Community Benefit as a Tool for Institutional Reform
The preceding chapters provide the evidence and justification for definitive action by health professions education and training institutions to increase the diversity of the health-care workforce. A key question is whether community benefit can be used as a tool to frame the responsibility of these institutions to play a role in responding to major societal imperatives. This chapter reviews the historical and legal origins of community benefit, the evolution of policies and practices, and the potential application to health professions education and training institutions.
HISTORICAL ORIGINS AND LEGAL ANTECEDENTS
Community benefit is a legal term that applies to charitable activities that benefit the community as a whole. The term grows out of an English common law concept, articulated in a 1891 legal decision that defined four types of charitable organizations: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community.1 The outlines of this framework were adopted into U.S. law with the passage of the first federal taxation act in 1894.2 Although this law was ruled unconstitutional3 with the ratification of the 16th Amendment4 and passage of Congressional
legislation in 19135 allowing for federal personal and corporate income taxation, the charitable trust framework providing for income tax exemption for qualifying eleemosynary organizations (nonprofits that served “religious, charitable, scientific, literary, or educational purposes”)6 was adopted and maintained in every update of the tax code since the original ruling.
In this era of the advent of corporate income taxation and accompanying tax exemption in the United States, there also arose an accompanying effort to establish a more uniform regulatory structure for the formation of nonprofit organizations. While the size of the nonprofit sector was relatively small at this point in U.S. history, legislators also recognized a need for a more uniform process to determine which organizations qualified for tax exemption and the extent of their tax preferred status. This became increasingly important in the twentieth century, as the nonprofit sector entered a period of dramatic growth.
A major factor in this trend was the emergence of nonprofits that derived the majority of their income from the sale of personal services. Chief among these types of organizations were voluntary hospitals. By 1910, there were approximately 4,000 such institutions in the United States (Stevens, 1982). Rapid advances in medical technology during the 1930s and 1940s transformed the hospital into a provider of highly sophisticated services. The modern hospital bore little resemblance to the almshouses of the eighteenth and nineteenth centuries, which had a limited role to provide free custodial care to poor people. The hospital now operated fully in the marketplace, charging fees for an increasing array of costly services. Services for the poor were limited to what could be covered by a combination of donations, public sector contracts, and surplus revenue from fees charged to insured populations (Stevens, 1982).
By 1956, concern about medical care for the poor contributed to the issuance of IRS Revenue Ruling 56-185, which established explicit “relief of poverty” criteria for hospitals to qualify for tax exemption as 501(c)(3) nonprofit organizations.7 While the ruling included language that acknowledged the practical limits to the volume of charitable services that could be provided by nonprofit hospitals,8 only services to the poor would qualify the organization for tax exemption.
The relief of poverty interpretation of charity remained the standard for nonprofit hospitals until the issuance of IRS Revenue Ruling 69-545 in
1969.9 This ruling modified the criteria of 56-185 to remove the requirement to provide services for the poor, and identified the promotion of health (i.e., community benefit) as a charitable purpose. In promulgating this alternative standard for granting tax exemption to hospitals, the IRS created a controversy that has now lasted over 30 years over the issue of what exactly is expected of a nonprofit hospital to meet the “community benefit standard.”
It is important to note that this ruling was issued 4 years after the passage of the Medicare/Medicaid Act of 1965. Some have suggested that these events contributed to an impression among government officials that problems of access for the medically indigent would be solved in the near future, and hence it would be appropriate to broaden the criteria for charitable purposes (Fox and Schaffer, 1991).
In the 1970s, major changes in health-care financing and ownership contributed to increased scrutiny and the withdrawal of some privileges for nonprofit hospitals. Rising costs, application of federal cost-containment measures, expansion in the number of investor-owned hospitals, growing numbers of medically indigent, and two economic recessions contributed to an amplification of competitive behavior among hospitals. In the public sector, local governments were faced with a reduction in federal and state support at the same time they were confronted with significant increases in social safety net costs. In some cases, these pressures led to legal actions that challenged the tax exemption of individual institutions. The most notable of these occurred in 1985 with Utah County v. Intermountain Health Care.10
At the federal level, a series of regulatory actions were taken in the 1970s and 1980s to withdraw privileges from nonprofit organizations. Notable examples include the elimination of exemption from federal labor law,11 elimination of the exemption to pay Social Security taxes (with the exception of employees of schools, colleges, and universities),12 and clarification that there was no nonprofit health-care exception under the antitrust laws.13 Federal action was also taken against specific classes of nonprofit
organizations. The 1986 Tax Reform Act eliminated tax exemption for life and health insurance companies.14 It has been suggested that these actions were driven by substantial growth in the number of commercial nonprofits and observations of their operations in the marketplace (Hansmann, 1989).
