 to one, the EY analysis of Medicare hospital cost reports shows. Federal revenue foregone due to tax exemption totaled $9 billion that year.

“On top of delivering around-the-clock care to all who come to us, hospitals and health systems of all types are providing a wide range of comprehensive benefits, activities and services tailored to meet the specific needs of their patients and communities,” Rick Pollack, AHA president and CEO, states in a press release. “These new reports clearly quantify the significant benefit tax-exempt hospitals and health systems provide to their communities.”

READ MORE: Key Ways to Start A Hospital Revenue Cycle Turnaround Process

The majority of hospitals in the US are considered non-profit organizations and, as such, are exempt from federal taxes. In exchange for tax exemption, non-profit hospitals deliver community benefits, including providing financial assistance to patients and establishing tailored programs and services that meet the current and future healthcare needs of patients in their community.

The EY analysis finds that non-profit hospitals provided $43.9 billion in financial assistance to patients and unreimbursed care to Medicaid, Medicare, and other government program beneficiaries in 2016. The remaining $51.1 billion in community benefits went towards other community benefits, such as tailored programs that address social determinants of health and subsidize high-cost, essential services.

But whether non-profit hospitals deliver enough community benefits to justify their tax-exempt status has been up for debate for over a decade, with the debate culminating in new community benefit requirements in the Affordable Care Act (ACA).

Prior to new community benefit requirements from the ACA, the IRS allowed hospitals to interpret what activities and services counted as community benefits. The flexibility resulted in significant variation in what stakeholders considered a community benefit and the value of those activities.

Through the ACA, policymakers intended to increase non-profit hospital transparency by requiring the organizations to conduct a community health needs assessment, create an implementation strategy, develop a written financial assistance policy, and comply with limitations on hospital charges for patients eligible for financial assistance, as well as other specific billing and collection requirements.

READ MORE: Tracking Key Hospital Revenue Cycle Metrics to Up Profitability

The new rules prompted the IRS to revoke a rural hospital’s tax exemption in 2017 after the unnamed hospital did not comply with the requirement to conduct a community health needs assessment, develop an implementation strategy, and make the assessment available to the public.

However, some critics still push for increased scrutiny and transparency, especially since the ACA did not stop non-profit hospitals from reporting bad debt and Medicare shortfalls as part of their community benefits.

A significant portion of the community benefit related to financial assistance and uncompensated care stemmed from the Medicare shortfall, AHA reports in its own analysis.

Addressing the Medicare shortfall, which totaled $48.8 billion in 2016 and increased to $53.9 billion in 2017, made up 3.3 percent of the hospitals’ total benefits to the community in 2016, the hospital group reports. Additionally, 71 percent of hospitals reported having Medicare shortfalls in 2016.

In contrast, community building activities only accounted for an average if 0.1 percent of total hospital expenses in 2016.

READ MORE: Nonprofit Organizations Lead Way in Hospital Revenue Cycle

The report underscores the reason why the Medicare shortfall should be treated as a community benefit, the AHA states. Hospitals participating in the analysis state that non-negotiable Medicare reimbursement rates are “sometimes out-of-line with the true costs of treating Medicare patients,” the report says.

In addition, hospital leaders said their organizations “alleviate the federal government’s burden for directly providing medical services” by treating patients eligible for Medicare, and the IRS considers lessening the government’s burden associates with providing Medicare benefits a “charitable purpose.”

Hospital leaders also explained that an IRS rule states that if a hospital serves patients with government health benefits, then that is an indication that the hospital operates to promote community health.

What constitutes a community benefit and how stakeholders value those benefits will continue to be a hot topic for healthcare stakeholders. In fact, the IRS may up its scrutiny of non-profit hospitals after Senator Chuck Grassley (R-IA) called on the agency in February 2019 to investigate non-profit hospital compliance with IRS rules for community health improvement and financial assistance.

“Making sure that tax-exempt hospitals abide by their community benefit standards is a very important issue for me,” he wrote to the IRS.