As published in The Journal of Health Administration Education (Summer 1994).
In Health Care Reform, Who Cares For The Community?
By Robert Sigmond and J. David Seay, J. D.
Abstract: Health care reform has again focused the issues of ownership and mission of organizations in the health care field. Some believe that universal entitlement will eventually make both charitable patient care and the nonprofit form of organization obsolete. Others believe that special treatment of nonprofit organizations does not depend on charity at all; rather that the nonprofit form has social value in and of itself. The authors reflect a different point of view. They suggest that with reform, community benefit as the modern expression of a charitable mission will become ever more important in achieving the nation’s health care goals. They believe that nonprofit organizations will continue to be entitled to special treatment only if their missions and programs extend beyond care of patients and entitled populations to focus also on care
Any health organization’s investment in disciplined community initiatives encompasses all the people in targeted communities, including those served by competing organizations. Without tax exemption, an organization committed to community care initiatives will beat a competitive disadvantage under the proposed community rated capitation payment system. Rather than abandoning the community benefit standard for tax exemption, health care reform calls for more systematic management of community
care initiatives by nonprofit organizations and also of tax-exemption eligibility by the IRS.
In the rapidly escalating evolution of America’s health care sector, called “health care reform,” questions
of auspice or ownership are making their way toward the forefront of the debate. Hot shot for-profit entrepreneurs are declaring the rationale for the existence of nonprofit hospitals dead, and members of Congress are questioning the same public policies (Washington Post 1993; Wall Street Journal 1994; Subcommittee on Select Revenue Measures, 1994). In this discussion, some have suggested that it makes no difference whether a hospital, health care system or network, or other organized method of providing health care and coverage is formed and operated as a nonprofit, charitable institution or as a strictly for-profit enterprise (Pauly and Redisch 1973; Clark 1980; Hansmann 1980; Herzlinger and Krasker 1987). Others maintain that these distinctions still have validity, especially and perhaps only for those organizations that are genuinely and demonstrably committed to serving communities and striving to improve community health care systems, as well as overall health status (Seay and Sigmond 1989; Kovner and Hattis 1990; Seay 1992; Frontiers 1992). And there are others who maintain that, when all is said and done, the nature of the ownership of a hospital really does matter, for reasons apart from notions of community orientation (Gray 1993). Certainly, these issues are made more complex by the intricate banding together of hitherto disparate segments of the health care financing and delivery systems. Maybe the time has come when looking only at ownership and profit status is no longer enough, and that a more exacting measure is needed to differentiate the public-serving from the others.
Nonprofit hospitals, long the dominant force in the provision of health care services in America, are now competing for power and prominence, capital and market share, with those who approach the issue from the point of view of finance rather than health care. Risk is being borne increasingly by all parties, creating both the parallel incentives of efficiency and profit maximization, and the risks of undertreatment and misappropriation of valued resources.
Against this backdrop, some thoughtful commentators have concluded that “ownership matters” after all.
At least one scholar, sympathetic to the plight of the voluntary hospitals in the face of increasing tax-exemption attacks, has argued for removing organizations in the health care field from the “charitable” classification of tax-exempt entities in the Internal Revenue Code, and placing them instead in a new classification called “health services,” similar to educational or religious organizations that are not required to be “charitable,” in the relief-of-poverty sense, in order to be tax exempt (Gray 1993). We would like to differ, and argue for a renewed and sharper focus on the charitable mission of such organizations, emphasizing the work done by the United Hospital Fund in this area a few years ago with “Mission Matters” and In Sickness and In Health: The Mission of Voluntary Health Care Organizations (Seay and Vladeck 1987; 1988).
Those pushing at the time for programs designed to benefit these kinds of communities, building on the Kennedy-Johnson initiatives and grant funding, got precious little support from most of those involved with traditional hospital community service. To most hospital leaders of the 1960s, community service meant any service beyond service to paying patients, service that reflected quite different goals than service designed to benefit targeted communities.
For some, community service meant little more than support for medical education as then organized.
To others, it meant fulfilling a deeply felt professional responsibility to serve patients in need, irrespective
of their place of origin. To some managers, community service meant service that was not charged for or service that was not paid for, in full or in part. The notion of specific services designed to benefit specific communities seemed foreign and was resisted by most hospitals, as indicated in part by the small number of hospitals that applied for and received any of the widely available grants for which they were eligible
under the “Great Society” legislation enacted at the time.
