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Modifying Hospital Community Benefit Tax Policy: Easing Regulation, Advancing Population Health

Written by Sarah Rosenbaum, Maureen Byrnes, Gary Young on December 15, 2016

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Acting under existing legislative authority and without new funding, the new Administration can give hospitals greater flexibility over tax-exempt spending while strengthening their role in building healthy communities.

This article first appeared on the Health Affairs blog on December 1, 2016. 


How might regulatory tax policy constraints be eased while promoting greater health equity? The Trump Administration could take steps—under existing legislative authority—to broaden the longstanding definition of “community benefit” spending to promote fuller community-wide health improvement partnerships between tax-exempt hospitals and the communities they serve. These steps, discussed below, are described at length in a new report issued by the Milken Institute School of Public Health at the George Washington University and funded by the Kresge Foundation and the Robert Wood Johnson Foundation.

Origins And Evolution Of Community Benefit Policy

Under policies first adopted by the Internal Revenue Service (IRS) in 1956 under Revenue Ruling 56-186, nonprofit hospitals could qualify as tax-exempt charities if they “operated to the extent of [their] financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay.” In other words, charity care was the basic prerequisite to tax exemption.

In 1969, the Nixon Administration replaced this earlier standard with Revenue Ruling 69-545, which recognized the promotion of health for the benefit of communities as a whole as a charitable purpose. Under the ruling, hospitals could eliminate their charitable care activities altogether without losing their tax-exempt status as long as they could demonstrate a benefit to their communities as a whole.

In 2009, the IRS first issued a special reporting schedule (Schedule H) that must be completed annually by exempt hospitals as part of their Form 990 filings. This schedule provides guidance on what constitutes community benefit spending.

The Community Benefit/Community Building Conundrum

Part I of Schedule H contains a relatively detailed definition of community benefit spending. To a considerable degree, the Schedule H definition represents something of an evolution from the activities first classified as community benefit spending by the IRS in its 1969 revenue ruling: financial assistance (often termed charity care) for patients, with considerable hospital discretion to define the terms of assistance; hospital expenditures to offset losses in connection with participation in Medicaid and other means-tested government health insurance programs that pay less than the cost of care; community health improvement and community benefit operations; health professions education; community-wide subsidized health care such as regional trauma units; and research. The term “community health improvement” is defined as “activities or programs, subsidized by the health care organization, carried out or supported for the express purpose of improving community health. Such services do not generate inpatient or outpatient revenue, although there may be a nominal patient fee or sliding scale fee for these services.”

Separate and apart from community benefit spending activities, Part II of Schedule H permits hospitals to report expenditures for certain “community building” activities. Part II activities encompass physical improvements and housing, economic development, community support, environmental improvements, leadership development and training for community members, coalition building, community health improvement advocacy, workforce development, and other activities.

The IRS reporting instructions note that Part II expenditures may be reported as community health improvement spending under Part I. At the same time, however, the same instructions note that Part II expenditures are “not reportable” under Part I. Furthermore, the instructions fail to provide guidance regarding the circumstances under which Part II spending can be reported under Part I and therefore count as support for the hospital’s tax-exempt status.

Hospital organizations have attempted to give examples to their members regarding the types of community building expenditures that might qualify as Part I community health improvement activities. Moreover, on occasion, and in response to specific queries (related to housing), the IRS has recognized community building as community health improvement. But the ambiguous IRS instructions create uncertainty regarding what community building activities qualify; indeed, the very existence of Part II effectively creates a presumption of exclusion of some or most community building activities. One might infer from the community benefit/community building distinction that activities focused on patient care (e.g., free lead tests for children) are reportable as community benefits, while activities that help community residents who are not patients (e.g., installing water filters in homes) amount to community building with a presumption of exclusion from Part I. This creates a disincentive for hospitals worried about maintaining their tax-exempt status to engage in the latter set of activities.

Hospitals As Community Health Actors: Eliminating The Community Benefit/Community Building Distinction

Health system transformation, spurred on by the Affordable Care Act (ACA), creates an opening for a different approach to defining community benefit, one that the IRS could adopt under its current legislative authority, just as it has done over the years in establishing the concept of community benefit itself. Using its authority, the agency could eliminate the community benefit/community building distinction, thereby incentivizing hospitals to move beyond patient care and assume a far more forceful role as full participants in efforts to improve the health of their communities.

Such a move would be consistent not only with the growing focus on underlying social conditions that affect health, but also with the “Triple Aim”—reducing the cost of health care while improving quality of care and population health—which has been part of the broader health policy landscape for years. This aim cannot be achieved by insurance alone. The Affordable Care Act has reduced the uninsured from 49 million to 29 million, from 16 percent to slightly more than 9 percent of the population, and its delivery reforms are structured to promote efficiency and incentivize hospitals and other health care providers to take a more holistic approach to patient health. While the ACA’s insurance reforms face an uncertain future, to the extent that hospitals feel the effects of improved coverage, they can begin to focus on the broader community-wide health improvement role the Nixon Administration originally envisioned.

To be sure, the continued need for charity care remains great. This is particularly true in non-Medicaid expansion states for lower-income people who would be Medicaid-eligible in expansion states; it also holds true for privately insured patients, covered through individual and employer plans alike, who face steep, escalating cost sharing. But despite this continued need for financial assistance in connection with hospital care—which was established under the Internal Revenue Code as a basic condition for tax exemption (see page 1961)—the expansion of insurance can be expected to have a positive impact on hospital financing.

