• September 23, 2021

Oregon sets first hospital-specific community benefit spending floor

Feb 5, 2021

Oregon set its first community benefit spending floor for one of its health systems, establishing a more rigorous regulatory framework that more states may follow, experts said.

As mandated by state bill HB 3076 passed in 2019, Portland, Ore.-based Legacy Health will have to spend at least $253 million on community benefits in fiscal 2022 based on its three-year average of unreimbursed care; direct spending on the social determinants of health, health equity and other community benefits; and its operating margin. Oregon officials hope to address unmet needs and health inequities by setting minimum spending thresholds and tracking those investments. They believe a separate state bill to align and coordinate community benefit programs across providers, health plans and public health departments can also help.

Oregon is the first state to establish hospital-specific community benefit spending floors, said Jeremy Vandehey, director of the Oregon Health Authority’s health policy and analytics division.

“This is a first-in-the-nation approach to community benefit spending,” he said. “First and foremost, it adds transparency and clarity to how dollars are categorized.”

Legacy Health, which has 30 days to comment on the spending floor, said it is carefully reviewing the numbers but did not provide any other detail. Legacy was the first organization to receive a floor given its fiscal year; the Oregon Health Authority will continue to roll out spending thresholds for other hospitals and systems.

Oregon is among a group of states including Connecticut and Massachusetts that have bolstered their community benefit oversight to gauge whether hospitals are earning their billions of dollars a year in collective tax exemptions through community investment. Five other states have minimum community benefit spending thresholds and 31 have community benefit public reporting requirements, according to the Hilltop Institute at the University of Maryland.

The National Academy for State Health Policy has convened a working group to strategize how to best regulate and measure hospitals’ community benefit spending, said Trish Riley, executive director of NASHP.

Oregon has laid out a sophisticated approach to community benefit spending oversight that recognizes that a one-size-fits-all approach doesn’t work, she said.

“We do see all this activity building on each other—there is real interest in Oregon,” said Riley, adding that each state has a different relationship with their hospitals and that regulatory oversight has to be balanced with the pressures hospitals are currently facing with COVID-19. “It is a really big issue. Given the state and local budget challenges amidst the pandemic, it is important to think about the value of these lost revenues through tax exemptions and if they are really getting meaningful community investment.”

Oregon developed a reasonable formula for calculating hospital-specific floors for community benefit spending, said Cynthia Woodcock, executive director of the Hilltop Institute, lauding the state’s transparency. The hospital-specific floor addresses an unintended consequence of uniform thresholds, as seen in Texas, which could drive down community benefit spending, she said.

While setting a floor could help encourage community benefit spending for some hospitals that have been lagging behind, it may discourage high achievers from delivering more than the minimum, cautioned Ge Bai, an associate professor of accounting and health policy and management at Johns Hopkins University.

“Also, pegging the floor amount to individual hospitals’ previous performance would encourage hospitals to contain community benefit spending so as to lower their floors in future years,” she said.

The IRS oversees not-for-profit hospitals’ community benefit spending through Form 990’s Schedule H and their community health needs assessments. But it’s still difficult to parse out where the dollars are going and the federal forms can yield miscalculations, a Modern Healthcare analysis revealed.

For instance, community building activities are not counted in a hospital’s total community benefit spending in the 990s, which could deter investment in those areas. Those building activities include physical and environmental improvements and housing, and economic, leadership and workforce development. Without explicit rules guiding hospitals’ interventions or setting a baseline level of funding, community benefit programs and related investment vary wildly.

States are implementing their own rules to hold hospitals more accountable. Connecticut, for instance, has used the certificate of need process involved in hospital mergers and acquisitions to ensure that community benefit spending is tied to the community health needs assessment and aligns with the State Health Improvement Plan. In Massachusetts, the attorney general updated its community benefit guidelines to better coordinate hospitals’ and health plans’ community benefit programs.

“If there is one message from COVID, it is that it has had an incredibly disproportionate impact on communities of color. If we’ve had all these community investments for so long, why do these disparities remain so profound?” Riley asked. “That has tightened states’ interest on community benefits and how hospitals are directly impacting health equity.”

According to 2019 data gathered by Oregon state officials, Legacy Health’s system-wide total community benefit spending, excluding the Medicare shortfall—the gap between Medicare payments and the system’s estimated cost for those services typically calculated by its cost-to-charge ratio, was $252.5 million. About 71.9% of that was made up of its Medicaid shortfall while 16.8% of its total community benefit spending went toward charity care, or spending on free or subsidized services provided for the uninsured or underinsured.

But policy experts are generally skeptical of community benefit that’s mostly comprised of so-called “undercompensated” care. As the Affordable Care Act expanded coverage, charity care typically decreased. Hospitals have had to direct their dollars elsewhere, and Medicaid shortfalls have generally taken up larger proportions of community benefit spending.

“Many argue that this is not what hospital community benefit spending was intended to be,” Woodcock said.

She noted that Legacy’s community health improvement net costs were only 1.4% of its total community benefit spending while community building net costs were only 0.1%.

“The challenge for Oregon going forward is determining how to incentivize increased hospital community benefit spending in these latter two categories that aligns with state and local population health improvement goals,” Woodcock said. “This is where hospital community benefit spending promises to be most impactful, particularly when there is robust engagement between the hospital and community stakeholders.”

The impact of community investments has been hard to measure. That’s in part because healthcare institutions are trying to solve problems associated with housing, food and transportation, which typically haven’t been under the industry’s purview, Vandehey said.

“It’s important that we hear what the community says it needs and understand how these investments can impact social issues that affect health,” he said. “We need to strengthen the linkage between the community and the health system to ensure there is really good coordination around where the spending is happening. Transparency is only one piece of that.”

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