News & Analysis

Hospital Community Benefit Rules: Changes Ahead

Portrait of Dawn Carter

Dawn Carter

3 volunteers offering food & medicine illustrate the idea of hospital community benefit guidelines

Big changes are likely on the way for nonprofit health systems accustomed to “checking the boxes” in their community benefit reporting.

Last month, two Democrat and two Republican senators wrote to the IRS questioning $28 billion in tax exemptions for nonprofit providers that “avoid providing essential care in the community for those who need it most.”

Sens. Elizabeth Warren (D-Mass.) and Bill Cassidy (R-La.) rarely agree on anything, so I think it sends an important signal when they join Sens. Chuck Grassley (R-Iowa) and Raphael Warnock (D-Ga.) to go after nonprofit health systems.

“We are alarmed,” the senators wrote, “by reports that despite their tax-exempt status, certain nonprofit hospitals may be taking advantage of this overly broad definition of ‘community benefit’ and engaging in practices that are not in the best interest of the patient.”

Much of this bi-partisan critique relied on the Lown Institute’s 2023 Fair Share Spending report, which has already drawn a blistering response from the AHA.

The Lown Institute wants to see nonprofit hospitals dedicate “at least 5.9 percent of overall expenditures to charity care and meaningful community investment” without the current allowances for expenses such as unreimbursed Medicaid costs and medical education.

In other words, according to the Lown Institute and its allies in Washington, “community benefit” should be defined as charity care and community health improvement activities, period.

Keeping Ahead of Community Benefit Rule Changes

After reading the full study on which Lown bases its “fair share” calculation, I could argue for days that much of this critique is dangerous and misguided. But as a healthcare strategist, I am more concerned with the likely impact this could have on the future sustainability of nonprofit health systems.

Yes, hospital associations should continue to fight, but I think some change is inevitable, given the rare bipartisan agreement in Washington. Among the changes we’re likely to see:

  • Multi-hospital systems will have to break out community benefit numbers for each facility. Currently, some systems submit aggregated numbers to the IRS, and critics say that undermines the very idea of community In the near future, I think the IRS will require a separate report from every facility with a provider number.
  • The IRS will impose stiffer penalties for missing, late, or incomplete Form 990 reports while requiring more quantifiable metrics in Schedule H. (Currently, hospitals may provide an “open-ended, narrative” explanation of their community benefit.)
  • Medicaid shortfalls eventually will be limited or disallowed in the community benefit calculation. Per the critics, all hospitals – both for-profit and nonprofit – have unreimbursed Medicaid expenses, and those losses are offset by higher charges to commercial payers or by federal Disproportionate Share Hospital payments. While I may not agree with that logic, I see it gathering a kind of critical mass.
  • Perhaps most importantly states will demand additional accountability. Nonprofit hospitals in Massachusetts already have to file five different reports every year quantifying their community benefits, while Illinois and Utah require hospitals to show that the value of their charity care exceeds the value of their property tax exemption. For many nonprofit providers, state regulations are a more immediate threat than federal regulations.

With all those things in mind, there are at least three things hospitals should be doing to prepare for the big changes to come:

    • Go back to your last Form 990 and subtract any amounts that you claimed for Medicaid shortfall. Could you justify the new figures to a reporter doing a story on your community benefit? That kind of thinking may help to focus your strategic thinking.
    • Look at your county’s CHA, then have some serious talks about partnership. Aligning with the Public Health Department makes sense on every level – moral, political, and financial. (See our Case Study on taking a collective approach to CHAs.)
    • Finally, view your next CHNA as a chance to redefine “community benefit.” Without the crutch of Medicaid shortfall, how would you describe your value to community stakeholders? Turning those stakeholders into true partners will be critical. As we’ve written before: “Churches, schools, food banks, shelters, clubs and membership organizations – the nonprofit infrastructure reaches deep into every community, offering a cost-effective channel for relationship-building, education, and service delivery. These organizations already have a stake in the health and wellness of their members; they are partners waiting to be activated.”

With our unique expertise at the intersection of healthcare strategy and public health, Ascendient can help hospitals navigate the changing requirements around community benefit and nonprofit status. Please contact us for a no-obligation consultation.