This positive effect can be seen in a 2015 study, which estimated a $6 billion decline in uncompensated care among hospitals in 2014. A separate study shows uncompensated care reductions as well, particularly in Medicaid expansion states. Added to potential gains from insurance expansion are payment incentives designed to reduce unnecessary readmissions and shorten the length of stay. These two developments, taken together, elevate the case for a hospital strategy that looks beyond the hospital door at the social conditions of health.

Tax Policy As Health Policy: Broadening The Meaning Of Community Benefit

The IRS possesses the power to broaden the definition of community benefit by eliminating the community building/community benefit distinction that the agency itself has created. Such a move—a recognition of hospitals’ potential role in community-wide health improvement—would come at a time of transformation of hospital mission and practice and of growing awareness of the importance of the role of hospitals as community health anchors. We believe the IRS could take several actions to achieve this broad goal.

Eliminate The Separation Between Part I And Part II Of Schedule H

First, the IRS could eliminate the wall between Part I and Part II of Schedule H in terms of what the agency classifies as community benefits. This would encourage hospitals to contribute to clearly identified, high-priority health needs identified by hospitals themselves as part of their community health needs assessments (CHNAs), required by the tax code. The CHNA process emerges as a critical guide to such community-wide health improvement efforts. CHNAs must be conducted with input from the community served as well as public health experts and must be accompanied by annual implementation strategies that demonstrate how a hospital will respond to the needs that have been identified.

The George Washington University’s (GW’s) review of the most recently available CHNAs shows that, indeed, hospitals are themselves identifying population health conditions whose amelioration depends less on timely medical care and more on changing the conditions under which children grow and adults live, work, and age. By eliminating the Schedule H Part I/Part II distinction, the IRS could encourage hospitals to position themselves as full participants in community-wide health improvements that do not depend on a provider-patient relationship.

Identify Promising Community-Wide Health Improvement Activities

Second, the IRS could issue comprehensive guidance to help hospitals identify those community-wide health improvement activities that hold real promise. To do so, the agency clearly would need the help of public health experts, just as the agency turned to these experts to develop its CHNA rules. This expertise could be provided through a government-wide advisory group that could guide tax regulators on promising health improvement efforts, while also suggesting criteria that hospitals might apply as they seek to introduce additional community health improvement innovations.

Typically the IRS waits until it receives queries regarding the lawfulness of particular practices, such as supportive housing. A far better course would be for the agency to affirmatively engage with experts across the government—drawn from the Departments of Agriculture, Education, Health and Human Services, Education, Housing and Urban Development, Transportation, Veterans Affairs, Labor, Commerce, and other agencies—in developing community health improvement policy. The National Prevention Council, whose mission is to promote lifelong health, potentially offers such a starting point for the agency.

Establish Metrics To Guide Reallocation Of Hospital Community Benefit Spending

Third, the IRS could establish basic metrics to guide hospitals as they consider reallocation of community benefit spending. Federal law establishes no minimum community benefit spending floor, but hospital community benefit spending is considerable. According to a January 2015 IRS Report to Congress on Private Tax Exempt, Taxable, and Government-Owned Hospitals, in 2011, hospitals governed by the community benefit spending requirement spent $62.4 billion on community benefits. About half went to charity care and Medicaid shortfalls; only about 4 percent of this total (about $2.7 billion) was spent on Part I community health improvement activities, a figure that also includes expenditures on hospitals’ own community benefit administration operations.

Moving forward, expenditures to support direct patient care undoubtedly will and should continue to play the major role in community benefit spending. But this leaves considerable room for spending on a far broader set of activities that can improve community health and that are undertaken in response to health priorities identified through the CHNA process. The IRS could set as a specific goal the greater alignment of community benefit spending and the priorities set through hospital CHNAs; the agency could offer suggested performance measures by which hospitals could, over time, slowly begin to reallocate their own community benefit spending toward these priority needs. Such actions could help ensure that as hospitals realize gains from broader insurance coverage, their contributions to community health improvement grow, and community benefit spending does not shrink.

In sum, eliminating the distinction between community building and community benefit is the essential first step. For maximum effect, however, this step should be coupled with broad guidance on community health improvement strategies that show promise, as well as guidance for hospitals that could, over time, help them reallocate spending toward CHNA-established priorities.

There are many efforts to improve the health of communities that will require new legislative authority coupled with increased spending. But the transformation of community benefit policy is not one of them. These reforms can be set in motion through executive action, led by the agency that oversees federal tax policy but deeply informed by the many sources of public health expertise within government. This approach to community benefit policy offers the potential for integrating tax and health policy in new ways, so that federal policy levers are not only being pulled, but pulled in the same direction.


Rosenbuam, Byrnes, and Young, Modifying Hospital Community Benefit Tax Policy: Easing Regulation, Advancing Population Health, Health Affairs Blog, December 1, 2016,, Copyright ©2016 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.

Sara Rosenbaum, J.D. Harold and Jane Hirsh Professor Milken Institute School of Public Health at the George Washington University Maureen Byrnes Lead Research Scientist Milken Institute School of Public Health at the George Washington University Gary Young Director of the Northeastern University Center for Health Policy and Healthcare Research as well as Professor of Strategic Management and Healthcare Systems Northeastern University