Final Say - Tax-exempt Healthcare In a Reformed System

November 1993

Ms. Trocchio is a government liaison for the Catholic Health Association.

In a reformed healthcare system with universal access to comprehensive services, will we still need "charitable" healthcare organizations that are exempt from paying taxes? This is a frequently asked question, one that reflects the ongoing public debate on healthcare organizations' tax-exempt status.

A Charitable Purpose
The history of tax exemption of healthcare organizations has implications for the future. Our nation's first healthcare facilities were exempt from the earliest tax laws because they were seen as clearly having a charitable purpose, providing care and shelter for the sick poor who had no place else to go. The tax code has never specified that healthcare organizations such as hospitals, nursing homes, or other not-for-profit healthcare providers should be eligible for tax exemption. Rather, these organizations began and continue to derive their exemption from their charitable purpose.

"Charitable purpose" has been defined two ways through the years. From 1956 until 1969, a healthcare facility's charitable purpose was interpreted by the Internal Revenue Service as the provision of free and discounted care to low-income persons to the extent of the institution's financial ability. This criterion was changed primarily because it was believed that the Medicare and Medicaid programs would eliminate the need for free and discounted care to the poor. After 1969 "charitable" was interpreted as benefiting the general community.

These two interpretations of "charitable" (care for the poor and benefit to the community) have historic roots. More than a century ago, Lord MacNaghten, a leading authority on the English law of charity, included both aspects when he wrote, "Charity in its legal sense, comprises four principal divisions: 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, not falling under any of the preceding heads" (emphasis added) [Restatement of Charitable Trusts, ref. in Commissioners v. Pemsel, A.C. 531,583 (1891)].

In a reformed healthcare system, mission-driven, not-for-profit healthcare organizations can continue to demonstrate that they serve a charitable purpose under both interpretations of "charitable": care of the poor and benefit to the community.

Care of the Poor
It is unlikely that even the most generous reform package will address all needs of all people—especially the poor and other underserved persons.

Persons who are poor and others currently going without healthcare services may fail to enroll in the new system. To receive benefits, persons in a geographic area will likely join an integrated delivery network—a group of providers offering a continuum of services to enrollees on a capitated basis. Inability to cope with government bureaucracies and other struggles of daily living may prevent many low-income, low-literacy, and otherwise troubled persons from taking advantage of programs available to them. Evidence of this is seen in underenrollment in the Special Supplemental Food Program for Women, Infants, and Children; Early and Periodic Screening, Diagnosis, and Treatment; and Medicaid.

Despite financing and other safeguards designed to prevent discrimination, some providers may not wish to treat persons struggling with poverty and other problems. Today (and predictably in the future), some providers will shun persons who are poor, are part of minority groups, or have certain physical or mental disabilities. Their reason may be outright prejudice or the belief that such persons present language, literacy, or other problems that require excessive staff and resources.

In fact, persons and families with low incomes and many problems will require additional attention and services if their needs are to be adequately addressed. Not all providers are prepared or willing to respond to these needs, however, even if the new system adjusts payments for these needs. Catholic healthcare and other mission-driven community service organizations have traditionally reached out to these populations. The necessity for this will continue.

It is also likely that the new system of care will not meet all the health and health-related needs of enrolled persons. Even a fairly comprehensive benefits package may not include needed over-the-counter medicines and appliances, transportation to health services, counseling, and some desired, but not lifesaving, procedures and treatments. Low-income persons enrolled in a healthcare network are likely to continue to need some free and discounted services and supplies.

Catholic and other mission-driven healthcare organizations holding to the principle that "the poor have a moral priority" will continue to be needed in our healthcare system. These providers, whether they sponsor healthcare delivery networks or are part of such networks, will continue to need and deserve tax exemption.

Community Benefit
Providing benefits to the broad community can also characterize a tax-exempt IDN and its component organizations.

Although a network will primarily focus on persons who are enrolled, it can and should show concern for the broader community. This community may be the overall geographic service area, or it might include an area remote from the network and most of its enrollees, such as an underserved rural or inner-city area. Benefits to the broader community include policies and programs that:

  • Improve the health of persons in the community (helping them get and stay well)
  • Improve the overall health within the community (preventing widespread disease and injury and acting on societal problems that tend to cause disease and injury)
  • Contain healthcare costs and conserve scarce resources (avoiding unnecessary duplication of services and equipment and providing services in the most cost-effective and economic setting)

The Catholic Health Association's (CHA's) Standards for Community Benefit (see "Catholic Health Association's Standards for Community Benefit" at the end of this article) present a framework for describing how an integrated delivery network can demonstrate it is meeting a charitable purpose as a community benefit organization.

Mission and Philosophy The standards suggest that mission statements and other descriptions of philosophy should speak to the organization's commitment to community service. The mission statement of the Alexian Brothers Medical Center (see "Mission Statement of Alexian Brothers Medical Center, Elk Grove Village, IL" at the end of this article) is an example that an integrated delivery network could use as the basis of a community benefit statement.

