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It seems a simple proposition. The roughly 3,000 nonprofit hospitals in the United States receive tax-exempt status from the Internal Revenue Service. In return, they are expected to provide a “community benefit,” which could come in the form of providing financial assistance to patients, covering the cost of uncompensated care to the uninsured or supporting programs to connect underserved patients to the healthcare services they need.

The concept may be clear, but the question of how much nonprofit hospitals should be expected to invest in community benefits remains vague. There are no concrete rules set up by the IRS that require nonprofit hospitals to lay out their community benefit plans and expenditures and therefore justify their tax-exempt status. That lack of clarity is a problem addressed by Dr. Kelsey Owsley, who earned her PhD in Health Services Research from the Department of Health Systems, Management and Policy in the Colorado School of Public Health at the University of Colorado Anschutz Medical Campus. Owsley’s graduate dissertation examined the extent to which nonprofit hospitals invest their financial surpluses in community benefit programs, and she received the 2023 “Outstanding Dissertation Award” from AcademyHealth, which supports studies of how the healthcare system works and how to improve it.

AcademyHealth officially recognizes Owsley, who is now an assistant professor at the University of Arkansas for Medical Sciences’ Fay W. Boozman College of Public Health, at its 2023 Annual Research Meeting in June in Seattle.

Where is the benefit?

“Our hospitals and the healthcare system were built to serve our communities,” Owsley said. With a majority of hospitals claiming tax-exempt status, it is fair to ask them to define the specific benefits they will provide in return, she added.

“That is a question that communities and policymakers really have to think about,” Owsley said. “Studies have shown that many nonprofit hospitals are not providing the community benefit that justifies being tax-exempt.”

Owsley’s own study looked at two specific areas shown to improve hospitals’ financial status: acquiring other nonprofit hospitals and gaining savings from the 340B drug pricing program, which provides some hospitals with significant discounts on outpatient drugs. Did these savings result in more extensive spending to provide uncompensated care; fund research; cover unprofitable service lines, such as inpatient psychiatric care; and develop population health efforts, like disease screenings?

The answer was no, Owsley concluded after analyzing a variety of data from federal sources and the American Hospital Association.

“I found no evidence that nonprofit hospitals either redistribute financial surplus to the community through community benefit spending or by providing increased access to unprofitable services,” she wrote in a synopsis of her dissertation.

A problem due to poorly defined policy and expectations

That isn’t an indictment of all nonprofit hospitals, Owsley stressed. She noted, for example, that the 340B program was originally intended to assist safety-net hospitals that protect access for the most vulnerable patients. The Affordable Care Act expanded eligibility for the program, and now about half of all hospitals participate, but without any requirement that they use the savings to develop community benefit programs, Owsley said. While it is clear that the 340B savings are not always “trickling down” to serve patients, the issue “is not black-and-white,” she said.

“Some hospitals really do use the program to sustain patient services,” Owsley noted. For example, some rural hospitals have used the extra resources to support oncology services, while others bolstered unprofitable service lines, she said. In Owsley’s view, the problem is one of poorly defined policy.

“There needs to be more transparency and guardrails around how the program is used if we actually want to see patients benefit,” she said.

In regard to hospitals acquiring nonprofits and bolstering their profits, Owsley said her research highlights the need for “policymakers at the state and federal level to consider community benefit spending when they are assessing consolidations, acquisitions and mergers.” She advocated conditioning approval of these moves on hospitals’ commitment to making community investments.

Owsley also supports more IRS oversight of nonprofits and clearer information around the requirements of what and how much they are supposed to invest in their communities.

“Right now, we have a black box about what counts as community benefits,” she noted. “Having more recommendations spelled out for hospitals and outlining expectations are really important for holding them accountable.” She cited Oregon and Colorado as two states that have implemented policies to address that issue.

Early observations fuel academic interest

Owsley said the seeds of her interest in the social contract between hospitals and their communities were planted in the rural Missouri community where she grew up. The only nearby provider was a nurse practitioner, she recalled.

“Whenever we needed any kind of specialty care, it was pretty common to drive two-and-a-half hours to St. Louis,” she said. “I was lucky enough that my family was able to drive a long distance, but I know that there were many families or patients that did not have the ability to do that.”

The early experience eventually led to her interest in understanding how hospitals and healthcare systems could expand and improve the health of communities and their patient populations.

During her PhD work at the ColoradoSPH, Owsley worked with health systems, management and policy professor Richard Lindrooth, PhD – who mentored her dissertation work – on ways that hospitals can conceive of and implement their community benefit programs.

“I really got interested in the overall question of why some hospitals do a great job at investing in their communities and have the resources to do so, while some aren’t making those investments – and what that means for overall community health,” Owsley said.

The AcademyHealth award is an honor she is grateful to receive, she said.

“It shows my work is important and needed,” Owsley said. “It motivates me to continue this work and examine [community benefit] policies and decision-making at the hospital level.”

Written by Tyler Smith for the Colorado School of Public Health.