Community Benefit Analysis

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Federal tax-exemption for charitable organizations has been in existence since the beginning of federal income tax law. This exemption is based on the principle that the federal government’s loss of tax revenue is equivalent to the relief of financial burdens charitable organizations provide that would otherwise have to be supported by public funds. Nonprofit hospitals are able to qualify for federal tax-exemption under section 501(c)(3) of the Internal Revenue Code because the Internal Revenue Service (IRS) has recognized the promotion of health for the benefit of the community, where medical assistance is afforded to the poor or where medical research is promoted, as a charitable purpose. (U.S. Government Accountability Office, 2008) Thus, not all hospitals are considered charitable organizations, creating a distinction between for-profit facilities and nonprofit facilities. Two distinguishing factors of nonprofit hospitals is that they must be organized and operate in such a manner that promotes health while ensuring that no part of their net earnings benefit private individuals. (U.S. Government Accountability Office, 2008)
All federally tax-exempt organizations are required to report their financial data annually to the IRS via Form 990. There are many schedules associated with Form 990, however the one specifically required for hospitals and related to community benefit activities is Schedule H. (Somerville, 2012) Community benefit as related to hospitals is defined by The Hilltop Institute, a non-partisan health research organization, as “initiatives and activities undertaken by nonprofit hospitals to improve health in the communities they serve.” (The Hilltop Institute, 2013b) Community benefit activities not only serve as a way for nonprofit hospitals to carry out their charitable mission, but it also serves as justification for tax-exempt status as defined by the IRS. Federal tax exemption requirements specific to nonprofit hospitals did not exist until 1956, when the IRS issued a ruling which stated a hospital could qualify as a tax-exempt charitable organization if it operated, among other things, for those not able to pay for the services rendered and not exclusively for those who were able and expected to pay. In 1969, the IRS established broader standards for nonprofit hospital tax-exemption status based on the extent to which these hospitals provide community benefit to the communities they serve. (Somerville, 2012) From 1969 to the implementation of the Patient Protection and Affordable Care Act (ACA) in 2010, there were some attempts to change this policy, however these attempts largely failed. Prior to the implementation of the ACA, community benefit activities included providing free and discounted care to uninsured and low-income patients, reimbursement shortfalls associated with participation in Medicaid programs, activities to promote population health improvement, programs to increase access to care, medical research,...

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