Hospital Departments

Question: Can clinical service lines be reported as subsidized health services? Examples include ICU, CCU, Med/Surg/Cardiac surgery (for example certain procedures) and orthopedic surgery.


The Internal Revenue Service instructions for Form 990, Schedule H note the following regarding subsidized health services:

  1. In order to qualify as a subsidized health service, the service must meet an identified community need. Criteria for demonstrating community need include:
    1. If the organization no longer offered the service, it would be unavailable in the community;
    2. If the organization no longer offered the service, the community's capacity to provide the service would be below the community's need; or
    3. If the organization no longer offered the service, the service would become the responsibility of government or another tax-exempt organization.
  2. For qualifying services, the subsidized loss reported as community benefit must not include the cost of charity care, bad debt and losses from Medicaid and other means-tested government programs
  3. The task force recommends that all of the following be considered when deciding if clinical service lines should be reported as subsidized health services:

  4. Community need is paramount in determining whether to report a service as a subsidized health service. Organizations should not identity services that operate at a loss and then try to justify community need. Rather the decision to provide (or continue) a service despite financial losses should be based primarily on a documented need for the service in the community.
  5. The cost of the full service line — not just a portion — should be considered when calculating the loss. For example, consider cardiology as a service line, not medical and surgical cardiology separately and do not report specific procedures as a subsidized health service.
  6. If a service, other than an emergency department, is required by the state's licensing law it should not be reported as a subsidized health service. For example, it is likely that without a basic Med/Surg service, the hospital would not be licensed as a hospital.
  7. When assessing whether the service would be unavailable in the community unless the hospital provided the service, consider the driving time to the nearest hospital that has the same services. One hour drive time seems to be a reasonable benchmark.
  8. Before providing the service in need of subsidization, hospitals should consider their capacity to provide the service; including whether there will be sufficient volume to offer quality care.

(Updated November 2015)

Please Take Note: The information provided does not constitute legal or tax advice. The material is provided for informational/educational purposes only. Please consult with counsel regarding your organization's particular circumstances.