A commitment to delivering community benefit will be a critical strategic ingredient in ensuring a hospital’s financial success in the emerging healthcare reform environment.
At a Glance
Hospitals that are committed to a population health strategy should take five steps to address the strategic, cultural, technical, and structural challenges involved in such an effort:
- Adopt wellness as a strategic priority for the hospital.
- Challenge those responsible for community health to become more actively involved in actually improving the health of the population the hospital serves.
- Adopt a wellness philosophy and demonstrate to the community that the organization is committed to that philosophy.
- Leverage limited charitable resources by collaborating and partnering with community stakeholders.
- Integrate the agenda, policies, procedures, and systems of clinical care management, quality, and population health functions.
Here’s an all-too-common scenario:
ABC Health System was observing an apparent decline in the life and health of communities it was serving. Infant mortality rates were high, and cancer-screening rates were low. Too many homes had high lead levels, and too few residents had jobs. ABC was doing all that it was required to do to keep its not-for-profit status—filing Form 990s and Schedule H and preparing to conduct a community health needs assessment (CHNA). It had sponsored a host of health fairs. Yet the dismal statistics hadn’t budged.
And ABC had grave concerns for its future. How would the system respond down the road if new cancer cases developed among the uninsured or underinsured? How would it care for the health effects of the children growing up in homes loaded with lead? Who would pay for the health effects of the chronically unemployed? How could the community attract companies that pay competitive wages and offer rich benefit packages if its population health profile continued to be so grim?
Without question, the first response for any hospital or health system facing such challenges should be to make a strong commitment to improving the well-being of its community—with focused efforts on community benefit designed to create lasting change in the communities served.
Community Benefit: New Mandates
In many ways, making this commitment is not so much a matter of choice as it is a mandate. The important role that tax-exempt hospitals, in particular, play in ensuring the well-being of their communities has received much attention from the federal government in recent years.
In 2007, the IRS shook up the status quo with respect to community benefit with the radical redesign of Form 990 and Schedule H. Soon after, on March 23, 2010, President Barack Obama signed the landmark Patient Protection and Affordable Care Act (ACA), which is now being enacted. In the future, community benefit will be more aligned with the healthcare reform efforts at the national and state level. The catalysts for fundamental change in the focus of community benefit arise not only from legal and regulatory requirements, but also from the recommendations of the Institute for Healthcare Improvement with the promulgation of the “triple-aim” approach to health system performance, focusing on improved population health, improved patient experience, and reduced per-capita costs (see the sidebar below).
As a response to these circumstances, healthcare finance executives should consider promoting a strategic, population health focus in their organizations’ efforts to deliver community benefit, while ensuring these efforts remain in sync with health care’s ongoing transformation toward positioning quality as a fiduciary standard.
The Case for Transforming Community Benefit
Hospitals and health systems have both regulatory and legal incentives to shift the strategic focus of their community benefit efforts to population health.
Regulatory. Section 9007 of the ACA, “Additional Requirements for Charitable Hospitals,” calls for hospitals to perform routine community health needs assessments (CHNAs), thereby effectively ensuring that the issue of community benefit remains a pivotal concerns on hospitals’ strategic planning agendas.
Section 9007 amends section 501(r)(3) of the Internal Revenue Code of 1986 by including three basic requirements for a CHNA:
- To describe how the organization is addressing the needs identified in each CHNA
- To describe any needs not being addressed
- To provide reasons for not addressing the identified needs
Organizations that fail to meet these requirements will be assessed an excise tax of $50,000.
To demonstrate that these CHNA requirements have been met, an organization must document this fact on Form 990. A CHNA is required at least once every three taxable years. Five areas related to the CHNA should be documented on Form 990:
- A description of the community served by the organization and how it was determined
- A description of the process and methods used to conduct the CHNA
- Identities of all collaborating organizations and third parties, such as consultants
- Efforts undertaken to make the CHNA widely available to the public
- Efforts undertaken to implement the CHNA as authorized by a governing body such as the board of directors
Beyond this CHNA requirement, many other opportunities exist in the regulatory environment to position community benefit strategically, with a focus on improving population health. The ACA’s provisions regarding accountable care organizations (ACOs), for instance, advance these new delivery models as means to promote the improved health of defined populations. As hospitals and health systems increasingly participate in ACOs and ACO-like organizations, the population health focus will assume a more prominent place at senior leadership and board meetings—especially given that financial incentives in the form of shared savings could be at risk depending on how well the ACO manages the health of a defined population. It is incumbent of finance leaders to consider how developing an ACO structure might benefit the communities served by their organizations.
