Nonprofit hospitals can be important partners for states in promoting community health, especially through their community benefit investments. Montana’s Legislative Audit Division recently completed a report that calculated the total tax exemptions and community benefit spending by its 47 nonprofit hospitals and found they had no real impact on the health of Montanans.

The division has recommended the state enact laws defining reporting expectations for hospital community benefit spending and its impact on community health, something a number of states are doing to ensure community benefit spending reflects state and community health goals.

For decades, hospitals have been expected to provide financial benefits to their surrounding communities in exchange for their tax-exempt status. The passage of the Affordable Care Act set new requirements for hospitals’ community benefit policies, requiring them to complete Community Health Needs Assessments (CHNAs) every three years and develop implementation strategies to address the identified needs.

Montana’s 47 nonprofit hospitals received more than $146 million in tax exemptions in 2016 and self-reported more than $257 million in community benefit spending. Four percent of community benefit spending went to community health improvement.

Read Montana’s Legislative Audit Division report, Community Benefit and Charity Care Obligations at Montana Nonprofit Hospitals.

While there are gaps in federal oversight and enforcement of community benefit reporting by hospitals, several states are exercising more oversight to ensure hospital community benefit spending has a meaningful impact on community health.

Community Benefit and Charity Care Obligations

In the early 2000s, a group of state attorneys general became increasingly concerned about how hospitals were handling account collections, charity care, and patient bankruptcies. As part of its efforts to monitor nonprofit hospitals and ensure they were fulfilling their charitable obligations, the Montana Attorney General’s Office published annual Montana hospital reports between 2008 and 2014 as a way to protect  “the interests of those served by a nonprofit corporation.”

The reports included information on pricing policies, charity care, community benefit, and debt collection practices. Although funding for the reports ended in 2014, Montana legislators remained interested in revisiting these issues, leading to a request by the Legislative Audit committee, a bipartisan committee of the Montana Legislature, for a performance audit.

The Legislative Audit Division’s report was designed to answer two questions:

• Does hospital community benefit spending compare equitably to tax-related benefit relief and impact community health?
• Does the Montana Department of Public Health and Human Services (DPHHS) ensure hospitals provide charity care policies consistent with industry standards as required by law?

In 2016, Montana’s nonprofit hospitals’ estimated tax exemption was more than $146 million dollars. This number was calculated using Internal Revenue Service (IRS) documents and included federal corporate income tax, state corporate income tax, state property tax, local property tax, and state personal property tax liabilities.

Auditors also calculated nonprofit hospital community benefit spending in 2016 from self-reported information on IRS-990 Forms with Schedule H attachments. In 2016, the 47 nonprofit hospitals reported spending $257 million on community benefit activities. Ten hospitals’ community benefit spending was less than their estimated tax liability. Overall community benefit spending was reported as $110 million more than the estimated tax liability for hospitals.

The following is the total community benefit spending in Montana for 2016 broken down by Schedule H report categories:

¹ Financial support to organizations engaged in community benefit activities defined by the hospital.
² Payment for health services for patients unable to pay their bills.
³ Programs designed to improve community health. Also includes hospitals’ costs to complete their CHNAs every three years.
⁴ Funding for education resulting in a degree, certificate, or training to become a medical professional. Can also include medical residency opportunities.
⁵ Funding to offset costs of hospital services provided to patients enrolled in Medicaid.
⁶ Funding to offset other government health programs, such as Healthy Montana Kids, Montana’s CHIP program.
⁷ Funding for researcher salaries and activities that benefit the public.
⁸ Money spent on clinical services despite a financial loss for the hospital. Examples include neonatal intensive care, inpatient psychiatric care, emergency services, palliative care, and hospice.

The majority of community benefit spending – 87 percent, including subsidized services, Medicaid, and charity care – directly fund hospital services and raise concerns about hospital efficiency, particularly regarding their significant spending on subsidized services. Generally, hospitals report the charges, not actual costs, that inflate the value of these expenditures. The report also found that 4 percent of community benefit spending is on community health improvement. This finding is consistent with national research that has determined that only a small percentage of community benefit spending goes to community-based activities aimed at upstream drivers of health. Health status is largely affected by social determinants of health, therefore to improve community health, hospitals should direct spending to issues like food access, housing and education that improve population health.

