Posted: 16 Jan. 2020 10 min. read

Why hospitals should move beyond their traditional roles and create stronger community connections

by Ryder Riess, principal, and David Rabinowitz, senior manager, Deloitte Consulting LLP

Fundamental regulatory changes, technological advances, and increased public awareness are pushing many hospitals and health systems to place more emphasis on the value they contribute to their communities. It is often no longer enough for health systems to simply remain financially viable so that they can treat members of the community. In the future of health, we expect economic and customer pressures will demand that health systems demonstrate the value they provide to the local community.

The vast majority of US hospitals are classified as nonprofit, which means they typically do not have to pay state and federal income and property taxes.1,2 In exchange, these organizations provide financial assistance to underserved and disadvantaged patients and invest in the health of their local communities. However, what is considered community benefit spending has never been well defined or measured, and vast variation exists across markets, brands, and specialties.

Hospitals might contribute through partnerships with organizations that provide services in their communities. However, about 25 percent of more than 5,500 US hospitals do not have any community partnerships, according 2016 survey conducted by the American Hospital Association.

We estimate that community benefit accounts for anywhere from 8 percent to 13 percent of a hospital’s annual operating costs based on available data. This is a considerable amount of money and could go a long way to improve health in the communities they serve. Hospitals and health systems are already spending the money, but a different investment strategy might yield better results that could help them win in the future of health.

What is community benefit and how is it applied?

We found little uniformity in defining community benefit. The US Centers for Medicare and Medicaid Services (CMS) defines it as the sum of charity care, unreimbursed care and Non-Medicare services, and non-reimbursable Medicare bad debt. Researchers have analyzed spending on charity care and non-reimbursable care to help understand community benefit.3,4 However, inclusion of bad debt as part of the community benefit can be more controversial. Bad debt partially depends on a hospital’s ability and willingness to collect payment from a patient who might be able to pay.

The Affordable Care Act (ACA) requires hospitals to conduct a community needs assessment and establish a formal financial-assistance policy, among other regulations, to retain their tax-exempt status. The ACA, however, does not define a minimum value of community benefit that hospitals must provide to maintain not-for-profit status.

Quantifying the dollars spent on the community benefit can be computed through simple math. But quantifying the value created for the community it serves remains obscure. In our view, hospitals should collect and analyze these data to gain a better understanding of the impact they are having as well as whether they comply with laws and regulations. Hospitals that fall short could jeopardize their tax-exempt status.

How does the evolving health care landscape impact community benefit?

An investment strategy focused on healthy communities could improve  members’ health. Today’s community spending strategies tend to be reactive in nature and largely focus on patients entering the facilities with an inability or unwillingness to pay. While hospitals are required to report expenses related to community benefit activities, these activities are not tied to population health outcomes, nor are they informed by the community’s drivers of health.5

CMS’s 2016 Quality Strategy report calls on providers to develop programs that address social determinants of health, the “conditions in which people are born, grow, work, live and age, and the wider set of forces and systems shaping the conditions of daily life and improving health outcomes” within their communities.6 However, determining return-on-investment for social needs activities requires hospitals to identify meaningful measures, such as quantifiable improvements in health outcomes and cost savings. About one-third of hospitals (35 percent) are tracking cost outcomes from their social needs investments, according to Deloitte's survey of 300 hospitals and health systems. Most hospitals do not have dedicated funds for all of the populations they want to target (72 percent), and report that finding sustainable funding to address social needs is a challenge. Most hospitals report relying on a mix of federal, state, community, and private investor funding for their social needs initiatives.

As hospitals and health systems rely more on value-based care models, they might consider incorporating population health into their community benefit spending strategy. According to our survey, hospitals that are further along in the journey to value-based care report the largest investments and most activity around addressing social needs. These organizations are also more likely to measure more aspects of their social-needs activities, including health outcomes, cost outcomes, and patient experience.

Investments in population health could help to alleviate some of the political and regulatory pressures some hospitals face by helping to justify the benefits and tax exemptions they receive in exchange for their non-profit status.7 Additionally, investing in population health can provide hospitals and health systems with an opportunity to bridge natural gaps in care and care funding in an environment where governments, NGOs, and communities are rethinking “donations” as a mechanism to foster better community care.

How can hospitals effectively leverage their community benefit spending?

There remains a yawning gap between knowing what people need to be healthy and delivering what they need to become and stay healthy. Many of these roles remain opaque across typical stakeholders according to Deloitte research. We know what is required to improve health outcomes in communities, but how do we achieve these requirements in a resource-constrained environment?

As the future of health evolves, we believe answering this question will involve federated investment, working back from unmet needs of customers, to positively impact health. Investing in virtual-care capabilities, partnerships with community health programs, coordinated care models, and analytical tools can lead to insights into target populations. This insight can generate greater returns on community benefit spending while exponentially serving the community in a more impactful way. Additionally, investments in these capabilities and tools can yield a larger return for the health system while also improving the quality of care for the community by shifting from sick care to health care.

These investments can also create unique opportunities for hospitals and health systems to remain competitive in an era of health care disruption. By being strategic in their investments, hospitals and health systems can create financial opportunities by improving the health and well-being of their communities.

Acknowledgement: Ashley Pandit

Endnotes

1. Affordable Care Act of 2010: Reforming the Health Care Reform for the New Decade. Pain Physician. February 14, 2011

2. Health Forum/Fast Facts on US Hospitals. American Hospital Association, January 2016

3. In California, Not-For-Profit Hospitals Spent More Operating Expenses On Charity Care Than For-Profit Hospitals Spent. Health Affairs, August 2015

4. Provision of Community Benefits by Tax-Exempt U.S. Hospitals. New England Journal of Medicine, April 2013

5.  Evaluating Hospitals' Provision of Community Benefit: An Argument for an Outcome-Based Approach to Nonprofit Hospital Tax Exemption, American Journal of Public Health, April 2013

6. CMS Quality Strategy, 2016

7.  Nonprofit Hospitals’ Community Benefit Requirements, Health Affairs Brief , 2016

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