The community benefit standard articulated in IRS Revenue Ruling 69-545 was reaffirmed with the issuance of IRS Revenue Ruling 83-157 in 1983. Revenue Ruling 83-157 provided some clarification of the “promotion of health” language in 69-545, indicating that the class of beneficiaries “must be sufficiently large … so that the community as a whole benefits.”15 The only significant amendment to 69-545 was an easing of the emergency room requirement. Ruling 83-157 indicated “nonprofit hospitals are not required to operate an emergency room where a state or local health planning agency has found that this would unnecessarily duplicate emergency services and facilities that are adequately provided by another medical institution in the community.”16
The community benefit standard for nonprofit organizations, established with 69-545 and reaffirmed with 83-157, provided an important backdrop for the U.S. Supreme Court’s 1983 decision in Bob Jones University v. the United States.17 In that case, the Court was asked to rule on a challenge to the tax-exempt status of Bob Jones University because of its racially discriminatory policies. The university denied admission to applicants who were in an interracial marriage or known to advocate interracial dating. While the IRS Revenue Rulings were intended to address the specific obligations of nonprofit hospitals, the Court determined that the obligation to confer a public benefit by not being in violation of public policy was applicable to an educational organization as well—and for that matter to all 501(c)(3) organizations. Accordingly, the Court found that that the policy of overt racial discrimination at Bob Jones University vitiated its eligibility for income tax exemption. The importance of the ruling is that it at least suggests that all tax-exempt organizations have certain public policy responsibilities that, if left unfulfilled, can place them at risk of losing some important privileges that government can confer.
Debate over the charitable obligations of nonprofit hospitals entered the federal policy arena in 1991 with the introduction of two bills in the House of Representatives. Rep. Edward Roybal (CA) introduced HR 790,
and Rep. Brian Donnelly (MA) introduced HR 1372.18 Both bills sought to establish minimal financial thresholds for a combination of charity care and “qualified” community benefit activities, and both included substantial penalties for noncompliance. While neither bill made it to the floor of the House for a vote, the scope of issues raised in public hearings conveyed a strong sense of concern among policy makers about the market behavior of nonprofit hospitals. Both bills faced strong opposition from congressional opponents, industry representatives, and the George H.W. Bush administration.
By the time Roybal and Donnelly introduced their bills at the federal level, two states had already taken action. Section 2803-1 of the New York Public Health Law was adopted as part of legislation passed in 1990 and requires the development and implementation of “community service plans” by nonprofit hospitals. Requirements include an annual review of the hospital mission statement, publication of hospital assets and liabilities, an assessment of community needs and hospital strategies to address them, and the solicitation of input from community stakeholders.19
In the same year, the Utah State Tax Commission issued a set of formal guidelines for nonprofit hospitals and nursing homes that included a requirement for a minimum financial threshold of contributions that exceed the annual property tax liability of each facility.20 Categories of sanctioned contributions included care to the medically indigent, community education and service, medical discounts, and donations of time and money. These legal requirements were a direct outgrowth of the 1985 challenge to the tax exemption of Intermountain Healthcare.
The initial ruling by the Utah Supreme Court was notable in that in interpreting its State Constitution, it rejected the community benefit standard in favor of the more narrow “relief of poverty” interpretation of charity, viewing community benefit activities as “any of countless private enterprises might provide”21 (p. 265). The rejection of the community benefit standard was also based on the contention that it “entangles the state in the impossible task of valuing the relative contributions of organi-
zations in the community.22 The court enacted a set of strict standards consistent with the more narrow interpretation, which were reversed less than a year later, and the community benefit standard was codified in the 1990 State Tax Commission guidelines.
The New York and Utah legal requirements placed upon nonprofit health-care providers reflect two alternative approaches that have marked subsequent state actions in this arena: a general reporting requirement (NY) and the establishment of a minimum financial threshold (UT). Between 1990 and 2001, a total of 11 states implemented some form of legal mechanism to increase the accountability of nonprofit health care providers. Eight of the eleven (CA–1994,23 ID–1999,24 IN–1994,25 MD–2001,26 MA–1994 [Harshbarger and MA Attorney General’s Office, 1994], NH–2000,27 NY–1990, WV–1990 28 ) took the general reporting requirement approach; three (PA–1997,29 TX–1993,30 UT–1990) took the minimum financial threshold approach.
Eight of the eleven states also require community assessments to identify local unmet needs; three do not (NY [limited to consultation with community members], PA, WV). Six of the eleven states require solicitation of community input in the development of community benefit plans; one state suggests it as an option (MD) and four do not address the issue (ID, PA, UT, WV). Five of the eleven states call for a review of organizational mission statements to reflect a commitment to address community health needs (CA, IN, MA, NY, TX); two require submittal of existing mission statements (MD, NH); and four do not address the issue (ID, PA, UT, WV). Finally, eight of the eleven states specifically identify unreimbursed costs of health professional training and research as reportable community benefit activities; three do not (ID, MD, WV).
Among the 11 states, there are a few unique characteristics worth noting. In Massachusetts, the state mechanism is a set of voluntary guidelines promulgated by the Office of the Attorney General, rather than a statute. In addition, a parallel set of voluntary guidelines was developed for
health maintenance organizations (HMOs) (Harshbarger and Massachusetts Attorney General’s Office, 1996). These guidelines are particularly notable in that they apply to all HMOs, both nonprofit and investor-owned. The basic reasoning provided by the Attorney General is that “all HMOs share responsibility for the health care needs of medically-underserved Massachusetts residents” (Harshbarger and Massachusetts Attorney General’s Office, 1998).
