Richard L. Gundling

Congress is continuing to question whether not-for-profit hospitals are providing sufficient charity care to justify their tax-exempt status. But the question, framed too narrowly, misses most of the reasons not-for-profit hospitals merit tax exemption in the first place.

Concerned about lapses in governance, fund raising, and other practices, the Senate Finance Committee, House Energy and Commerce Committee, and House Ways and Means Committee have held hearings over the past year, and plan for more, about the operations of not-for-profit hospitals. One area of particular scrutiny has been the role of charity care and community benefit in justifying these hospitals' tax-exempt status. Many in Congress believe that not-for-profit hospitals might be cheating taxpayers by not providing enough charity care.

"It would be very dangerous to address a broken system such as ours by simply revoking the federal tax-exempt status of nonprofit hospitals. . . . [A] blanket revocation of federal tax-exempt status would revoke more benefit than the tax revenue stream it would produce to support the uninsured."
- Nancy M. Kane, Professor of Management, Department of Health Policy and Management, Harvard School of Public Health, Boston, in testimony before the House Committee on Ways and Means, May 26.

The provision of charity care is an important attribute of not-for-profit hospitals that justifies their tax exemption, but it is only one of many such attributes. Congress should be careful to recognize the broad basis for tax exemption and not attempt to draw a direct correlation between the volume of charity care provided and the amount of tax exemption allowed.

10 Attributes of Hospitals that Merit Tax Exemption

Tax-exempt healthcare organizations are formed to address the specific needs of their communities, so the reasons they merit tax exemption vary among different institutions and communities. In the early 1990s, an HFMA chairman's task force identified 10 major attributes of tax-exempt organizations:

Mission to provide community benefit. Mission is a cornerstone of granting tax exemption. According to federal law, the tax-exempt provider must have a clearly defined mission statement committing the institution to charitable endeavors. Both the institution's historical background and the community's needs are important in determining the mission statement. Use of financial surpluses. No individual may receive any portion of a tax-exempt institution's financial surpluses as a result of ownership. Both federal and state laws require that all financial surpluses must go toward furthering the organization's charitable purpose. Compensation arrangements must be carefully constructed to reflect fair market value for services rendered.

Accountability. The organization's board of trustees must hold themselves answerable to their community for maximizing the organization's contribution to the community.

Goodwill. Successful tax-exempt hospitals gain this intangible attribute by continuing their mission of providing care and meeting their community responsibility over a long period of time. Such hospitals usually have stable ownership and governance structures and regularly receive significant philanthropic and volunteer support.

Provision of charity care. Free or discounted care is undeniably important among the attributes that justify a not-for-profit hospital's tax exemption. Organizations that provide charity care must establish and communicate a clear charity care policy based on community needs and input, with easy-to-understand, written eligibility criteria.

Reduction of government burden. Many tax-exempt hospitals provide services that the government would otherwise have to provide. Such services include, in particular, high-tech, high-intensity services; emergency care; chronic care; long-term care; and unprofitable services (also discussed below).

Provision of essential healthcare services. A not-for-profit hospital often warrants tax-exempt status because it is the sole provider of healthcare services that are essential to a community. Such essential services include emergency departments and outpatient clinics serving low-income patients.

Provision of unprofitable services. The provision of unprofitable services is a common charitable response of hospitals to a community need. Such unprofitable services lose money not because of inefficient operations, but because of high costs combined with low volume or inadequate payment. Common examples of unprofitable services include burn, neonatal, and trauma centers and community mental health centers.

Public education. Most tax-exempt hospitals provide a range of educational programs to enhance public health. Examples of such programs include public health education, wellness programs, and the sponsorship of educational activities.

Serving other unmet human needs. Some tax-exempt hospitals provide important services that are tangential to health care but that no entity in the service area can or will provide. Examples of these activities include senior citizen education and outreach programs, care for "boarder" babies, or the operation of meals-on-wheels
 programs.

The Baby's in the Bath Water

Not-for-profit hospitals are an important part of the nation's healthcare delivery network because they provide a wide variety of community services that fall within the IRS's definition of "charitable" under Revenue Ruling 69-545. For this reason, HFMA has encouraged Congress to use great caution when reviewing quantitative research that compares amounts of charity care provided by individual hospitals.

Not-for-profit hospitals that provide relatively little charity care may, in some instances, be devoting their exempt resources to other important community services, such as trauma centers, health clinics, neonatal intensive care units, and other important needs not served by governments or for-profit businesses. HFMA has asked Congress to realize that because the healthcare needs, including charity care needs, vary greatly by community, the solutions, whether legislated or voluntary, should be flexible to best serve each community's different needs.

Meanwhile, it is imperative that healthcare providers continue to identify, measure, and openly disclose all the attributes of their organizations that warrant tax-exempt status. They can do so most effectively with appropriate community benefit reporting standards that promote comparability and that are sufficiently scalable to account for the wide variation in size and resources among the nation's tax-exempt healthcare providers.

In preparing an issue analysis on community benefit, HFMA's Principles and Practices Board has modeled its practice recommendations on those advanced in Community Benefit Reporting: Guidelines and Standard Definitions for the Community Benefit Inventory for Social Accountability, developed by Irving, Texas-based VHA Inc., the St. Louis-based Catholic Health Association of the United States, and Sylvania, Ohio-based Lyon Software.

All stakeholders, from government officials to members of a provider's community, need to understand all the reasons why an organization qualifies for tax exemption and how it is progressing toward achieving its mission.


Richard L. Gundling, FHFMA, is vice president, product development, in HFMA's Washington, D.C., office, and a member of HFMA's Washington Metropolitan Chapter.


Guidance on How to Fulfill the Charitable Mission

HFMA formed a chairman's task force to identify the specific attributes of healthcare providers that characterize them as tax-exempt institutions.

The report findings were recently incorporated into HFMA's Principles and Practices Board's Issue Analysis 05-01: The Relationship of Community Benefit to Hospital Tax-Exempt Status, which seeks to clarify ways hospitals can gather and report the information needed to demonstrate their fulfillment of their charitable mission. Learn more about obtaining P&P Board issue analyses. 

Publication Date: Monday, August 01, 2005

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