A Group of Leaders Calls for a Major Reworking of the IRS’ Community Benefit Standard

A group of four healthcare leaders is calling for a thorough revision of the terms under which non-profit hospitals maintain their tax-exempt status, arguing that the current terms no longer make sense, for a variety of reasons. Writing in the “Forefront” section of Health Affairs online (formerly known as the Health Affairs Blog), Sunjay Letchuman, Leonard L. Berry, Ph.D., Michael K. Hole, M.D., and Ge Bai Ph.D., argue in “Revise The IRS’s Nonprofit Hospital Community Benefit Reporting Standard,” published online on April 15, that the current community benefit reporting standard no longer works.

The article’s authors note that, while the Internal Revenue Service continues to rely on the Community Benefit Standard (CBS), a set of 10 holistically analyzed metrics, to determine whether individual nonprofit hospitals benefit community health sufficiently to justify their tax-exempt status, “[A]ccumulating evidence shows that many nonprofit hospitals’ investments in community health meet the letter, but not the spirit, of the CBS. Indeed,” they write, “a 2021 study showed that for every $100 in total expenses nonprofit hospitals spend just $2.30 on charity care (a key component of community benefit)—substantially less than the $3.80 of every $100 spent by for-profit hospitals. A 2022 study looked at the cost of caring for Medicaid patients that goes unreimbursed and is therefore borne by the hospital (another key component of community benefit); the researchers found that nonprofit hospitals spend no more than for-profit hospitals ($2.50 of every $100 of total expense).”

Given all this, the researchers assert that “Providing tax exemption to nonprofit hospitals imposes an opportunity cost: Local property tax dollars that nonprofit hospitals would have paid could have been used to build parks, improve schools, fix roads, and offer other services that bolster public health. A stronger focus on fulfilling needs identified in a CHNA [community health needs assessment] can improve community health.”

Specifically, they recommend maintaining the CBS requirement for hospitals to operate emergency departments open to all, regardless of ability to pay, and be required to provide care to all patients able to pay, while modifying the community health needs assessment to require that it be done collaboratively with the local public health development, other nonprofit hospitals, and/or apporpviate nongovernmental organizations in the local area; and also to require hospitals to maintain a written financial assistance policy “that is easily accessible and proactive”; that the CBS requirement set billing and collection limits “that restrain punitive action”; that any hospital receiving tax-exempt status “maintain a board of directors drawn from the community, reflecting diversity in viewpoint and background”; and that any such hospital “use surplus funds to advance medical training, education, and research that align with long-term community needs.

Meanwhile, they recommend jettisoning the requirement that a hospital “maintain an open medical staff policy, arguing that such a requirement provides no value to the community; as well as jettisoning the requirement to “use surplus funds to improve facilities, equipment, and patient care.” And they believe that three additional requirements must be added to the standard: “report the estimated property tax exemption and sales tax exemption”; measure and report community health interventions’ role in influencing health outcomes”; and “spend at least some of the CbS-designated surplus funds externally, specifically to address social determinants of health.”

The article’s authors write that “We believe that the generous tax benefits received by nonprofit hospitals should be surpassed by what they spend on fulfilling a community’s health needs and championing public health. Strengthening the Community Benefit Standard can help nonprofit hospitals fulfill their stated mission to promote the health and well-being of the communities they serve. Adjusting the CBS to prioritize the social determinants of health and measurable health outcomes, not merely the provision of health services, can fortify entire communities so that residents feel the results tangibly. Several institutions are implementing this refined approach effectively in real-world practice, and a revised CBS will encourage others to follow their lead,” they write.

Sunjay Letchuman is a senior business honors student at Texas A&M University, and he will be attending the Icahn School of Medicine at Mount Sinai in New York City in the fall of 2022; Leonard L. Berry, Ph.D., MBA, is University Distinguished Professor of Marketing, Regents Professor, and holds the M.B. Zale Chair in Mays Business School, Texas A&M University; Michael K. Hole, MD, MBA, is a pediatrician and policy professor at University of Texas, Austin, where he leads a social innovation hub; and Ge Bai, Ph.D., CPA, is a professor of accounting at Johns Hopkins Carey Business School and professor of health policy and management at Johns Hopkins Bloomberg School of Public Health. She is an expert on health care pricing, policy, and management.