The CHA standards suggest that policies, as well as mission statements, can reflect an organization's community benefit orientation. These could include policies on:

  • Financial assistance for enrolled and nonenrolled persons
  • Advocacy for improved public policies
  • Physicians' and employees' role in community benefits
  • Employee benefits and the work environment
  • Selection of contractors and other partners
  • Treatment of poor and other minority persons
  • Selection and participation of board members
  • Energy and resource conservation and the environment
  • Decision making, considering impact on community
  • Planning and budgeting, incorporating community health concerns and community benefit
Community Benefit Plan A growing number of community-oriented healthcare organizations are developing an annual community benefit plan, as suggested by CHA's standards. This can be an excellent way both for ensuring that the healthcare organization is being adequately responsive to community needs and for documenting commitment to community well-being.

Community benefit plans can include:

  • The organization's mission and tradition of service
  • A description of the community served
  • Identification of unmet healthcare needs in the community
  • How the organization intends to address, directly and in collaboration with others, particular or unique healthcare problems of the community, and the healthcare and related needs of the poor, frail elderly, minorities, and other medically underserved and disadvantaged persons
  • How community members, organizations, and businesses were involved in identifying the needs and developing the plan
Provision of Services The ultimate demonstration of meeting a community benefit purpose is the provision of services. CHA's standards describe community benefit services as those designed to improve health status in the community, to promote access to healthcare services to all persons in the community, and to contain healthcare costs.

Some examples of community benefit services include:

  • Being part of community-wide efforts to decrease infant mortality and morbidity, to protect children against vaccine-preventable disease, to address the problem of violence in the community, or to help homeless families.
  • Reaching out to minorities, the poor, and other underserved persons, whether or not they are enrolled in the integrated delivery network. This could include providing multilingual information on child health or offering employment opportunities to persons who are developmentally disabled.
  • Implementing programs that promote health and avoidance of injury and illness through campaigns to decrease teen drinking, promote the use of car seats for toddlers, and institute surveillance systems that detect unusually high incidences of cancer, certain infections, or other possible indications of systemic community health problems.
Community Benefit Report Finally, CHA's standards suggest frequent and regular reports on what the organization understands to be the healthcare needs in the community and how it is responding to those needs. This reporting is not a self-promotion. Rather, it is a way of being accountable to those in the community responsible for tax policies, to those who volunteer their time in governance and direct service, to those who contribute financial support, and to the medical staff and employees who want to be part of a mission-oriented organization.

Catholic Health Association Standards for Community Benefit

As members of the Catholic Health Association of the United States, we share a historical mission and tradition of community service. In order to continue our tradition of providing benefit to the community, we affirm that:

  1. The organization's mission statements and philosophy should reflect a commitment to benefit the community and that policies and practices be consistent with these documents including
    • Consideration of operational and policy decisions in light of their impact on the community served, especially the poor, the frail elderly, and the vulnerable
    • Adoption of charity care policies that are made public and are consistently applied
    • Incorporation of community healthcare needs into regular planning and budgeting processes
  2. The governing body should adopt, make public, and implement a community benefit plan that
    • Defines the organization's mission and the community being served
    • Identifies unmet healthcare needs in the community, including needs of the poor, frail elderly, minorities, and other medically underserved and disadvantaged persons
    • Describes how the organization intends to take a leadership role in advocating community-wide responses to healthcare needs in the community
    • Describes how the organization intends to address, directly and in collaboration with physicians, other individuals, and organizations
      —Particular or unique healthcare problems of the community
      —Healthcare needs of the poor, the frail elderly, minorities, and other medically underserved and disadvantaged persons
    • Describes how the organization sought the views of the community being served and involved community members and other organizations in identifying needs and developing the plan
  3. The healthcare organization should provide community benefits to the poor and the broader community that are designed to
    • Comply with the community benefit plan
    • Improve health status in the community
    • Promote access to healthcare services for all persons in the community
    • Contain healthcare costs
  4. The organization should make available to the public an annual community benefit report that describes the scope of community benefits provided directly and in collaboration with others.

Mission Statement of Alexian Brothers Medical Center, Elk Grove, Village, IL

The mission of Alexian Brothers Medical Center is to serve the health care needs of the community with a constant striving for the highest quality care, innovative and responsible use of resources and an abiding regard for the individual.

The health care provided here is the outward sign of the Alexian Brothers' enduring vision, holistic perspective and sensitivity to the dignity of every person, advantaged and disadvantaged. It is care illuminated by the teachings of Christ and his Church.

We deliver health care in partnership with those who would share our ministry. Only with and through the community can we fully and faithfully serve those who come from the community to find healing and blessing.


Copyright © 1993 by the Catholic Health Association of the United States.
For reprint permission, contact Betty Crosby or call (314) 253-3477.

Final Say - Tax-exempt Healthcare In a Reformed System

Copyright © 1993 by the Catholic Health Association of the United States

For reprint permission, contact Betty Crosby or call (314) 253-3490.