Legal. Failure to deliver adequate community benefit could jeopardize a not-for-profit hospital’s or health system’s tax-exempt status. The 2010 Illinois Supreme Court’s ruling in Provena Covenant Medical Center v. Department of Revenue serves as a wake-up call. In this case, the charge against Provena was, in essence, that it had had pursued aggressive debt-collection practices while failing to deliver sufficient charity care to justify its tax-exempt status. The court concluded that Provena Medical Center did not qualify for tax exemption, ruling that the acceptance of Medicare and Medicaid patients cannot be the sole determination as to whether a hospital is providing charity care. By adopting a population health focus with demonstrated evidence, a healthcare organization should be better positioned to defend itself against a suit challenging its not-for-profit status.
Funding the Transformation
In exchange for not paying taxes at the federal and state level, the expectation is that the organization will allocate resources to benefit the community in which it operates. In spite of fiscal limitations, there are several opportunities to fund an investment in population health. Below are just a few possible funding approaches.
Allocate operational funds to finance population health initiatives. Grant funding may serve as seed money to get population health initiatives launched, but to demonstrate a strategic commitment to such programs, it is critical to fund them as other operational initiatives. Soft money—i.e., funds allocated as a one-time investment—can signal that the initiative is temporary. Moreover, soft money distracts time, attention, energy, and talent away from achieving the objectives of the initiative by forcing the team to focus on the next round of funding.
To date, there is no universally agreed upon or nationally mandated percentage of operating expenses that should be allocated to providing community benefit. However, in 2007, U.S. Sen. Chuck Grassley (R-Iowa) of the Senate Finance Committee proposed that 5 percent of annual operating expense be allocated for charity care to maintain tax-exempt status. A 2009 study conducted in Maryland found that the average allocation for hospitals was 7.4 percent, and a 2012 Wisconsin study found that the average allocation among hospitals was 7.52 percent of total expenses.a
Given the lack of a national benchmark, organizations should allocate, at a minimum, 5 percent of total operating expenses to community benefit to be at least on par with the federal requirement for foundations. It also is critical that boards and financial executives view this percentage as an investment in improving the community by advancing population health, providing a financial safety net for those in need, and enhancing the community in ways that result in improved health. These investments should then be allocated within the organization as a source of investment and operating capital. Prevention, population health, and community benefit without a budget are mere rhetoric.
Allocate a portion of funds traditionally budgeted for community benefit specifically to develop population health initiatives. A recommended initial step is to take a small percentage of the amount currently budgeted for community benefit and invest it in initiatives to improve population health while at the same time improving the fiscal bottom line. A wise investment may be to divert unnecessary visits to the emergency department by investing in health literacy, access, and care coordination.
Strengthen the philanthropic arm of the organization to attract funds from donors targeting population health initiatives. Donors are accustomed to funding buildings, equipment, and clinical activities, but not population health initiatives. A health system can address this issue by encouraging donations not only in specific dollar amounts but also in targeted areas, such as a wellness fund that is directly focused on funding community benefit projects, like a free clinic.
Seek funding partners. Hospitals should consider partnering with other organizational stakeholders, in both the private and public sector, to apply for funding at the federal, state, and municipal level. As an example, Provena Saint Joseph Medical Center in Joliet, Ill., partnered with the local health department in its county to identify and address community health needs. The partnership relied upon an assessment and planning tool jointly developed by the Centers for Disease Control and Prevention and city health officials called Mobilization for Action through Planning and Partnerships (MAPP).
Hospitals also should consider partnering with local public health leaders, community developers, and community bankers to identify and apply for funding for targeted-but-collaborative community health and population health initiatives.
Another potential partnership strategy is to launch a social-venture incubator within the hospital with a primary focus on funding ventures to improve population health outcomes, and position it to receive funding from the growing list of social-venture capital firms. Rex Health Ventures in Raleigh, N.C., for example, provides Rex Impact Grants to fund organizations dedicated to improving both community health and patient care. And a provider organization, Dignity Health in San Francisco, has a community grants program and a community investment program, both of which focus on community benefit using a social determinants model of health, disease, and illness.
Tap into the Prevention and Public Health Fund established by ACA. Appropriations to this fund, launched in 2010, are currently set at $14.75 billion over the period of FY10 through FY22.b This fund, which focuses on chronic diseases, provides new money to reduce tobacco use, obesity, and heart disease, as well as to build healthier communities. One of the funding priorities is community prevention.
Beyond such efforts to fund population health initiatives, it is important to take steps to identify and receive credit for all of the organization’s current work for community benefit work that is happening in the organization, particularly if the organization is a health system with numerous organizational entities. The University of Michigan Health System, for example, has a Community Benefit Reporting Form that employees can complete so that more community benefit initiatives are documented. (View the form).