In three states, the statutes apply to other nonprofit organizations in addition to hospitals. As noted previously, Utah’s guidelines also apply to nursing homes, and New Hampshire’s law applies to all health-care charitable trusts. Pennsylvania’s statute applies to “institutions of purely public charity,” which is general language drawn from their state constitution. While this term has contributed to uncertainty about the scope of application, key elements in the statute suggest that major providers of health-care services (i.e., hospitals) are the central focus of attention. Perhaps the most unusual element of Pennsylvania’s statute is an option for applicable institutions to fulfill their charitable obligations by making payments in lieu of taxes (PILOTs) to government agencies, in essence, to pay property tax revenues that had been exempted. To encourage this practice, the state offers up to 350 percent credit for such payments, depending upon the size of the contribution in relation to annual revenues.
The most recent federal regulatory action in the community benefit arena came in March 2001 with the issuance of an IRS Field Service Advice Memorandum.31 The advisory reviews case law in the period since IRS Revenue Ruling 69-545 and offers two significant conclusions. First, it indicates that charity care is an important part of a hospital’s community benefit contributions, beyond simply the operation of an emergency room. Second, it indicates that it is insufficient simply to state that hospitals have established policies that ensure access for the medically indigent; that a hospital “must show that it actually provided significant health services to the indigent.”32 This action provided validation of recent efforts by consumer advocates to increase the volume of charity care provided by nonprofit hospitals, particularly in states with high numbers of medically indigent.
The actions taken by legislators, regulators, and the courts over the course of the last half-century reflect a clear inclination to respond to changing societal imperatives and emerging trends in organizational behavior. The most significant societal imperative driving actions related to hos-
pitals is the persistent and system-wide problem of access to care for the uninsured. This problem is exacerbated by growing fiscal constraints on safety net funding in the public sector, downward pressures on reimbursement among health-care providers in the private sector, and rapid increases in the cost of care.
At different points in time, promising efforts to improve access for the medically indigent have led to an emphasis on a broader role for hospitals to promote health in local communities. Rising costs have also led some hospitals to focus on strategies to address the causes of persistent health problems in an effort to reduce demand for high-cost medical care among medically indigent populations. While this reflects an appropriate interest in a more cost-effective and sustainable approach to health improvement, near-term pressure to increase the volume of charity care has made it difficult for hospitals to expand investment in this arena.
Two major trends in organizational behavior have served as drivers for regulatory activism: nonprofit hospital closures and/or conversions to investor-owned facilities, and periodic reports of institutional practices that are inconsistent with public expectations. With conversions, concerns about the loss of public assets, reduced access for the medically indigent, and a decline in support for community health initiatives have led some states (e.g., CA Assembly Bill 3101,33 RI Hospital Conversion Act of 199734) to pass conversion statutes that use community benefit principles to determine what responsibilities should be maintained by an investor-owned purchaser of a nonprofit provider or HMO. Similar concerns are raised in transactions among nonprofit hospitals. In one case, a proposed merger between two nonprofit hospitals in New Hampshire was challenged over concerns about the loss of essential services (New Hampshire Attorney General’s Office, 1998). In Michigan, the FTC imposed a Consent Decree in 1996 as a condition for a merger of two nonprofit hospitals that limited price increases and established an annual minimum financial threshold for community benefit contributions.35
Examples of institutional practices that have provided the impetus for regulatory activism range from aggressive bill collections among medically indigent populations to the use of surplus revenues for purposes other than improving the quality of services and facilities. In most cases, however, the core issue is the net volume of quantifiable charitable contributions pro-
vided by an organization. In a number of states, concerns about the behavior of one organization can provide the impetus for regulatory actions that impact the entire field. The community benefit statutes in Idaho, Texas, and Utah were all outgrowths of challenges to the tax-exemption of individual nonprofit providers.
The next section provides an overview of the implementation of public and private sector community benefit initiatives and explores the evolution nonprofit health care organization practices during the last decade.
EVOLUTION OF POLICIES AND PRACTICES
The implementation of state community benefit initiatives provides important lessons for the potential application of community benefit principles to institutions engaged in health professions education and training. Insights can also be gleaned from the implementation of private sector initiatives that have sought to enhance the community benefit practices of nonprofit hospitals. This section highlights key lessons from experience to date and explores the evolution in the practices of nonprofit health-care organizations during the last decade.
Implementation of State Initiatives
As indicated in the preceding section, states have taken two basic approaches in the design of community benefit initiatives: the establishment of a general reporting requirement that outlines steps to plan, implement, and document community benefit contributions; or the establishment of specific minimum financial thresholds. The following discussion will explore common and distinctive characteristics in the implementation of both approaches.
Perhaps the most common characteristic among all state initiatives is a failure to allocate sufficient resources to the state agency responsible for monitoring compliance. The net effect is that for states with general reporting requirements, initial concerns among nonprofit health-care providers about the quality and veracity of documentation are gradually eroded by knowledge that reports are filed with minimal review. Moreover, any effort to conduct a systematic review is confounded by a lack of uniformity in documentation. A review of reports from multiple states confirms that there is profound variation in the quality and specificity of reporting. This variation makes it impossible to conduct a comparative analysis of performance. The only alternative would be a detailed audit of individual reports, an approach that would be highly resource-intensive and infeasible, given the paucity of resources.
