United States Government Accountability Office

GAO Report to the Ranking Member, 

Committee on Finance, U.S. Senate 

NONPROFIT 

HOSPITALS 

Variation in Standards 

and Guidance Limits 

Comparison of How 

Hospitals Meet 

Community Benefit 

Requirements 

September 2008 

 

GAO-08-880 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2008

NONPROFIT HOSPITALS

Variation in Standards and Guidance Limits

Comparison of How Hospitals Meet Community 

Highlights of GAO-08-880, a report to the Benefit Requirements

Ranking Member, Committee on Finance, 

U.S. Senate 

Nonprofit hospitals qualify for 

federal tax exemption from the 

Internal Revenue Service (IRS) if

they meet certain requirements. 

Since 1969, IRS has not specified 

that these hospitals have to provide

charity care to meet these

requirements, so long as they

engage in activities that benefit the 

community. Many of these 

activities are intended to benefit 

the approximately 47 million 

uninsured individuals in the United 

States who need financial and 

other help to obtain medical care.

Previous studies indicated that

nonprofit hospitals may not be

defining community benefit in a 

consistent and transparent manner

that would enable policymakers to

hold them accountable for 

providing benefits commensurate 

with their tax-exempt status. GAO 

was asked to examine (1) IRS’s 

community benefit standard and 

the states’ requirements, 

(2) guidelines nonprofit hospitals 

use to define the components of 

community benefit, and 

(3) guidelines nonprofit hospitals 

use to measure and report the 

components of community benefit.

To address these objectives, GAO 

analyzed federal and state laws; the

standards and guidance from 

federal agencies and industry 

groups; and 2006 data from

California, Indiana, Massachusetts, 

and Texas. GAO also interviewed 

federal and state officials, and 

industry group representatives.

IRS stated that the report in general 

was accurate, but noted several 

concerns regarding the description 

of the community benefit standard.

CMS did not have any comments. 

IRS’s community benefit standard allows nonprofit hospitals broad latitude to

determine the services and activities that constitute community benefit. 

Furthermore, state community benefit requirements that hospitals must meet 

in order to qualify for state tax-exempt or nonprofit status vary substantially 

in scope and detail. For example, 15 states have community benefit 

requirements in statutes or regulations, and 10 of these states have detailed 

requirements. 

GAO found that among the standards and guidance used by nonprofit 

hospitals, consensus exists to define charity care, the unreimbursed cost of 

means-tested government health care programs (programs for which 

eligibility is based on financial need, such as Medicaid), and many other 

activities that benefit the community as community benefit. However, 

consensus does not exist to define bad debt (the amount that the patient is 

expected to, but does not, pay) and the unreimbursed cost of Medicare (the 

difference between a hospital’s costs and its payment from Medicare) as

community benefit. Variations in the activities nonprofit hospitals define as 

community benefit lead to substantial differences in the amount of community 

benefits they report. 

Even if nonprofit hospitals define the same activities as community benefit, 

they may measure the costs of these activities differently, which can lead to 

inconsistencies in reported community benefits. For example, standards and 

guidance vary on the level at which hospitals may report their community 

benefit (e.g., at an individual hospital level or a health care system level) and 

the method hospitals may use to estimate costs of community benefit 

activities. State data demonstrate that differences in how nonprofit hospitals 

measure charity care costs and the unreimbursed costs of government health

care programs can affect the amount of community benefit they report. 

With the added attention to community benefit has come a growing realization 

of the extent of variability among stakeholders in what should count and how 

to measure it. At present, determination and measurement of activities as 

community benefit for federal purposes are still largely a matter of individual

hospital discretion. Given the large number of uninsured individuals, and the 

critical role of hospitals in caring for them, it is important that federal and 

state policymakers and industry groups continue their discussion addressing

the variability in defining and measuring community benefit activities. 

To view the full product, including the scope 

and methodology, click on GAO-08-880. 

