The Accountability of Nonprofit Hospitals: Lessons from Maryland's Community Benefit Reporting Requirements
Gray, Bradford H., Schlesinger, Mark, Inquiry
Under Internal Revenue Service requirements, nonprofit hospitals will begin filing new community, benefit reports in 2010. Maryland has had similar requirements since 2004. This paper, based on interviews at 20 hospitals, describes how Maryland's requirements affected hospitals and their activities. Increases in reported community benefit expenditures since the program began are due to both changes in activities and better data capture. Charity care accounts for one-third of community benefit dollars. A key distinction concerns whether hospitals take an accounting or managerial approach to community benefit. The Maryland experience suggests the issues that will arise when the national requirements are implemented.
A new era of accountability has begun for nonprofit organizations in the United States. Growing concerns culminated in 2008 when the Internal Revenue Service (IRS) adopted a major revision of its Form 990, the return that tax-exempt organizations must file annually. Health care has been a particular focus of criticism about nonprofit accountability, with some 20 states adopting reporting requirements in the past two decades for nonprofit hospitals (and, in some cases, other nonprofit health care organizations) and with the IRS establishing a specific reporting requirement for hospitals regarding their charitable activities. Hospitals will have to begin filing the new Schedule H in 2010, reporting on a defined set of community benefit expenditures including charity care.
Experience with similar reporting requirements at the state level may be useful in anticipating how hospitals will meet the new reporting requirement, what their reports may show, and what issues may arise. That is the premise of this paper.
The various new reporting requirements for hospitals have sprung from perceptions that some hospitals were insufficiently charitable, from hopes of increasing the ability of uninsured patients to obtain needed services, and, at a more general level, from the belief that more public information is needed about what these tax-exempt organizations are actually doing as charitable entities--that is, in language used by the IRS since a 1969 revenue ruling about nonprofit hospitals, what "community benefits" they provide.
Community benefit originally was defined by the IRS in terms of structures and policies (e.g., an emergency department open to the community). By contrast, state reporting requirements and the new IRS Schedule H focus on what hospitals are actually doing. A common limitation of states' reporting requirements has been a lack of clarity about what should be counted as a community benefit (U.S. Government Accountability Office 2008). In the absence of standardization regarding what activities should be included and how their value should be calculated, it has been difficult to use reported information to compare hospitals' community benefit expenditures against those of other hospitals, over time, or against some standard.
It is in this regard that the Maryland experience is of interest because for several years that state has required hospitals to report on community benefits, using a standardized set of categories and accounting rules. The reporting requirements are similar, though not identical, to the requirements of Schedule H.
Maryland Community Benefit Reporting Requirements
In 2001, Maryland enacted "An Act concerning Nonprofit Health Entity Accountability," which requires nonprofit hospitals to submit annual community benefit reports to the Health Services Cost Review Commission (HSCRC), the rate-setting agency in the state's unique all-payer hospital system. Defining community benefit as activities "intended to address community needs and priorities primarily through disease prevention and improvement of health status," the legislation gave the HSCRC responsibility for developing the actual reporting requirements. That agency worked with the Maryland Hospital Association and adopted reporting requirements based on guidelines developed by the Catholic Health Association and VHA, Inc., to standardize community benefit definitions to facilitate consistent reporting. (2)
Maryland's community benefit reporting requirements are designed to be both complete and standardized. The categories include community health services, health professional education, mission-driven health care services, research, financial contributions (made by the hospital), community-building activities, and charity care. Also included (as separate categories) are the operating costs of the community benefit programs and community benefit activities (not reported elsewhere) funded by hospital foundations. For most categories, hospitals are asked to report their staff hours, number of "encounters," direct costs, and indirect costs (using rates calculated by the HSCRC based on each hospital's financial report).
Hospitals also must report and deduct from the cost of each activity any offsetting revenues from fee-for-service charges or grant support. However, although hospitals' costs of charity care are built into the rates approved by the HSCRC--as are Medicare medical education payments--both charity care and graduate medical education costs are shown on the community benefit form because they are well established as forms of charitable activity.
Hospitals have been given detailed instructions (25 pages of text in 2006) regarding what should and should not be counted. For example, the cost of health promotion programs (e.g., smoking cessation) offered to the community can be counted, but similar programs offered as an employee benefit cannot. Costs associated with employees' service on community boards can be counted (as an in-kind contribution) if done on behalf of the hospital, but not otherwise. Instructions and the reporting requirements themselves have undergone several minor modifications in response to experience.