The IRS staff who were developing the community benefit idea had little use for the notion that community service embraced any and all nonmarketplace activities of a hospital, a simplification of the view of community service held by most hospital executives at the time. They endorsed the concept that hospitals should go beyond traditional community service and support activities explicitly designed to benefit a community; they also believed that the activities, to qualify as charitable, should result in some specific benefit to the community, not only to the individuals served and those providing the service (Bromberg 1970). In modern health policy language, the IRS viewed community benefit as community service with an outcome orientation, measured in terms of impact on the community as a whole.
A great deal of what hospitals were doing as community service, then as now, reflects the desire of staff to carry out their professional commitments beyond care of inpatients. But these valuable services generally were not organized in a manner in which any community was actually better off as a result. In opting for community benefit, the IRS staff, whether they knew it or not, were ahead of their time in anticipating measurement of outcomes as a major management theme in health care, especially with respect to community care. But it soon became apparent that they were looking too far ahead-the universal entitlement they anticipated was at least 30 years away, and the sector’s curiosity for outcomes research has just been raised in recent years. And virtually none of the promising and innovative Great Society programs that were moving in the community-focused direction survived the Reagan-Bush years.
Those at the IRS involved with the new notions implicit in the shift from charity care to community benefit moved on to other things, and the Service never adopted guidelines or educational programs about the new application of community benefit. However, virtually all of the court decisions and revenue rulings involving tax exemption of hospitals and health service organizations have been consistent with the concept of
With the likelihood that universal coverage is again imminent, and with the newfound interest in outcomes measurement, now is an excellent time to develop and implement the community benefit concept systematically, as the standard for charitable status in the health care field, rather than to abandon it as some have suggested.
One of the reasons for this review of the changing concept of charity in American public policy is that there
is good reason to fear that some of our best thinkers may have missed, or some of the rest of us might have failed to sufficiently emphasize, the significance of these changes. Even the sympathetic commentators still have trouble separating the notions of charity and relief-of-poverty when, for example, it is observed that universal coverage”, would seem to leave little room for organizations whose rationale lies, in the domain
of charity” (Gray 1993). And in recent Congressional hearings, Representative Charles Rangel of New York questioned the need for continued tax exemptions for hospitals if universal coverage eradicates medical poverty and, along with it, the need to provide “charitycare” (Subcommittee on Select Revenue
Can it be that there is a trap here, that is dangerously difficult to avoid, of assuming that entitlement can solve all of the problems of accessibility to health care services in the absence of community-oriented programs? Those with experience with the Indian Health Service, for example, may know differently.
Native Americans on reservations have been entitled to the most comprehensive services for nearly a
century or more, and still have among the worst health records in the nation.
Health care services are not only a commodity, they are part of the fabric and culture of communities.
It may be telling that the Clinton administration was going to solve the problem of low rates of immunization for preschool children through a new entitlement program, until they learned that the states with such programs already in existence had not much better success than other states.
As the IRS may have figured out a quarter century ago, universal entitlement will focus the importance of community benefit programs, not plans-at least those that are really accountable, will be developing the most effective coordinated allocation of resources and management support services among these three approaches, with respect to almost all health problems. There is substantial evidence, for example, that when immunization entitlement for preschool children is backed up by community initiatives to encourage and assist all families to have their children immunized, the immunization rates rise to a level comparable with other developed nations.
Whether it is immunization, heart disease, HIV/AIDS, trauma and violence, care of the infirm aged, the various addictions, or stroke, the case can be made that the greater allocation of resources to community care, closely integrated with care of patients and care of enrolled populations, will achieve the most effective results, both with respect to health outcomes and access, as well as costs (Hattis 1993).
However, there are obstacles to meeting this challenge, and measurable results are usually observable only in the longer run. Managed health plans financed by capitation payments in a competitive environment, and without a quite explicit community benefit commitment or obligation, would have no incentive, really no excuse, to give much thought to the long run. As a result, most accountable health plans, as they are now conceived, would have a much more immediate point of view and little reason to develop longer-term community benefit programs.
