Community Benefit Spending 101

In exchange for their tax-exempt status, tax-exempt hospitals are required to provide a community benefit. This obligation dates back to the 1950s and is an IRS compliance issue. For a very long time, community benefit was considered the primary provision of charity care. If a patient arrives at the Emergency Room of a tax-exempt hospital and has no means of paying for his/her care, the tax-exempt hospital will not turn that patient away and will absorb the cost of that care.

In 1969, the IRS expanded the kinds of activities a tax-exempt hospital could count as community benefit beyond charity care. It now includes things such as counting the difference between what Medicaid costs and what Medicaid actually pays for, health professions training, research, and a category called community health improvement. For the most part, the community health improvement category is where the tax-exempt hospital reports spending in activities and strategies outside the four walls of the tax-exempt hospital.

Schedule H

In 2009, the IRS introduced a Schedule H worksheet that all 501(c)(3) tax-exempt hospitals are required to complete and submit with their annual tax Form 990. Schedule H captures community benefit spending and collects information on compliance with the federal requirements for a hospital to have policies for granting financial assistance/charity care and the process for collecting unpaid bills.

Schedule H also includes a category called Community Building which is reported on the IRS 990 Schedule H in Part II. Community Building is defined as activities that protect or improve the community's health or safety and are not reported on Schedule H as a Community Benefit under Part I. Understanding the difference between Community Benefit and Community Building can be challenging. Beginning with the 2011 Schedule H, the IRS clearly indicated that some Community Building activities may also meet the definition of Community Benefit. Activities that demonstrate evidence- based results in improving health better meet the definition of Community Benefit. There are many resources available to tax-exempt hospitals for documenting the evidence base for community building activities. Some are listed in the Resource section of this web site.

Community Building activities help build the capacity of the community to address health needs and often address the "upstream" factors and social determinants that impact health, such as education, air quality, and access to nutritious food. The IRS subcategories of Community Building are activities are:

  • physical improvements and housing, such as housing rehabilitation for vulnerable populations, removing harmful building materials (e.g., lead abatement), neighborhood improvement and revitalization, housing for vulnerable populations upon inpatient discharge, housing for seniors, and parks and playgrounds to improve physical activities;
  • economic development activities such as assisting in small business development and creating employment opportunities in areas with high joblessness rates;
  • community supports such as child care, mentoring programs, neighborhood support groups, violence prevention, disaster readiness and public health emergency preparedness and community disease surveillance "beyond what is required by accrediting bodies or government entities";
  • environmental improvements to address "environmental hazards that affect community health such as alleviation of water or air pollution," the safe removal or treatment of garbage and waste products, and other activities to protect the community from environmental hazards (other than expenses made to comply with legal requirements);
  • leadership development and training for community members such as training in conflict resolution, civil, cultural, or language skills, and medical interpreter skills;
  • coalition building such as community coalitions to address health and safety issues;
  • community health improvement advocacy such as efforts to support policies and programs to safeguard or improve public health, access to health care services, housing, the environment, and transportation; and
  • workforce development, including recruiting physicians and other health professionals to underserved areas.

CHNA and Implementation Strategies

The Affordable Care Act (ACA) places additional community benefit-related requirements on tax-exempt hospitals. Under Section 9007 of the ACA, tax-exempt hospitals are required to conduct a CHNA every three years, beginning after March 23, 2012 (tax-exempt hospitals that use calendar years as their tax year were not required to conduct a CHNA until 2013). The law requires that when conducting the CHNA, the tax-exempt hospital must "take into account input from persons who represent broad interests of the community served, including those with expertise in public health" and the results of the CHNA must be made widely available.

In addition to the CHNA requirements, the tax-exempt hospital must also adopt an Implementation Strategy that describes how the tax-exempt hospital is addressing the significant health needs that have been identified and prioritized in the CHNA process. Both the CHNA and the Implementation Strategy must be approved by an authorized body of the hospital.

In 2013, the New England Journal of Medicine published a study that examined community benefit expenditures by tax-exempt hospitals in 2009. The study found that:

  • 7.5% of total expenses were spent on community benefit;
  • Approximately 6.4% of all expenses (85% of community benefit) involved financial assistance and expenditures associated with Medicaid participation (which pays less than the cost of care);
  • Less than one half percent (0.4%) of total tax-exempt hospital expenditures were devoted to community health improvement activities.