Some state agencies have managed to secure additional resources on a
temporary basis to enhance monitoring capability and to facilitate increased awareness among nonprofit health-care providers. California’s Office of Statewide Health Planning and Development (OSHPD) conducted a series of workshops and site visits in the first few years following the passage of Senate Bill 697 and produced a report that summarized findings from a general review of reports.36 A state advisory committee was also formed to support the implementation of the statute. The state legislature provided a small pool of funds in 1999 to support the enhancement of OSHPD’s monitoring capacity but withdrew those funds the following year as part of a general cost-saving measure in state government. In a recent survey of nonprofit hospital community benefit practices in California, respondents identified a lack of clarity in the current legislation on the reporting process as a significant challenge (Barnett, 2002). To date, OSHPD staff are limited in their ability to provide specific guidance beyond the current language in the statute, since the law prohibits the promulgation of specific standards without direct action by the California legislature.37
In Massachusetts, the Office of the Attorney General recently completed a multiyear process to develop uniform reporting guidelines and establish a searchable website for posting of community benefit reports. This was made possible by a combination of proceeds from class action insurance settlements and private foundation support.38 While the guidelines lack the specificity needed for a reliable comparative analysis of performance in quantitative terms, the searchable function provides a rich opportunity for qualitative analysis. As public competence in the use of Internet technology increases, access to detailed information by a full spectrum of stakeholders offers significant potential to increase local accountability.
In New Hampshire, the enactment of SB 69 in January 2000 was accompanied by the parallel funding of a statewide health planning process by the state legislature.39 The health planning process focused primarily on the assessment of health-care needs and the development of strategies to increase access to health care, but it also included funding for a series of
workshops to increase understanding of community benefit requirements associated with New Hampshire’s statute. In addition, the state Department of Health and Human Services and the Office of the New Hampshire Attorney General secured funding from a private foundation40 to conduct an evaluation of first-year report filings and to hold a state conference to highlight exemplary practices. Findings from the evaluation are consistent with experience in other states; there are numerous examples of promising programs, but substantial variability in the quality and specificity of reporting make it impossible to conduct a reliable comparative analysis of performance. As is the case with California’s community benefit statute, further action is required by the state legislature in order to promulgate uniform guidelines for reporting.41
In states with minimum financial thresholds (PA, TX, UT), monitoring is a less challenging prospect, but experience to date suggests that compliance with requirements has not yielded the intended outcome, that is, improved access for medically indigent populations. Two predictable trends have emerged. First, hospitals have devoted increased attention to the development of sophisticated accounting methods to maximize the compilation of contributions. Second, there has been a de-emphasis on more proactive approaches to address persistent health problems in partnership with local community stakeholders. The first trend presents a challenge for state agencies in determining whether specific elements of reported contributions are consistent with the letter and intent of the statute. The second trend raises concerns that community hospitals may be moving toward a more inward focus, limiting the allocation of charitable resources to the provision of costly emergency and inpatient care for what are often preventable illnesses among the medically indigent populations.
Until recently, the implementation of community benefit statutes at the state level has been a relatively benign process with submissions of annual reports and a cursory review by state monitoring agencies. Federal funding of state programs to increase coverage for children and families in the 1990s produced measurable gains42 and may have reduced pressure for
further action in the state policy arena. In the last three years, however, rising costs, job losses, and the general economic downturn have contributed to a steady increase in the number of uninsured and underinsured people. Attention is once again turning to nonprofit hospitals as a resource to fill the growing gaps in the social safety net. Consumer advocates are applying pressure on state policy makers to act, and some have acquired new tools to conduct independent analyses of nonprofit hospital charitable contributions and overall expenditures.
Given the current fiscal crisis in many states, passage of a community benefit statute with minimum financial thresholds may be viewed by some policy makers as a low-risk alternative to taking on the problem of access to health care in a more systematic manner. A coalition of consumer advocates and organized labor groups recently collaborated with policy makers in California to propose minimum financial thresholds of charity care for nonprofit hospitals. While the initial effort was unsuccessful, a similar proposal is expected in the next legislative session.
There is also evidence that state legislators may be moving in the direction of prescribing the specific content focus of charitable contributions. A bill passed in New Hampshire in 2002 established a study committee that explores strategies to increase the number of physician residents in medically underserved areas (MUAs) in the northern part of the state and includes the consideration of securing funding from health-care charitable trusts as a component of their community benefit responsibility.43 Continued fiscal pressure and growing numbers of medically indigent persons suggest that other states will consider more prescriptive approaches to community benefit in the foreseeable future.
Private Sector Initiatives
Two national demonstrations funded by the W.K. Kellogg Foundation in the last 15 years focused on increasing the accountability of nonprofit hospitals and encouraging the engagement of community stakeholders to address local unmet health needs. The Hospital Community Benefit Standards Program (HCBSP) ran from 1989 to 1992 and was administered by the Robert F. Wagner Graduate School of Public Services at New York University. The primary goal of the initiative was to recognize hospitals committed to improve community health, and to support the enhancement of their efforts. Forty-nine hospitals were selected from a pool of 331
applicants. Participants were challenged to meet a set of specific standards that demonstrated their commitment to play an ongoing role in addressing health problems in local communities and participated in a survey at the end of the demonstration to assess their performance.
