Nonprofit hospitals are in the crosshairs. With state and federal governments in need of money, and some nonprofit organizations appearing to shirk their community responsibility, many are questioning the continued wisdom of the long-standing tax exemption afforded these institutions.
These qualms are unfortunate. The nonprofit hospital sector offers an essential and unparalleled community resource. Over 2,900 hospitals in our country—almost 60 percent of the total—are nonprofit. Eliminating the tax exemption would cripple these organizations at a time when our nation most needs them. But to whom much is given, much is expected. The public expects more. And they deserve more.
Hospitals are exempt from federal taxes if they pursue "charitable" purposes. The "promotion of health" has long been considered a charitable purpose worthy of exemption, and hospitals generally qualify under this rationale. Congress has never tried to define the criteria under which a hospital should qualify as promoting health, instead leaving that task to the Internal Revenue Service.
In 1969, the IRS created the so-called "community benefit standard" for exemption that governs all such determinations today. Under this standard, the provision of charity care (the previous criterion) was no longer the sole measure of exemption, although it remained an important one. A hospital could now demonstrate other ways it was benefiting the community at large. In the 40 years since this vague standard was developed, there has been a raging debate about whether it is serving its intended purpose.
But often overlooked in this debate is the vital role governing boards can play in keeping hospitals on the right path. Nonprofit hospital boards must become much more intentional about promoting and improving the health of their communities. Here are three ways they can start:
Promote active engagement. There is a growing body of research showing a direct connection between high-performing organizations and the board's level of engagement. The most recent example comes from a study in Health Affairs by Harvard University researchers demonstrating a correlation between a hospital's quality outcomes and the board's engagement. Alfred P. Sloan Jr., the president of General Motors in the 1920s, once postponed a board meeting because there was too much agreement in the room. He did so "to give [themselves] time to develop disagreement and perhaps gain some understanding of what the decision is all about." He had it right. Some nonprofit hospital boards have a tradition of being relatively passive and polite bodies that defer to management. Living rooms should be comfortable; boardrooms should not. Nonprofit hospital boards must create a culture of healthy tension and constructive conflict and make room for deep dialogue. Decisions are seldom better made as a result of silence.
To best promote active engagement in the boardroom on matters of community benefit, the board must draw on the rich diversity of community perspectives. And I do not mean the bankers, lawyers and accountants. These professionals all serve very important roles on boards, but they are standard fare in most boardrooms today. I mean community stakeholders who have a unique perspective on the plight of populations with disproportionate unmet health needs. I mean the principal of an inner-city public school or the head of a food pantry, a homeless shelter or a health center. Given their experience, these voices will help ensure that boards appropriately balance the hospital's margin with its mission.
Establish a community benefit committee. Most nonprofit hospital boards have not established a community benefit committee. They should. With a board committee, there is built-in accountability and transparency. This committee should oversee the community benefit program in the hospital and should ensure the quality as well as the quantity of the programs being offered. The committee should establish priorities for the year, develop specific metrics to measure performance and hold management responsible for striving to improve community health—particularly for low-income and otherwise vulnerable populations. These metrics should be shared with, and regularly monitored by, the full board.
The community benefit committee should also thoughtfully define what the organization means by "community" and should then ensure that a health assessment is performed within the targeted community. Different communities will require different programs to best meet their needs. But it is hard to meet a community need if you don't talk to the community. Hospitals and their boards must engage in regular outreach and assessment to identify the specific health needs of their communities. This should not be limited to a review of indicator data. It should be an active process in full collaboration with community organizations. And the collaboration should not end with the assessment. Engagement with the community—and collaboration with others to improve health—should be an ongoing process and should be an expectation of leaders in the organization, including members of the board.
Redefine the role of hospitals. Hospitals have historically (and appropriately) focused on effectively responding to patients' episodic, urgent or emergent needs. As a result, a hospital's community benefit program has been measured largely in terms of the uncompensated care it provides in meeting these needs. But with or without reform, in order to bend the health care cost curve, hospitals must begin to stretch into new terrain. As scrutiny continues on the meaning of tax exemption and community benefit, hospitals must take a more forceful and proactive role in focusing on keeping patients well, and not just treating them when they are sick. This includes focusing on prevention and health promotion outside of the hospital.
To do this well, hospitals should better align clinical care and overall quality with their community benefit programs. There is a growing recognition of the benefits of such a linkage. One example is the work of the Planetree organization, a nonprofit focused on helping hospitals promote patient-centered and compassionate care, long a hallmark of high quality. It now has "healthy communities" as one of the 10 components of its model. Planetree urges "increasing the role of hospitals and redefining health care to include the health and wellness of the community by working with schools, senior citizens, churches and other community partners."
Another example is the excellent work of the Public Health Institute, which is pursuing a demonstration project to advance the state of the art in community benefit. One of its core principles is the development of links between clinical services and community health: "Building these links will help to reduce the demand for treatment of preventable illnesses and reduce readmissions that result from medical discharges into communities with inadequate support systems."
These organizations get it. In our brave new world of health care, linking clinical quality and community benefit is perhaps the best way that hospitals can meet their charitable obligations of promoting community health. For this reason, boards should continue to lead their hospitals in this direction, including developing one or more incentive goals for the CEO and the leadership team that are focused on process or outcome measures on community health.
Nonprofit hospitals are the heart and soul of communities. They exist not for the benefit of shareholders, but for the benefit of stakeholders who make up the community at large. They provide critical, and often unprofitable, services. For these reasons, much is at stake in this debate, and nonprofit hospitals must better demonstrate that they are worthy of continued government subsidy. Their boards would do well to step up their accountability, improve their overall governance, and remain keenly focused on the goal of promoting and improving community health.
Douglas S. Brown (douglas.brown@umassmemorial.org) is senior vice president and general counsel of UMass Memorial Health Care, Worcester, Mass. He is the 2009 recipient of the American Bar Association's Outstanding In-House Counsel Award for distinguished service by an attorney employed in a legal role at a nonprofit organization in the United States.
