Study: Many nonprofit hospitals would not meet proposed community benefit thresholds

A new study of community benefit spending by Maryland's nonprofit hospitals, published in Health Affairs, suggests caution is needed before requiring that nonprofit healthcare providers spend a certain amount on activities to benefit their communities in order to retain their tax exemptions.

Overall community benefit spending by Maryland hospitals increased over the first four years of the reporting program, according to 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 more than $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 percent of operating expenses in 2007, up from about 7 percent in 2005, Gray and Schlesinger report.

The authors analyzed 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 one 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 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 United States 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.

The Senate Finance Committee's Republican staff has 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 defines it ranged from less than 1 percent to more than 6 percent of hospitals' expenses, averaging 2.4 percent in 2007. The study notes that Maryland hospitals have little reason to avoid charity patients because the cost of their care is built into the state's all-payer rate-setting system for hospital services. The authors say variations in charity care expenses are not surprising, since the poverty rate at the county level in Maryland ranges from 5 percent 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.

If a threshold focusing on charity care is used, the researchers say, better measures are needed. For example, on the Maryland state forms and IRS Schedule H, charity care includes only 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 write. They also say that community benefit should ideally be measured through performance or effects on community health, not just expenditures.

"A new era of accountability begins when nonprofit hospitals start reporting on Schedule H in 2010," the authors write. "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."