The Lown Institute released its “2024 Fair Share Spending Report,” which ranks hospitals on their “meaningful community investment” relative to the value of their tax-exempt status. The report, which evaluated 2,425 nonprofit hospitals, concluded that 80% of the hospitals evaluated did not provide community investment exceeding the value of their tax exemption. Hospitals that allocated at least 5.9% of their overall expenditures to charity care and meaningful community investment were considered to have met their fair share, a threshold based on research into the valuation of the not-for-profit tax exemption.
This report contributes to the ongoing discussion surrounding the tax-exempt status of not-for-profit hospitals – a conversation that has gained momentum the past couple of years. In April 2023, the House Ways and Means Committee held a hearing focused on tax-exempt hospitals and the community benefit standard. The hearing examined the value of tax exemption for not-for-profit hospitals, the adequacy of community benefits provided by these hospitals, and the regulation and oversight of their operations. In addition, a bipartisan group of Senators sent letters to the IRS and the U.S. Department of the Treasury Inspector General for Tax Administration, and the majority on the Senate Health, Education, Labor, and Pensions committee issued a report calling for regulatory action to investigate the community benefit efforts of not-for-profit hospitals.
Challenging the Lown report
The 2024 Lown report was highly critical of not-for-profit hospital transparency and accountability, sparking significant debate and leading the American Hospital Association (AHA) and others to challenge the Lown Institute’s methodology and findings. Critics of the report contend that it cherry-picks categories of community benefit, such as financial assistance and certain community health services, while ignoring others like unreimbursed Medicaid costs, professional education, and research. These ignored areas, they argue, represent substantial investments by hospitals that also contribute to community well-being.
Critics also point out that the report does not address state-level policy differences that can affect hospitals’ financial assistance levels and Medicaid shortfalls. They argue that the Lown Institute’s use of an arbitrary fair-share threshold does not account for changes in the healthcare landscape since the implementation of the Affordable Care Act, including Medicaid expansion.
The AHA emphasizes that hospitals provide a wide range of social services beyond medical care, such as food security programs, maternal and prenatal education, vaccination clinics, and subsidized transportation. Additionally, hospitals often are one of the largest employers in their communities, contributing to economic development.
Not-for-profit hospitals can include various activities and programs as community benefit activity on Form 990, “Return of Organization Exempt From Income Tax,” Schedule H, “Hospitals,” as long as they address an identified health need. However, the Lown Report excluded many of these activities and programs, such as health professional education and research, from its methodology. These activities should be recognized as part of the Lown Report analysis as important ways in which not-for-profit hospitals give back to their communities.
Crowe observation
The categories excluded by the Lown Report represent significant ways in which tax-exempt hospitals provide community benefit. Excluding them from the calculation doesn’t fairly represent the true amount of community benefit provided by hospitals.
Additionally, it is widely recognized that Medicaid reimbursement falls short of covering the cost of care to Medicaid patients, and for decades the guidance provided by leading industry authorities and the IRS has allowed that Medicaid shortfall to be included in community benefit. Tax-exempt hospitals treat Medicaid patients knowing the cost will be higher than the reimbursement – an important contribution to the vulnerable and low-income populations in their communities.
On April 4, 2024, members of the House sent a letter to the IRS and Treasury calling for new regulations and guidance on not-for-profit hospitals. The letter highlights the issue of medical debt, which affects more than 41% of U.S. adults and disproportionately affects Black and Hispanic households.
The lawmakers urge the IRS to clarify, strengthen, and enforce requirements for not-for-profit hospitals relating to financial assistance and collection actions, as mandated by IRC Section 501(r). This provision is intended to increase charitable care and decrease aggressive collection practices, but the letter suggests that many not-for-profit hospitals have not fully complied with these requirements.
The letter outlines additional recommendations for IRS enforcement, including increasing compliance efforts around financial assistance policies, billing, and collection actions. The lawmakers also request that Treasury and the IRS publish additional guidance to clarify the expected level of charity care from not-for-profit hospitals.
What not-for-profit hospitals can do now
In response to the ongoing scrutiny of tax-exempt hospitals, not-for-profit hospitals should consider taking the following steps to demonstrate that they are appropriately evaluating the value of their tax exemption and communicating their community contributions:
- Undertake a comprehensive review of Form 990 disclosures to ensure that program narratives and Schedule H disclosures truly are focused on highlighting the key areas of benefit the hospital provides back to the community.
- Calculate the value of the hospital or health system’s tax-exempt status annually.
- Communicate to key stakeholders in the community the value of tax-exempt status compared to the community benefit provided by the organization.
- Review community benefit reporting to ensure comprehensive and accurate reporting for all community benefit activities.
- Educate others in the organization about the importance of community benefit activities and the standards used to evaluate them. Make sure hospital leadership, board, and stakeholders truly understand the level of community benefit provided and are armed with a complete and compelling narrative that demonstrates that the organization’s contributions to the community meet or exceed the value of their tax exemption.
Looking ahead
The 2024 Lown report and the response from the industry and Congress underscore the complexity of measuring and reporting the community benefits provided by not-for-profit hospitals. While the topics of medical debt and community benefit reporting are different, they are related in that they result in increased scrutiny on tax-exempt hospitals. The ongoing debate emphasizes the need for hospitals to renew and heighten their focus on telling their story, effectively communicating the full scope of their community contributions, and ensuring they are delivering significant benefits to the communities they serve.