Impact of Community Benefit Spending on Community Health

The Legislative Audit Division reviewed the CHNAs of all 47 nonprofit hospitals and identified the top four community health priorities across all hospitals:

1. Mental health, substance abuse and suicide;
2. Access to health care;
3. Healthy living, nutrition and exercise; and
4. Chronic disease prevention and management, diabetes and heart disease.

To determine the impact of community benefit spending on identified community health priorities, auditors used County Health Rankings, a collaboration between the University of Wisconsin Population Health Institute and Robert Wood Johnson Foundation, to provide county-level health factors. Previous analysis of community benefit spending has also used County Health Rankings to determine impact on community health.

County Heath Rankings’ measures used to determine community benefit impact include:

• Adult excessive drinking;
• Ratio of Population to Primary Care Physicians
• Adult obesity rates; and
• Prevalence of adult diabetes.

Data for each measure was examined for an available time period to determine if the county ranking increased or decreased. For all four measures, the change in health ranking across all counties found no clear indication that hospital community benefit spending had improved the health of Montanans.

Oversight of Charity Care Programs

Charity care, one type of community benefit spending, is free or reduced-cost health care provided to low-income patients. Montana Law requires hospitals to have “a charity care policy consistent with industry standards applicable to the area the facility serves and the tax status of the hospital.” Only 9 of Montana’s 47 nonprofit hospitals fall under this requirement, the other 38 are critical access hospitals (CAHs).

Spending on charity care varies widely between hospitals, ranging from 1 percent to 76 percent of community benefit spending. Charity care income eligibility limits also vary across the state’s nine large hospitals.

The audit determined that DPHHS does not review hospital charity care policies as required by state law. DPHHS primarily regulates hospitals for quality and relies on self-attestation for their compliance with state law for licensing. Montana law also does not define charity care spending or eligibility.

Recommendations

Montana’s Legislative Audit Division made the following recommendations:

1. The state legislature should enact laws defining reporting expectations for community benefit spending, and its impact on community health. The legislature should also identify the state government entity responsible for reviewing community benefit spending.
2. Montana DPHHS should define spending and eligibility expectations related to charity care and establish an oversight and review process consistent with industry standards.

Montana DPHHS concurred with the second recommendation, but did not comment on the first. After the report’s presentation, some legislators expressed interest in further defining community benefit and charity care provisions in the state.

States Can Provide Guidance on Charity Care and Community Benefit Spending

Findings and recommendations from this report are not unique to Montana. In 2011, hospitals benefited from $24.6 billion in tax exemptions, yet community benefit spending remained flat between 2011 and 2017. Many states do not currently regulate hospital charity care or community benefit spending. However, some states have laws designed to increase accountability for charity care and community benefit spending. For example:

• In Connecticut, nonprofit hospitals must direct their community benefit spending toward identified CHNA needs and State Health Improvement Plan goals.
• Maryland law requires its Health Services Cost Review Commission to establish a Community Benefit Reporting Workgroup. The workgroup must adopt regulations for nonprofit hospital reporting of community improvement activities. Additionally, nonprofit hospitals are required to report their community benefit initiatives and associated costs.
• Oregon requires nonprofit hospitals to provide assistance to patients with incomes up to 400 percent of the federal poverty level (FPL). The Oregon Health Authority also establishes minimums for community benefit spending by hospitals
• In Washington State, patients with incomes between 100 and 200 percent of FPL qualify for discounted care.

The National Academy for State Health Policy (NASHP) regularly convenes a Community Benefit Workgroup and will continue to provide technical assistance to states and track state policies related to accountability for community benefit spending and reporting requirements. Learn more at NASHP’s Resources to Help States Maximize their Hospitals’ Community Benefit Investments.

Support for this work was provided by the Robert Wood Johnson Foundation. The views expressed here do not necessarily reflect the views of the foundation.