The second national demonstration was the Community Care Network Demonstration (CCN), which ran from 1996 to 2000, and was administered by the Health Research and Educational Trust of the American Hospital Association. Twenty-five local partnerships of hospitals and local community partners were selected from a pool of over 300 applicants to develop and implement a series of community projects and institutional reforms. Both HCBSP and CCN provided valuable insights into alternative approaches to address persistent health problems in local communities. They also provided insights into the challenges associated with aligning institutional governance, management, and operations to ensure long-term commitment and to facilitate the optimal use of charitable resources. The Catholic Health Association of the United States (CHA) and VHA (formerly Voluntary Hospitals of America) have provided ongoing leadership by authoring publications and sponsoring conferences and workshops over the last two decades. Among the most notable publications was the Social Accountability Budget (SAB) (Trocchio et al., 1989), a comprehensive manual for planning and implementing community benefit programs activities in local communities. CHA and VHA collaborated to develop an electronic software package44 based on SAB for the documentation of program activities that is currently used by over 800 hospitals nationwide.
A study published by the Public Health Institute in 1997 outlined a strategy for planning, implementing, and evaluating community benefit program activities and offered a conceptual framework for community benefit that provides insights into public expectations associated with the exemption of local, state, and federal taxes for nonprofit institutions (Barnett, 1997). The Public Trust Model outlines six public expectations associated with tax exemption, including:
Redistributive intent—nonprofit health-care organizations are exempted from tax liabilities with the expectation that they will focus a substantial portion of their charitable contributions in proximal communities where there is a disproportionate volume of unmet health-related needs.
Assumption of Special Skills—nonprofit health-care organizations are expected to bring special skills and capacity to address health-related problems in their immediate geographic locale.
Protection from Political Influence—exemption from taxation reflects a desire to shield those revenues from the exigencies of the political process and ensure that they are carefully allocated to address unmet health needs.
Collaborative governance—decision making regarding the use of charitable resources should reflect the scope of interests, knowledge, and priorities of local communities.
Cost-effectiveness—the loss of tax revenues associated with exemption should be substantially offset by surplus value generated by private sector fulfillment of a public responsibility.
Pluralism—tax exemption encourages a more pluralistic expression of charity than would be accomplished by an expansion of the public sector.
A study by Schlesinger and colleagues (1998) offers a typology of community benefit that applies more broadly to all types of health-care institutions (including health plans) and highlights four different, but overlapping, perspectives that inform the debate regarding the roles and obligations of nonprofit health-care institutions. The Legal/Historical perspective focuses on the historical responsibilities of nonprofit hospitals, which provides the basis for current law (with exceptions cited previously in UT, NH, and MA). The Market-Failures perspective focuses on the costs and benefits of medical care experienced by communities and society at large. The Community Health perspective focuses on strategies to develop evidence-based linkages between medical services and efforts to address the causes of health problems. The Healthy Community perspective focuses on strategies to strengthen the social institutions that influence health and quality of life in local communities.
The Legal/Historical perspective draws it strength from the public expectations as outlined in the Public Trust Model and is reinforced by observations associated with the Market-Failures perspective (i.e., that market failures in American health-care financing result in negative externalities). While these expectations and the negative externalities associated with a market-based system of health-care financing have been applied primarily to nonprofit hospitals, there is at least the basis in principle for a broader application of similar societal expectations to other institutions that receive any form of public funding.
The Community Health perspective draws its strength from the proposition that the demand for high-cost medical care can be substantially reduced by targeted provision of preventive services and the promotion of health in local communities. For nonprofit hospitals, this approach often represents an effort to reduce hospitalizations and emergency room utilization for preventable illnesses.
Finally, the Healthy Communities perspective envisions diverse stakeholders (including nonprofit, public, and investor-owned organizations) as ongoing partners in efforts to create a local environment that will support and sustain optimal health and quality of life. Healthy Communities is an outgrowth of the Healthy Cities concept developed by Hancock and Duhl (1988) and has been implemented in cities throughout the world by the World Health Organization since 1988. This perspective significantly broadens the scope of contributions that may be viewed as community benefits to encompass activities such as economic development, neighborhood revitalization, and building social capital. While nonprofit institutions may be viewed as having special responsibilities, accountability for improved health and quality of life is shared among all local stakeholders.
As noted previously, there have been a variety of studies examining the community benefit obligations of nonprofit hospitals, ranging from quantitative comparisons of the volume of charity medical care provided by nonprofit and investor-owned hospitals (Kane, 1994; Sofaer et al., 1990; Herzlinger and Krasker, 1987; Norton and Staiger, 1994; Pattison and Katz, 1990; Nicholson et al., 2000) to more qualitative analyses of exemplary practices (Schlesinger et al., 1996; Shortell et al., 1995; Rundall, 1994). In the aggregate, these studies highlight the fact that there is significant variation in the charitable behavior of nonprofit hospitals that is driven by a range of factors, including, but not limited, to the following:
Local demographics and level and form of health-care coverage
Level of competition with other providers
Local/regional market penetration
Availability of public sector safety net services
Reimbursement rates from public and private sector payers
Links, leverage, and support from other facilities
These and other factors play a major role in determining the relative ability of nonprofit hospitals to generate surplus revenues that can be directed toward charitable purposes. For this reason, it is difficult, if not inappropriate, to judge the charitable intent of nonprofit hospitals (and other institutions that receive public funding) based upon a single standard such as the volume of free medical care provided to medically indigent populations. This understanding is crucial in the evolution of state community benefit statutes that permit the documentation of a broad spectrum of activities viewed as addressing priority concerns in local communities, as well as societal imperatives.
