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Tax Exemption and Community Benefit: Are We Getting What We Pay For?

From the Field | 06/30/2015

Practically all non-profits with a charitable mission provide important benefits to the communities that they serve. It is because of this benefit that the federal government allows them to be tax-exempt. Non-profit hospitals should be no different. Yet, because many of them are generating substantial revenues, there has been an on-going discussion about why we award tax exemption to our non-profit hospitals and whether those hospitals are giving back enough to the public in return for their received exemptions.

Paper tree stock photoFor those of us who have been engaged in this years-long debate, the article by Sara Rosenbaum and colleagues in the June Health Affairs about what that tax exemption yields could easily be dismissed as another data point in this ongoing deliberation.

But the article and its analysis arrive at an opportune moment in the discussion about the future of health care delivery and the need to address population health. Here’s why:

Starting with tax exemption, all non-profit hospitals have patient care missions; some also have ones tied to teaching and research. But all should also have a fourth mission—usually called “community benefit”—a term that derives from a 1969 IRS Revenue ruling defining the standard by which we grant tax exemption to hospitals. In essence, that ruling says that to be awarded federal income tax exemption, a hospital should “promote health in a manner that is beneficial to the community.” Most states more or less follow this concept in how they determine tax exempt status.

The hospital field and policymakers have never really understood or agreed exactly on what “community benefit” means under this “promotion of health concept.” A number of us (my colleagues Robert Sigmond, Tony Kovner and I, who with W.K. Kellogg Foundation support created the Hospital Community Benefit Standards Program in 1989) articulated a notion that is much closer to the concept of “community health improvement” that this Health Affairs article attempts to lay out.

Namely—beyond caring for patients—there is a total population that comprises some community (or communities) that deserve resources and attention to address overall health status improvement and inequity challenges. People drawn from that population may or may not ever set foot inside a hospital that includes them as part of its community for community benefit purposes. But that shouldn’t matter. A true community health improvement mission will focus resources and attention on bettering the overall well-being and health equity for that population.

Rosenbaum and team tell us that from a hospital accounting perspective, only about 8% of the reported monies spent by US hospitals on community benefit activities, or $5 billion (in 2011 dollars) was collectively spent on improving the health of people living in that community. The rest was spent on hospital activities that arguably would have been conducted even without tax exempt status—like indigent care, unreimbursed Medicaid costs, training, and research.

Rosenbaum and colleagues note that based on their calculations, tax-exempt hospitals received a benefit of $17 billion (in 2011 dollars) worth of avoided taxes. Add to this the taxes foregone from bond investors or those who made charitable deductions, federal and state governmental tax exemptions result in over $24 billion of foregone revenue.

In essence, the government pays $24 billion to get $5 billion worth of services to improve community health. That’s a lot of money that taxpayers are leaving on the table. That means they aren’t getting very much bang for their buck when it comes to improving the health status of the residents in their community. While it’s true that many nonprofit hospitals are facing declining resources for some key activities, including medical education and research, investing more in population health could help reduce unnecessary spending and generate savings that might then flow to other areas. Because more patients will have coverage under the Affordable Care Act, this too will reduce what hospitals are now devoting for uncompensated care and free up dollars for things like community health improvement activities.

We’ve know about this unbalance for a long time. If we really want a society that is healthier for all of its members, isn’t it time we take action together to right it?

Paul Hattis is a senior advisor at ReThink Health and senior associate director of the MPH Program at Tufts University School of Medicine