The reporting requirement began with fiscal year 2004, and hospital reports for all years are available on the HSCRC Web site, (3) along with summary reports for each year prepared by HSCRC staff.
Purpose and Methods
This paper is primarily concerned with the effects of Maryland's community benefit reporting requirement, including how hospitals have responded and how the community benefit requirement is viewed. In a separate paper, we use information from hospital reports to describe and analyze in more detail the forms and amounts of community benefit activity among Maryland's hospitals (Gray and Schlesinger forthcoming).
This paper is based on the community benefit reports of the state's 45 nonprofit acute care hospitals and on interviews with officials at 20 hospitals that were selected to reflect the state's diversity in size, region, type of community served (urban, suburban, rural), mission (teaching vs. nonteaching), system membership, and level of community benefit activity. Regarding this last dimension, five hospitals were selected from among the 10 reporting the highest percentage of community benefit expenditures in 2006, five were from among the lowest 10, five were chosen because of large changes in community benefit activity between 2004 and 2006, and five showed average, stable amounts between 2004 and 2006. (4) (Reports for 2007 became available only after most of the interviews were completed.)
The interviews, conducted by the first author between February and May 2008, consisted of 60 mostly open-ended questions, divided between a senior executive (CEO, CFO, or COO) and the person responsible for the community benefit report. Among the topics covered were: what hospitals had to do to respond to the requirement; how community benefit activity fits with the hospital's mission and strategic plans; the role of the hospital's governance structure in community benefit activities; changes resulting from the reporting requirement; strengths and weaknesses of the data reported by hospitals; and lessons derived from the first four years' experience. For analysis purposes, responses were grouped by topic in spreadsheets so that side-by-side comparisons could be made.
Hospitals' Initial Responses to the Reporting Requirement
To help hospitals prepare for the new reporting requirement, hospital and local public health officials were invited to several day-long workshops conducted by the non-profit Institute for Community Health in collaboration with the HSCRC, the Maryland Department of Health and Mental Hygiene, and the Maryland Hospital Association. The workshops, designed to help hospitals understand what was expected of them, featured national experts on needs assessments, reporting (Lyon Software), best practices, evaluation tools, and partnership building. People from nearly all hospitals and health departments attended at least one of these sessions: In addition, staff from the HSCRC responded to numerous speaking invitations from hospitals.
This training was important because to comply with the requirement, hospitals had to compile information that most had never seen before. This involved locating pertinent activities from throughout the hospital, determining whether they fit within the definitions of what should be counted, and inserting the information into a template created by the HSCRC. Catholic hospitals had the necessary internal reporting system in place because of the Catholic Health Association's policies. At other hospitals, officials used words such as "tedious," "frustrating," and "painful" to describe their hospital's early experience with the reporting requirement. Some say that these words to continue to apply.
An example helps convey the magnitude of what could be involved. At a 450-bed hospital with an average level of community benefit expenditures, an executive showed us a spreadsheet of information compiled for its current community benefit report. It included expense and offset information for 128 activities from 36 different departments. Included were: five programs in an adult day care center, 14 programs in the community health education department, two donation programs in the materials management department, 34 programs in perinatal education (e.g., basic baby care, dad's class, teen pregnancy class), 23 programs in a department focused on seniors, grocery store certificates in the pastoral care department, services in the palliative care department, health professional education expenses in several departments (both clinical and business), meals-on-wheels in the food and nutrition department, several programs in the diabetes education department, medications provided to low-income patients in the pharmacy department, transportation assistance expenses in the transport department, and fundraising expenses in the hospital's foundation. Even the credit and collections department was represented, having spent more than $1 million (direct costs) on financial counseling for uninsured patients. The executive told us that, even with five years' experience and state-of-the-art technology for capturing the information electronically, she suspects that not all reportable activities are being captured, in part because some people doing work that could count view themselves as merely doing their jobs.
Education in how to respond to the community benefit reporting requirements did not end after the initial set of workshops. An HSCRC …
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Publication information: Article title: The Accountability of Nonprofit Hospitals: Lessons from Maryland's Community Benefit Reporting Requirements. Contributors: Gray, Bradford H. - Author, Schlesinger, Mark - Author. Journal title: Inquiry. Volume: 46. Issue: 2 Publication date: Summer 2009. Page number: 122+. © Not available. COPYRIGHT 2009 Gale Group.
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