As noted previously, the charitable behavior of nonprofit health-care institutions is significantly influenced by historical and situational factors at the local level, as well as by major trends at the societal level (e.g., number of uninsured people, changes in reimbursement structures), and actions in the regulatory arena. While variations in both requirements and documentation have made it impossible to evaluate the impact of state community benefit statutes in any systematic manner, observation suggests the emergence of some common strengths and areas for improvement in organizational practices.
In the eight states that require nonprofit hospitals to conduct periodic needs assessments, anecdotal information suggests that hospitals and local partners acquire increased knowledge of the scope of local unmet needs and an increased understanding of linkages between health problems and a range of causal factors. This knowledge provides the basis for the design of more comprehensive approaches to health improvement that may yield sustainable impacts in the aggregate. Anecdotal information also suggests that there has been an increase in the engagement of diverse community stakeholders, in the best situations resulting in the leveraging of scarce local resources. A recent study of hospital community benefit practices in California (Rundall, 1994) identified four common elements among exemplary programs:
Clear targeting of community benefit activities to serve communities with disproportionate unmet health-related needs
Meaningful engagement of diverse community stakeholders
Strategic allocation of charitable resources to build on existing community assets
Alignment of organizational governance, management, and operational functions with the charitable mission of the organization
In the best cases, nonprofit hospitals have increased the diversity of their governance structures to reflect more clearly the diversity of local communities, established interdepartmental performance measures to increase the accountability of leadership and staff, hired dedicated staff with appropriate competencies to support an ongoing process of quality improvement, and shielded community benefit decision-making processes from marketing and business development imperatives.
Areas for Improvement
There are a plethora of examples across the nation where nonprofit hospitals have demonstrated a strong commitment to fulfill their charitable obligations. At the same time, there are a number of areas where greater attention and improvement are needed. Many nonprofit hospitals lack the internal infrastructure and competencies to design, implement, and monitor community benefit activities. Unfortunately, increasing financial pressures have led many hospitals to reduce dedicated staff support, undermining their ability to produce high-quality results. In addition, community benefit management in many hospitals is an isolated and marginal functional unit, lacking connections to senior leadership and/or organizational strategic planning processes. In this situation, staff turnover is high, program quality is compromised, and measurable impacts are absent.
The ability to demonstrate value and accountability in local communities is impeded by a lack of data at the subcounty level. Many hospitals are faced with the option of allocating substantial charitable resources to collect primary data in local communities or limiting their monitoring process to documenting the volume of inputs. Increased engagement of local public health agencies, colleges and universities, and other local stakeholders with special competencies is needed.
In summary, the charitable behavior of the best organizations provides valuable insights into potential contributions and roles that nonprofit hospitals, as well as other institutions, can play to address unmet needs at the local and societal level. Increasing public understanding of these potential benefits, roles, and expectations may yield substantial impact upon charitable practices and organizational behavior in general.
RELEVANCE TO HEALTH DISPARITIES AND HEALTH WORKFORCE DIVERSITY
Are there applicable laws or regulations—based on community benefit principles—that could function as “carrots” or “sticks” to better ensure that organizations such as teaching hospitals and colleges and universities would feel more obligated to advance key public policy goals tied to workforce diversity? More particularly, because the origins of the community benefit principles flow from the arena of income tax exemption, it is logical to first ask: Is there a legal obligation tied to the grant of tax-exempt status that obligates nonprofit hospitals, colleges, and universities to advance workforce diversity goals? The simple answer is probably not. Nevertheless, it is worthwhile to explore this question further and see where the legal precedents have taken us to date.
Applicability to Nonprofit Hospitals
In the hospital context, as noted previously, there is certainly a rich history supporting the notion that nonprofit hospitals are expected to meet community benefit standards as a quid pro quo for tax exemption. It is notable that teaching hospitals (hospitals that are centers of learning for physicians, nurses, and other allied health professionals) are expected to meet the same operational standard for tax exemption as those that are only involved in patient care. With the focus of this report on issues related to workforce diversity, an interesting issue arises regarding whether or not the formal educational activities of a teaching hospital are subject to scrutiny under a set of community benefit principles.
