Proposed legislation scrutinizes community benefit standards for tax-exempt hospitals

Updated on July 11, 2023

What can providers do to prepare?

By Rebekuh Eley, national tax-exempt health care leader, Michael Haas, and Danny Schmidt, health care senior analysts with RSM US LLP

Scrutiny over community benefit standards may provide further stress for some tax-exempt hospitals as a proposed bill titled “Holding Nonprofit Hospitals Accountable Act” was introduced in the House Committee on Ways and Means in late April. The bill outlines new policies, including expansion of charity care eligibility, establishment of quantitative standards for a minimum amount spent on community benefits, as well as community involvement in hospital decision making, such as requiring hospital boards to have community representation, and more.

The legislation intends to amend and codify the definition of the so-called community benefit standard, a measure the IRS uses to determine if hospitals with tax-exempt status are operated for the charitable purpose of promoting health in their community.

The road may be long to becoming enacted as a law as the legislation will no doubt see iterations before passage in the House and Senate; however, the significance of what it represents could be impactful to many tax-exempt hospitals. What can providers do to stay ahead of this proposed change? First, a look back to show how we got here.

How we got here

Since 1956, the community benefit standard has evolved under various tax code amendments. The latest update was in 2010 under the Affordable Care Act, which among other requirements, established compliance standards for nonprofit hospitals to maintain their tax-exempt status. The  standards include conducting a community health needs assessment every three years, developing an implementation plan to address the identified needs of the community, and providing free or discounted medical services and other initiatives to improve the health and well-being of the local population.

Under the current law, community benefit activities may vary depending on the type and size of the hospital, as well as the specific health needs of the community. According to the American Hospital Association (AHA)’s witness statement from the April hearing, ‘’One of the greatest accomplishments of the community benefit standard is the flexibility it gives to hospitals and health systems to meet the needs of their communities. A small rural community in Montana will not have the same needs for support and services as a hospital in downtown Atlanta. And it always should be up to those communities to decide if the amount, range and focus of their hospital’s community benefit activities meets their needs.’’

Since hospitals and health systems began reporting an amount attributable to community benefits, between $894 billion to $1.3 trillion has been spent on them, the AHA’s witness statement said. Additionally, based on AHA data, from 2013 through 2020, tax-exempt hospitals’ uncompensated care costs as a percent of total hospital expenses ranged from 12% to 16% and those providers have continued to generate operating losses. 

As tax-exempt hospitals are beleaguered from challenges such as the combined impact of higher incidences of influenza and respiratory syncytial virus, as well as ongoing cases of COVID-19, inflation and elevated interest rates, losing tax-exempt status could be the final blow that leads to further consolidation or worse, closing the doors for some hospitals.

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Staying ahead of the change

Amid evolving scrutiny over community benefit standards and additional oversight efforts from legislative bodies, tax-exempt providers should ensure they have the appropriate data analytics and financial tools available to provide data-driven transparency focused on the benefits they provide to their communities to protect their tax-exempt status.

One way a tax-exempt hospital can optimize its data-driven efforts is enhancing the Schedule H within its Form 990. The Schedule H is a key benchmark that shares an organization’s community benefit story. To aid in protecting the tax-exempt benefit, hospitals should capture key data points such as cost of financial assistance, community health improvement services and operations, health professional education, subsidized health services and research, cash and in-kind contributions for community benefit and other community benefit costs. 

The takeaway

While legislative changes impacting tax-exempt status may be in early stages, providers should not wait to take action. Improving financial and data analysis in a meaningful way now can provide valuable insight into operations, improve patient and community engagement, enhance future decision making, plus fortify the organization to address the rigor of new standards and transparency requirements when they come.