Challenges and Recommendations
Changes in healthcare and government regulations have created strategic, cultural, technical, and structural challenges for organizations seeking to increase community benefit and improve the health of the populations they serve.c Following are recommendations on how best to approach each of these four challenges. With each of these recommendations, however, it is important to keep in mind that the population health agenda should be strategic; the board should serve as fiduciaries in much the same way that boards do with regard to finances and, more recently, quality.
Adopt wellness as a strategic priority for the hospital (strategic challenge). If a hospital opts to become part of an ACO and the ACO is to function as such organizations were intended to function, then the hospital must adopt wellness as a strategic priority. To assume an effective population health focus, the hospital must position itself within the ACO to improve the well-being of three populations: the workforce, the communities in which the workforce lives, and the surrounding communities of the hospital and its associated clinics and organizational units. Given health care’s current shift to a quality and population health focus, even hospitals that decide not to participate in ACOs will need to position themselves in this way.
To establish this effort as a strategic priority, the board’s quality committee or social responsibility committee should make a strong commitment to the effort, creating a dashboard to measure progress toward achieving goals established by executive leadership. As a preliminary step, the board should appoint an ad hoc committee to assess the strategic fit of incorporating a wellness perspective into the work of the quality committee or community benefit committee.
Challenge those responsible for community health to become more actively involved in actually improving the health of the population the hospital serves (cultural challenge). In the past, it was enough to be reactive with respect to community benefit. Today and tomorrow, hospitals should be proactive not only with regulatory compliance and communication, but also with moving the dial on the community’s population health metrics. Leaders charged with advancing community health initiatives should identify and track population health metrics and develop targeted programming to benefit the hospital and the community. Finance leaders can play a role by analyzing the data from the ACA-mandated CHNA and helping to set targets with measurable outcomes.
Adopt a wellness philosophy and demonstrate to the community that the organization is committed to that philosophy (cultural challenge). Hospitals have credibility around diagnosing and treating illness, injury, and disease, as well as rehabilitating from disabling conditions and accidents. To date, however, few hospitals have established much credibility around keeping individuals and the community healthy.
To strengthen its standing from a wellness and corporate-responsibility perspective, a hospital should focus on building its brand and reputation as the “go to” place for wellness and health promotion. The hospital’s leadership should pull in public relations, marketing, wellness, and community health representatives and engage in a deliberate dialogue. The aim should be not only to showcase all of the good work that has been done, but also to determine how to become a “thought leader” and demonstrate best practices in keeping individuals and communities healthy and vibrant.
The Cleveland Clinic is an example of a healthcare organization that has adopted a wellness philosophy internally to spread beyond the wall of the hospital to the surrounding community and even the nation.d This type of approach signals a healthcare organization’s awareness that the health of its workforce very much depends on the health of its community, so that all—including the organization itself—benefit from efforts to improve the health of the community.
Such efforts also can build the community’s trust in the organization’s commitment to its care mission. A well-demonstrated wellness philosophy can help to counter community stakeholders’ negative perceptions of hospitals observed to be exiting inner cities and marketing community health with the goal of filling beds and increasing procedures rather than decreasing risk factors and the incidence of disease.
To build trust, a hospital should engage with community leaders by conducting listening tours, creating dialogue while suspending judgment, and understanding community criticism without rushing to defend. Finally, the hospital should collaborate with key leaders in conducting a CHNA, and then respond to the identified needs—all the while remaining transparent about its vision, mission, values, and strategies. Specifically, hospital leaders and partner leaders should not engage in a blame game in which each side points fingers at what the other side can or cannot do. On the flip side, hospital leaders must persuade other stakeholders in the business, educational, and public safety communities that health care and health status are concerns of not only the healthcare industry, but also the entire community. For instance, the presence of high unemployment and violent crime will have an impact on the health status of the population.
Leverage limited charitable resources by collaborating and partnering with community stakeholders (technical challenge). Given that most hospitals are not-for-profit and seek money from philanthropic organizations to run their operations and initiatives, they face a challenge in convincing donors and the wider community that monies received are worth the investment. Healthcare finance executives seek to attract such donors with calculations of net present value and internal rate of return. However, many donors are looking beyond a single financial bottom line. They want to know the hospital’s impact on the community and population health metrics and, in some cases, even the social determinants of disease, such as the percentage of houses that are lead-free due a hospital-sponsored but philanthropically financed community lead abatement program. The technical challenge is in the effective use of IT resources to enable tracking and sharing of such data.