A review of Revenue Rulings 69-545 and 83-157 indicates no references to the educational mission or function of hospitals; their focus is on the operational characteristics of hospitals tied to patient care.45 Certainly, under the Internal Revenue Code, hospitals could not remain tax exempt while practicing overt racial discrimination tied to patient care or employment.46 However, absent such overt discrimination, even in the patient care context, there do not appear to be affirmative expectations that hospitals make their patient care environments more welcoming to persons of color in order to remain tax exempt. Even in the face of growing concern over health disparities confronting our nation, or in dealing with the reality of a more diverse patient populations, to date there has not been any hint that the grant of tax exemption will be tied to hospital efforts to address language barriers for non-English speaking patients,47 provide needed cultural competency training of staff, and/or recruit and retain a more diverse cadre of provider staff. While these efforts individually or collectively may be part of a hospital’s community benefits plan, from the operative Revenue Rulings as well as the limited case law in this area, it appears that no one factor is determinative of a hospital’s eligibility for tax exemption.48
If one wanted to find an opportunity to push the limits of the community benefit standard as applied to hospitals, one possibility would be to build on the initial step taken by the IRS in its 2001 IRS Field Service
Advisory Memorandum #200110030 (referenced previously) which arguably represents a first tentative step in the direction of revisiting the specificity of what hospitals must do to meet the expectations of the community benefit standard. While the IRS memorandum seems to do that with respect to charity care and related policies, it also suggests that the IRS could further try to add some specificity to a hospital’s “promotion of health” obligations by requiring it to address issues such as workforce diversity and racial and/or ethnic health disparities as a key factor to maintain taxexempt status. Establishing such explicit requirements, however, would represent a radical departure from the historical practices of the IRS in this arena.
Applicability to Colleges and Universities
Colleges and universities derive their tax-exempt status by qualifying under the category of “educational” as delineated in Section 501(c)(3) of the Internal Revenue Code. While the IRS has never established a general community benefit requirement tied to the operational test for qualifying educational organizations in determining eligibility for tax-exempt status, the ruling of the U.S. Supreme Court in its 1983 decision, Bob Jones,49 adopted a “public policy” test that applies to all 501(c)(3) organizations, including those that qualify under the category of “educational.”
Tying this to the health professions workforce diversity issue, it is possible to argue that if such diversity goals are found to be part of established public policy, then the failure of colleges and universities to make sufficient efforts in this regard through their admissions, retention, and related policies should jeopardize their tax-exempt status for being in violation of established “national public policy.” Admittedly, reading the Supreme Court’s decision in this way might be considered a significant reach from the original decision. As the Court itself noted in the decision, “… a declaration that a given institution is not ‘charitable’ should be made only where there can be no doubt that the activity involved is contrary to fundamental public policy.”
Accordingly, the question here centers on the issue of whether the overt failure of health professional schools in recent decades to enroll and graduate sufficient numbers of underrepresented minorities (URMs) represents an action (or omission) that is contrary to established or fundamental public policy. If so, then Bob Jones tells us that such organizations may be in jeopardy of losing their tax-exempt status and hence, more likely to be actually engaged in efforts to address health-care workforce diversity issues.
Another application of community benefit principles to colleges and universities, beyond the tax exemption context for nonprofits, is the issue of what expectations should be placed on governmentally sponsored institutions. These institutions receive the bulk of their revenues from state appropriations (U.S. Department of Education, 2002). Health professionals training schools based at these public institutions often receive significant appropriations from state governments. It would certainly seem to make sense to ask if these public institutions of higher education are meeting their “community benefit” expectations in advancing societal goals tied to healthcare workforce diversity. Such an expectation surely could be part of a state legislature’s quid pro quo for sending over significant taxpayer dollars to these public institutions.
PUBLIC POLICY OPTIONS: PRECEDENTS, OPPORTUNITIES, AND PITFALLS
From a public policy perspective, it is clear that health professionals training schools and hospital based training programs have made only limited progress in advancing workforce racial and ethnic diversity goals in the United States. Though community benefit principles offer an attractive framework for holding health professionals training programs and their institutional sponsors accountable for advancing goals tied to racial and ethnic diversity of their students and trainees, from a legal perspective, it is important that the principles be applied in the most effective venue. In that regard, while community benefit laws and associated public expectations have evolved out of a tax exemption context, it is reasonable to suggest that the most practical application of concepts for increased institutional accountability are outside of the tax exemption arena. Specifically, they are best applied in the accreditation world affecting health professionals training programs. Furthermore, for publicly sponsored colleges and universities, community benefit concepts might also be part of a scheme that in some way ties governmental subsidies for these public institutions of higher education to performance measures related to student and trainee diversity goals. These concepts apply for a number of reasons:
Legally, based on the relevant IRS Revenue Rulings, there is no current tax exempt status requirement that would necessitate either charitable teaching hospitals or private, nonprofit colleges and universities to make affirmative workforce diversity efforts in order to maintain taxexempt status. It would likely be too much of a stretch for the IRS (even if motivated to do so) to make such a regulatory change absent new Congressional legislation that modifies the language of 501(c)(3) of the IR Code. This is especially true with respect to colleges and universities, which, at present, have only the Bob Jones “public policy” test (as described above)
for their community benefit expectations attendant to their tax-exempt status.
Tax exemption is only a factor of importance to nonprofit organizations. For public teaching hospitals, colleges, and universities, a community benefit standard aimed at advancing racial and ethnic diversity tied to tax exemption would have no impact on such governmental organizations, as they derive their exempt status as being units of government. In fact, reliance upon tax exemption as a framework for accountability could have the consequence of placing more legal expectations for advancing diversity goals on private, nonprofit institutions than on institutions that receive direct governmental subsidies as public entities.