Some have also questioned the fairness of granting tax exemptions to some types of health care providers and not others. However, those who pose this question as one of unfairness to the for-profit hospitals seem to miss the main point. Without the advantages of tax exemption, including not only relief from the burden
of supporting government but also eligibility for grants, tax-exempt gifts and donations, and other forms of community support; those health plans or providers with a commitment to community benefit programs which cost money will be at a significant disadvantage relative to their competitors who do not possess a similar commitment to the public good. Rather than focusing on unfairness to organizations that pay taxes, the issue becomes one of fundamental fairness to those with a community benefit commitment or obligation. The most intense competition may well be with the so-called “fully commercialized nonprofit” as opposed
to the for-profits. In this context, an exemption from taxation for the community benefit organizations
As the field gets more complex and harder to sort out by such traditional measures as ownership, acceptance of risk, capitation, the business of insurance, corporate practice of medicine, and so on, the need for clearer criteria for determination of tax-exempt status becomes even more acute. That is why a better understanding of the concept of community benefit can be so very helpful. And it is also why everyone should understand the distinction between care of the community as contrasted with care of patients and care of enrolled populations. That is why we conclude that in health care reform, the form of ownership may indeed be a relevant concern, but even more important to achieving measurable improvement in community health outcomes, caring for the community-mission matters most.
Boisture, R. “Assessing the Impact of Health Care Reform on the Formation of Tax-Exempt
Health Care Providers and HMOs.” Exempt Organization Tax Review 9:2 (February 1994) 271.
Bromberg, R. “The Charitable Hospital.” Catholic University Law Review 20:237(1970) 237-58.
Clark, R.C. “Does the Nonprofit Form Fit the Hospital Industry?” Harvard Law Review 1417 (1980) 93.
Connors, E. “The Mission is the Motivation.” Frontiers of Health Services Management 8:4
(Summer 1992) 41-42.
Cox, W. “The Un-Managed Care Revolution.” Frontiers of Health Service Management 10:3
(Spring 1994) 30-32.
Frontiers of Health Services Management. Special Issue. 8:4 (Summer 1992).
Gray, B. “Ownership Matters: Health Reform and the Future of Nonprofit Health Care.”
Inquiry 30 (Winter 1993) 352-61.
Hansmann, H. “The Role of Nonprofit Enterprise.” Yale Law Journal 835 (1980) 89.
Hattis, P.A. “Retooling for Community Benefit.” Health Progress 74:7 (September 1993) 38-41.
Herzlinger, R.E., and W.S. Krasker. “Who Profits From Nonprofits?” Harvard Business Review 65:1
(January-February 1987) 93-106.
Kovner, A.R, and P.A. Hattis. “Benefitting Communities.” Health Management Quarterly (Winter 1990) 6-10.
Pauly, M., and Redisch, M. “The Not-for-Profit Hospital as a Physicians. Cooperative.”
American Economic Review 87 (1973) 63.
Seay J.D. “From Pemsel’s Case to Health Security Community Benefit Comes of Age.”
The Journal of Health
Administration Education 12:3 (Summer 1994) 373-82.
Seay, J.D. “Community Benefit Prevails.” Health Progress (January-February 1992) 42.
Seay, J.D., and R.M. Sigmond. “Community Benefit Standards for Hospitals: Perceptions and
Performance.” Frontiers of Health Services Management 3 (Spring 1989) 3-39.
Seay, J.D., and B.C. Vladeck. In Sickness and In Health: The Mission of Voluntary Health Care. New York:
Seay, J.D., and B.C. Vladeck. Mission Matters. New York: United Hospital Fund, 1987.
Subcommittee on Select Revenue Measures, House Ways and Means Committee. Hearings,
Reprinted in Exempt Organization Tax Review 9:1 (January 1994) 45-122.
Wall Street Journal. “Tax Breaks Threatened, Some Hospitals Try to Prove How Charitable
They Are,” April 12, 1994, p. B1.
Washington Post. “Plan Lets Many Hospitals Keep Tax Break: Clinton Proposal Would Cut
Charity Care Load at Not-for-Profit Facilities,” December 28, 1993, p. D1.
Address communications and requests for reprints to Robert Sigmond, 2916 Carlton House, 1801 John F. Kennedy Blvd., Philadelphia, PA 19103.J. David Seay, J.D., is Vice President and Counsel for the
United Hospital Fund, New York, NY.