We see the terms “community benefit” and “charity care” more and more. Why? Because understanding both is important to answering challenges to tax-exempt status from both the federal Internal Revenue Service (IRS) and state and local governments (see The Taxman Cometh: How To Demonstrate Your Charity Care & Protect Your Tax-Exemptions ).
What do these terms mean? “Community benefit” is generally understood as activities that promote healthy activities as a response to community needs instead of for-profit, while “charity care” is health care provided for free (or at reduced cost) to low income patients. Often organizations, agencies, or associations all look at charity care in a different light – and frequently, each has a different set of rules for managing charity dollars.
To get an idea of how these concepts are used in practice, take a look at the American Hospital Association reported – Results of the 2009 Schedule H Project – which reported that 11.3% of total spending in non-profit hospitals goes to “community benefits.” In this case “community benefits” included “free or discounted care; Medicaid underpayments, health research, education, bad debt expense attributable to patients eligible for financial assistance, Medicare shortfalls, and other community benefits and building activities.”
The important thing to note here is that all of those items the American Hospital Association is calculating— bad debt, educational programs and community-based programs, reduced fees, the difference between Medicare or Medicaid reimbursements and the actual cost of care—are counted as a “community benefit” – not “charity care.” And that is a distinction well worth paying attention to. When we use the term “charity care,” many are thinking about only one thing – free scholarship care provided to individuals who are unable to pay for services.
If your organization is non-profit organization, these terminology distinctions are important when it comes to maintaining your tax exempt status. Some localities will look closely at only the value of the charity care that you provide when determining property taxes, whereas others will consider the entire scope of the community benefit that you deliver. The most important thing for you to do is to know and understand the tax exemptions that are available to your organization at both the state and local level (see Can You Defend Your Tax-Exempt Status? all members and Protect Your Organizations Most Valuable Financial Asset: Understanding Federal Tax Exempt Status ).
For more on this topic, check out the upcoming June edition of the OPEN MINDS Management Newsletter I will looks into who receives charitable care dollars and how that distinction will affects your organization. In the meantime, if you have questions about tax-exempt status in health and human services, contact the OPEN MINDS team at firstname.lastname@example.org.