Integrate the agenda, policies, procedures, and systems of clinical care management, quality, and population health functions (structural challenge). The integration of these seemingly disparate, but synergistic functions is critical to realize the benefits not only of an integrated delivery system, but also of a real and dedicated focus on—and willingness to assume accountability for—improving population health. There are obvious costs advantages to integration. If properly structured and managed, integration brings clear cost advantages, such as the generation of more innovative ways to approach multifaceted, complex challenges and opportunities in addressing the health of individuals and populations from early prevention and promotion of health to end-of-life care. In short, the advantage of a population health focus is that solutions will be designed and delivered not only from cradle to grave but also at three levels of society: individual, family, and community.
Wait No Longer
For healthcare finance leaders, there is no formula or recipe for transforming the community benefit function in their organizations from a reporting function to a population health improvement function. Nonetheless, as challenging as such a transformation can be, in organizations where there is strong and visionary leadership, excellent management of organizational resources, and a commitment to improving the health of the population both within and outside the walls of the organization, finance leaders will find the transformation to be challenging, but not impossible. If you are waiting for the Joint Commission, the IRS, or some other body to give you permission to begin, then wait no longer. Your community is waiting on you.
Marty Martin, PsyD, is director and associate professor, health sector management, Driehaus School of Business, DePaul University, Chicago, and a member of HFMA’s First Illinois Chapter (email@example.com).
a. Gray, B.H., and Schelsinger, M., “The Accountability of Nonprofit Hospitals: Lessons from Maryland’s Community Benefit Reporting Requirements,” Inquiry, Summer 2009; and Bakken, E., and Kindig, D.A., “Is Hospital ‘Community Benefit’ Charity Care?’ Wisconsin Medical Journal, October 2012.
b. For additional background, see Government Accountability Office, Prevention and Public Health Fund: Activities Funded in Fiscal Years 2010 and 2011, Report to Congressional Requesters, September 2011.
c. These four challenges were originally described in Shortell, S.M., Washington, P.K., and Baxter, R.J., “The Contribution of Hospitals and Health Care Systems to Community Health,” Annual Review of Public Health, April 2009.
d. More information about Cleveland Clinic’s wellness approach.
Schedule H, ACA Section 9007(a), and the History of Community Benefit
To more fully understand the sociocultural and political context of community benefit, it is helpful to consider how Schedule H of the IRS’s Form 990 and section 9007 of the Affordable Care Act (ACA), “Additional Requirements for Charitable Hospitals,” not only reflect recent trends, but also derive historically from earlier developments with respect to community benefit.
Schedule H of the IRS’s Form 990, for instance, is associated with the recent transparency trend in politics, government, and business. Schedule H, which became mandatory as of 2009, is designed for tax-exempt healthcare entities to report on their community benefit programs. On this form, the entities are required to detail activities and services in areas such as charity care (financial assistance) and other community benefits; community building; and Medicare, bad debt, and collection practices. In its rationale for developing the new form, the IRS indicated that the form was “designed to combat the lack of transparency surrounding the activities of tax-exempt organizations that provide hospital or medical care” (IRS, “Draft Form 990 Redesign Project—Schedule H, June 14, 2007).
The more recently enacted section 9007 of the ACA imposes additional requirements on tax-exempt hospital organizations aimed at ensuring these organizations delivered sufficient community benefit to justify their tax-exempt status. Among these requirements, an organization must “conduct a community health needs assessment (CHNA) at least once every three years.”a This CHNA requirement is effective for tax years beginning after March 23, 2012.
Tax-paying healthcare organizations are not off the hook because they do not have to comply with Schedule H and ACA requirements. Stakeholders that value corporate social responsibility will demand transparency and accountability, too, but frame the issue as one of corporate social responsibility.
Although the specific provisions of the Form 990 Schedule H and ACA section 9007(a) requirements are new, the tax-exempt status of organizations pursuing a “charitable purpose” dates back to 1946 under the Hill-Burton Act, which regulated charity care. In 1956, the IRS required that not-for-profit hospitals provide charity care to qualify for a federal tax exemption. In 1965, after the passage of Medicare and Medicaid, IRS Revenue Ruling 69-545 enlarged the focus from charity care to community benefit. The rationale for this change was that a greater number of previously uncovered individuals would be covered by Medicare and Medicaid and, hence, the nature of the “charitable purpose” would go beyond simply providing more charity care to a greater number of individuals, because those individuals would decrease in number.
The 1965 ruling included three specific expansions to the charitable purpose of not-for-profit hospitals:
- Establish a community board of trustees.
- Establish public health initiatives.
- Offer health education and promotion.
The section 9007(a) provisions of the ACA demonstrate that history does repeat itself, as they present a similar set of challenges for healthcare organizations today, as is outlined in the accompanying article.
a. IRS, “New Requirements for 501(c)(3) Hospitals Under the Affordable Care Act,” Nov. 1, 2012.
Publication Date: Tuesday, January 01, 2013