If tied to tax exemption, the failure of a program to advance diversity goals would lead to the entire organization losing its tax-exempt status. How should one handle a university where diversity goals were being achieved in a variety of schools but failed in the ones that are part of health professionals training? Under the tax code, while there are intermediate sanctions for certain prohibited transactions, failure to meet the overall operational test for community benefit would result in revocation of the entire organization’s tax-exempt status.
Accreditation is an oversight scheme that is attendant to all of the education programs that educate independently licensed health professionals. For some health professions (physician training, for example), there are distinct educational programs for different stages of professional training, each with its own separate accreditation program under a distinct sponsorship. Given the breadth and reach of the various accreditation programs and their ability to independently set standards based on high professional norms, it is a logical place to enforce a set of expectations tied to advancing diversity goals. In addition, the accreditation process often allows institutional individuality in how standards are met, thus encouraging creative approaches to meeting the underlying goals of the accreditation process. Such flexibility has some important advantages when approaching issues like racial and ethnic diversity.
While the issues are complex, it is the case that health professions schools and hospitals of all forms (i.e., nonprofit, investor-owned, and public) receive varying amounts of public resources, whether through tax deferrals, public third-party payments, or direct subsidies. This is especially true in health professions education, which is quite expensive and heavily subsidized for participating students and trainees (Chhabra, 1996). As discussed in Chapter 3, Medicare Graduate Medical Education (GME) provides a significant source of funding for the costs of educating health professionals, particularly physicians. Indirect funding, covering additional teaching costs associated with caring for Medicare patients, is also provided to academic health centers. In 1998, Medicare paid approximately $2 bil-
lion in direct payments and approximately $5 billion in indirect payments (COGME, 2000). In 2000, $260 million were provided for nursing and allied health programs (Medicare Payment Advisory Commission, 2001 as cited in IOM, 2003). In addition to Medicare funding, support for training is provided by the Health Resources and Services Administration (HRSA) and the National Institutes of Health (NIH). In 2002, approximately $400 million was provided by HRSA and about $650 million was provided by NIH to individuals (IOM, 2003; NIH, 2003). These public resources should come with an expectation that the institutions are responsible to societal imperatives. Community benefit offers insights into how these responsibilities can be framed and the scope of potential contributions. State legislatures or other bodies granting state taxpayer monies to these schools of higher learning rarely set policy quid pro quos related to the mission and activities of these higher education programs. There is certainly an opportunity for state government officials to be more explicit about their goals and expectations for higher education in the diversity arena. Such a mandate has periodically led to some focused and successful programs over the years. A very good example is the University of Illinois College of Medicine (Girotti, 1999).
SUMMARY AND RECOMMENDATIONS
This chapter of the report seeks to educate the public on an issue that has received limited attention outside of the nonprofit health-care arena. In the most basic sense, community benefit principles provide insights for the public expectations of both nonprofit health-care providers and institutions that train these providers. Just as nonprofit hospitals are expected to play a role in addressing priority unmet needs in local communities, health professions schools can appropriately be expected to play a direct role in responding to priority unmet health needs at the local and/or societal level. Specifically, we suggest that community benefit principles form a conceptual cornerstone by which accreditation organizations for health professional training programs and state governments can set expectations for the advancement of societal goals tied to racial and ethnic diversity of the healthcare workforce. The historical and legal antecedents outlined in the first section of this chapter validate the concept of a social contract. Moreover, they demonstrate that changes in social priorities justify periodic adjustments in public expectations and requirements. The Supreme Court in its recent decision in Grutter v. Bollinger et al.50 sent the message that, if
accomplished without fixed numerical quotas, such affirmative diversity efforts are permissible under the U.S. Constitution. We think that it is time for those entities that maintain significant leverage over health professionals schools and training programs to exercise those incentives.
The committee offers three core recommendations to encourage definitive action by academic medical centers and health professions education institutions in support of the societal imperative to increase the diversity of the health-care workforce. They include:
Recommendation 6-1: HPEI governing bodies should develop institutional objectives consistent with community benefit principles that support the goal of increasing health-care workforce diversity including, but not limited to (1) ease financial and non-financial obstacles to URM participation (redistributive intent), (2) increase involvement of diverse local stakeholders in key decision-making processes (collaborative governance), and (3) undertake initiatives that are responsive to local, regional, and societal imperatives (response to local needs) (see Recommendation 5-4).
Recommendation 6-2: Health professions accreditation institutions should explore the development of new standards that acknowledge and reinforce efforts by HPEIs to implement community benefit principles as they relate to increasing health-care workforce diversity.
Recommendation 6-3: HPEIs should develop a mechanism to inform the public of progress toward and outcomes of efforts to provide equal health care to minorities, reduce health disparities, and increase the diversity of the health-care workforce.
Recommendation 6-4: Private and public entities (e.g., federal, state, and local governments) should convene major community benefit stakeholders (e.g., community advocates, academic institutions, health-care providers), to inform them about community benefit standards and to build awareness that placing a priority on diversity and cultural competency programs is a societal expectation of all institutions that receive any form of public funding.
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