Was Internal Revenue Code Section 501(r) a Wake-Up Call for Tax-Exempt Hospitals to Focus on the Health of the Patient Population?

A Time magazine cover article estimated that the value of all tax exemptions given to hospitals by Federal, state and local authorities exceeds $80 billion a year. Many healthcare institutions have simply taken for granted that they will continue to receive tax exemptions, despite the fact that they have grown into large, multifaceted enterprises, often with financial interests in many for-profit initiatives. However, as government budgets have come under increasing pressure, many government entities are once again asking: Why do these institutions receive such large tax exemptions, and what contributions are they making to society in return?

It is important for tax-exempt healthcare institutions to recognize that they are under an increased level of scrutiny to demonstrate social responsibility. One tool that tax-exempt hospitals can use to demonstrate the validity of their tax exemption is the implementation of a Community Health Needs Assessment (CHNA), a report nonprofit hospitals are required to conduct by section 501(r) of the Internal Revenue Code. Failure to comply with section 501(r) can result in both fines and the potential loss of an institution’s tax-exempt status. Instead of viewing compliance with 501(r) as a cost of compliance, it should be seen as an opportunity to grow revenue through patient population management so that institutions can improve relationships with their communities, preserve their tax-exempt status and grow their bottom lines.

Developing a stronger CHNA requires a focus on managing the care of specific populations in the communities served, which in turn allows an institution to develop tools to identify those individuals who are more likely to require emergency room visits or expensive interventions. With this information, a hospital can help reduce inappropriate re-hospitalizations, prevent unnecessary admissions, provide more appropriate access to care and improve outcomes and the value of the care it delivers.

In order to develop a sound population management capability, institutions will need access to finance and data analytics, specialists with resources in clinical operations, and a keen understanding of the nuances of the regulatory environment. These components, leveraged effectively, may allow tax-exempt institutions to grow their market share while increasing revenue and margins which can, in turn, be reinvested.

Despite these benefits, it is often difficult to determine where to start. Here are some suggested steps for improving your CHNA:

1. Use an Outside Group to Conduct the CHNA

Healthcare organizations can capitalize on local university resources. For example, Akron Children’s Hospital, Akron General Medical Center and Summa Health System contracted Kent State University College of Public Health to study the needs of populations in the communities they serve. Topics addressed ranged from chronic illnesses and lifestyle factors to mental health and substance abuse. Input from community leaders and residents was instrumental in developing community health initiatives. As a result of the assessment, Children’s Hospital has begun developing a plan to help primary care doctors better identify young patients with asthma.

2. Increase Community Transparency

Chattanooga’s Hutcheson Medical personally and directly engaged its local community by conducting an online survey where residents were able to express their thoughts on health, nutrition and access to care. This direct feedback will allow the hospital to closely tailor its assessment and initiatives to the specific needs of residents.

3. Perform a “mock audit”

Determining areas of weakness – either financial or medical – can be enlightening for many institutions. It allows them to identify inefficiencies and reallocate resources to best serve their constituents before they catch the eye of the IRS , in turn helping the institution to maintain its exempt status.

We believe the sooner institutions embrace 501(r) as a tool for growth rather than as a cost of compliance, the more successful institutions will be going forward.

David Friend, MD, MBA and Patrick Pilch, CPA are Managing Directors with BDO Consulting and members of the Healthcare practice at BDO USA. They can be reached at dfriend@bdo.com and ppilch@bdo.com, respectively.