Tax-exempt Hospitals’ Savings-to-Community Benefits Ratio Disputed

A new report found that tax-exempt hospitals delivered $10 in benefits to their communities for every $1 in federal tax exemption they received in 2020, the American Hospital Association (AHA) said on Tuesday. To reach that calculation, the report — which was prepared by EY for AHA — takes into account not just non-profit hospitals’ charity care, but their full scope of “community benefits.”

The findings contrast sharply with a 2023 KFF report that contended non-profit hospitals received about $28 billion in tax exemptions in 2020 while only delivering $16 billion in charity care. It is also at odds with the Lown Institute’s March 2024 report that evaluated 2,425 non-profit hospitals and determined that 80% of them “spent less on financial assistance and community investment than the estimated value of their tax breaks.”

The disconnect, AHA’s Julie Rapoport Schenker explained at a September 24 session of the American Health Law Association’s (AHLA) tax conference, is that the AHA report looks at the “huge range of benefits” non-profit hospitals provide to their communities.

The community benefit standard.

Tax-exempt charitable hospitals are required to meet the “community benefit” standard under Code Sec. 501(c)(3) and Rev Rul 69-545.

Rev Rul 69-545 provides that a hospital can demonstrate its community benefit by:

• operating an emergency room regardless of patients’ ability to pay
• maintaining a board of directors drawn from the community
• maintaining an open medical staff policy
• providing hospital care for all patients who are able to pay (including Medicaid and Medicare participants)
• using surplus funds to improve facilities, equipment, and patient care
• using surplus funds for medical training, education, and research.

Hospitals provide information on their community benefits annually via Form 990, Schedule H.

Grant Thornton attorney Erin Couture explained to Checkpoint that what Rev Rul 69-545 represents is “really fundamental principles” or “pillars.” It draws on “certain principles that go beyond hospitals in what is a tax-exempt organization.” She cited things like having members of the board of directors drawn from the community, community voice, non-discrimination principles, and using surplus funds “in ways that are educational.”

Mary Torretta, also an attorney at Grant Thornton, told Checkpoint that there’s “a lot of flexibility” on community benefit. She noted that the criteria under Rev Rul 69-545 are from 1969, and that “medicine has changed so much since that time” in terms of “how we see our doctors, who we view as our health care providers.” So there’s flexibility, said Torretta, because “there just has to be — we do things so differently now.”

“Industry has asked for guidance that’s a little more modern,” added Torretta. As far as what that guidance might look like, she doubts the IRS will establish a “quantified test” for “a lot of different reasons.” Among those reasons, she explained, are variances in how states run their Medicare and Medicaid programs, and variances among hospitals that serve targeted populations — such as cancer hospitals, children’s hospitals, and rural hospitals.

Buckets of community benefit.

But with guidance that is over 50 years old, what are the “buckets” that we should be looking at today to determine a hospital’s full scope of community benefits?

Schenker highlighted hospital “programs and services that focus on community health and well-being, including programs that address some of the most persistent drivers of illness and accident.” She noted that many hospital programs are not “revenue drivers,” but are nonetheless essential, such as trauma centers and burn centers. “Hospitals invest resources to provide those kinds of care,” she added.

And looking at charity care costs alone also fails to account for things like health professional education and research and technology investments that benefit communities, said Schenker.

Schenker also stressed that accepting below-cost payment rates for health care — essentially “subsidizing the cost of that care” — is “an IRS cornerstone of the tax exemption” for non-profit hospitals. “Medicaid shortfall” in particular “needs to be part of the calculus,” she said.

Non-profit hospitals provide “a tremendous amount of financial assistance to patients, whether it’s through that charity care process” or “through subsidizing the cost of care for patients who are government care beneficiaries.” Schenker added that “it’s difficult to look at the charity care number without the Medicaid shortfall number,” and “we see that they tend to be inversely related.”

Getting to the right metric.

Given the broad range of community benefits set forth in Rev Rul 69-545, are the analyses by KFF, the Lown Institute, and others missing the mark in their calculations?

KFF’s report specifically looks at charity care. Meanwhile, the Lown Institute’s report takes a broader view — researchers looked at “spending on community investment” based on hospitals’ IRS Form 990, Schedule H.

But the Lown Institute report excludes “research, training, and Medicaid shortfall” from its calculations of community benefit. The authors contend that the “IRS allows hospitals to report on Schedule H certain categories of spending that are important and generally valuable, but do not have a direct and meaningful impact on communities.”

Couture, however, views Schedule H as providing “parameters” for non-profit hospitals to report their benefits. She explained to Checkpoint that the IRS form is “structured to provide a snapshot of community benefits.”

At the AHLA conference Tuesday, Schenker said “it’s important to keep in mind that as drafted, Form 990, Schedule H, reflects … a huge range of benefits to the community.” Looking at all of those benefits together “really underscores the different efforts that hospitals and health systems are providing to the community.”

Torretta told Checkpoint “there is pressure on tax-exempt hospitals to justify their special tax status.” On the negative reports, she said “there is a bit of picking and choosing going on with how some of that data is interpreted. I’m not sure that any of the reports that we’re seeing are giving the full picture.”

But Torretta added that hospitals could “work a little bit harder to prove” all of their benefits to community.

Schenker gave the same advice in her remarks Tuesday, emphasizing that “the value of what a non-profit hospital offers to its community should be looked at more broadly” and should be shared “in a really robust way.” Beyond Schedule H, non-profit hospitals should focus on “telling [their] story in the community, building relationships and stakeholders in the community, talking about what it is that [they’re] doing,” she said.

For more on hospitals as charitable organizations, see Checkpoint’s Federal Tax Coordinator ¶ D-4150 et seq.