Embargoed Until:
July 23, 2009
12:01 a.m. Eastern Time

 

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Christopher Fleming
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cfleming@projecthope.org

Should Nonprofit Hospitals Have To Meet Thresholds For Community Benefit Spending To Retain Their Tax Exemptions?

A New Study Of Maryland Hospitals Finds That Virtually All Would Fail To Meet One Proposed Threshold, Because It Reflects Only A Third Of Their Community Benefit Spending

Bethesda, MD -- Should nonprofit health care providers have to spend a certain amount on activities to benefit their communities in order to retain their tax exemptions? This is one of the questions being examined as Congress considers health care reform legislation. A new study of community benefit spending by Maryland’s nonprofit hospitals, published today on the Health Affairs Web site, suggests caution is needed in creating such thresholds. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.5.w809

Overall community benefit spending by Maryland hospitals increased over the first four years of the reporting program, say study authors Bradford Gray of the Urban Institute and Mark Schlesinger of Yale University. Nevertheless, in 2007, virtually all Maryland hospitals would have failed to meet a spending threshold proposed that year by the Senate Finance Committee’s minority staff.

Nonprofit hospitals in Maryland – which account for virtually all of the state’s hospitals -- spent just over $800 million on activities to benefit their communities in 2007, up from almost $646 million in 2005. Community benefit spending amounted to approximately 7.4 of operating expenses in 2007, up from just over 7 percent in 2005, Gray and Schlesinger report. The authors obtained this information by analyzing the reports on community benefit spending that Maryland hospitals have been required to file since 2004 with the state’s Health Services Cost Review Commission.

Gray and Schlesinger found that charity care and health professional education each account for about a third of community benefit spending by Maryland hospitals. Mission-driven health services that lose money and would not otherwise be available to the community account for about a fifth of community benefit spending. Community health services such as health fairs and free clinics account for about 7 percent of community benefit spending. Another 2 percent of community benefit spending comes in the form of community-building expenditures for physician improvements and economic development. Smaller amounts of community development spending come in the form of unfunded research costs, charitable contributions by the hospital and its foundation, and the costs of the community benefit operations themselves.

Beginning in 2010, all nonprofit hospitals in the country will be required to file reports on community benefit spending with the Internal Revenue Service. The new reports, on Schedule H of revised form 990, will use categories that are similar to those used in Maryland.

Only Two Of 45 Maryland Hospitals Spent 5 Percent Of Expenditures On Charity Care, Raising Doubt About The Appropriateness Of Such A Threshold

Despite an increase in reported community benefit spending by Maryland hospitals each year, 95 percent of Maryland nonprofit hospitals would not have met a threshold proposed by the Senate Finance Committee Republican staff. The Committee’s senior Republican, Sen. Charles Grassley (R-IA), has been a leading critic of the charitable performance of nonprofit hospitals.

The Finance minority staff proposed that nonprofit hospitals, as a condition of their tax exemption, be required to spend at least 5 percent of expenditures on charity care, narrowly defined to exclude other types of charitable activity as well as bad debt. In Maryland, charity care as the state defined it ranged from less than 1 percent to more than 6 percent of hospitals’ expenses, averaging 2.4 percent in 2007. Notably, Maryland hospitals have little reason to avoid charity patients, because the costs of their care are built into the state’s all-payer rate-setting system for hospital services. Variations in charity care expenses are not surprising, however, since the poverty rate at the county level in Maryland ranges from 5 to 20 percent of families.

“Local variations in need create serious doubt about whether a uniform charity care threshold is sufficiently flexible, and a 5 percent threshold seems unrealistic.” said Gray, a senior fellow at the Urban Institute. “Nationally, state-level rates of uninsurance range from less than 5 percent to more than 25 percent,” Schlesinger, a professor of public health and epidemiology at Yale, pointed out.

If a threshold focusing on charity care is used, better measures are needed, the researchers say. For example, on the Maryland state forms and IRS Schedule H, charity care only includes care provided without charge to patients, though Schedule H also includes financial shortfalls in means-tested programs. “Other forms of charity such as sustaining needed but money-losing services or paying physicians for treating the hospital’s charity-care patients are not counted as ‘charity care.’ The fact that some bad debt comes from patients who lack means to pay is a further complication,” Gray and Schlesinger point out. They also say that community benefit should ideally be measured through performance or effects on community health, not just expenditures.

The authors conclude: “A new era of accountability begins when nonprofit hospitals start reporting on Schedule H in 2010. It would be wise to defer further policy changes regarding tax exemption of nonprofit hospitals until the effects of Schedule H are seen. Given also the possibility of larger policy changes to address the problem of cost and the uninsured, we should hesitate to impose new charitable expectations.”

Gray and Schlesinger’s study was supported by a grant from the Robert Wood Johnson Foundation’s Changes in Health Care Financing and Organization Initiative.

After the embargo lifts, you can read the article by Gray and Schlesinger at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.5.w809


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HEALTH AFFAIRS:

Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org.

 

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