For more information, contact A. Bruce 

Steinwald at (202) 512-7114 or 

steinwalda@gao.gov. 
Contents 

Letter 1

Results in Brief 7

Background 8

IRS’s Standard Provides Broad Latitude for Nonprofit Hospitals to 

Determine Community Benefit Activities; State Requirements 

Vary Substantially in Scope and Detail 14 

Differences in the Activities Nonprofit Hospitals Define as 

Community Benefit Substantially Affect the Amount of 

Community Benefits They Report 19 

Differences in How Nonprofit Hospitals Measure Costs of 

Community Benefit Activities Can Affect the Amount of 

Community Benefits They Report 34 

Concluding Observations 39 

Agency Comments and Our Evaluation 40 

Appendix I Scope and Methodology 44 

Appendix II Other Activities That Benefit the Community 

Identified in Industry Guidance 49 

Appendix III State Community Benefit Requirements 52 

Appendix IV States with Community Benefit Requirements 

Related to Hospitals 57 

Appendix V Examples of States with Licensure-Related 

Community Benefit Provisions 65 

Appendix VI Examples of States with Only Community 

Benefit Reporting Provisions 67 

Page i GAO-08-880 Nonprofit Hospitals
Appendix VII Examples of States with Community Benefit 

Provisions Located Outside of Statutes and 

Regulations 69 

Appendix VIII GAO Contact and Staff Acknowledgments 70 

Tables 

Table 1: Number of Nonprofit Hospitals and Their Average Total 

Operating Expenses in Selected States, 2006 10 

Table 2: Charity Care and Bad Debt as Community Benefit—

Analysis of Selected Government Agency and Industry 

Group Standards and Guidance 22 

Table 3: Government Health Care Programs as Community 

Benefit—Analysis of Selected Government Agency and 

Industry Group Standards and Guidance 26 

Figures 

Figure 1: Geographic Distribution of Nonprofit Hospitals in 2006 9 

Figure 2: State Community Benefit Requirements 17 

Figure 3: Average Percentage of Total Operating Expenses Devoted 

to Charity Care Costs and Bad Debt among Nonprofit 

Hospitals in Selected States, 2006 23 

Figure 4: Average Percentages of Total Operating Expenses 

Devoted to Charity Care Costs, Bad Debt, and the 

Unreimbursed Costs of Medicaid and Medicare among 

Nonprofit Hospitals in Selected States, 2006 28 

Figure 5: Average Percentages of Total Operating Expenses 

Devoted to the Unreimbursed Costs of Other Activities 

That Benefit the Community among Nonprofit Hospitals 

in Selected States, 2006 31 

Figure 6: Charity Care Costs, Bad Debt, Unreimbursed Cost of 

Medicaid and Medicare, and Other Activities That Benefit 

the Community as Percentages of Their Sum among 

Nonprofit Hospitals in Selected States, 2006 33 

Page ii GAO-08-880 Nonprofit Hospitals
Figure 7: Average Percentages of Total Operating Expenses 

Devoted to the Unreimbursed Cost of Medicaid and to the 

Unreimbursed Cost of Medicaid Net of DSH Payments 

among Nonprofit Hospitals in Selected States, 2006 38 

Abbreviations 

AHA American Hospital Association 

BBRA Medicare, Medicaid, and SCHIP Balanced Budget 

 Refinement Act of 1999 

CBO Congressional Budget Office 

CCR cost-to-charge ratio 

CHA Catholic Health Association of the United States

CMS Centers for Medicare & Medicaid Services 

DSH disproportionate share hospital 

EIN employer identification number 

HFMA Healthcare Financial Management Association 

IRS Internal Revenue Service 

JCT Joint Committee on Taxation 

MedPAC Medicare Payment Advisory Commission 

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Page iii GAO-08-880 Nonprofit Hospitals
United States Government Accountability Office

Washington, DC 20548 

September 12, 2008 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

Dear Senator Grassley: 

In 2006, there were about 2,900 nonprofit hospitals in the United States.1

These hospitals qualify for federal tax exemption from the Internal 

Revenue Service (IRS) if they meet certain requirements.2

 The exemption 

is based on the principle that the government’s loss of tax revenues is 

offset by its relief from financial burdens that it would otherwise have to

meet with appropriations from public funds, and by the benefits resulting 

from the promotion of general welfare.3

 In addition to federal income tax 

exemption, these hospitals also have access to charitable donations that 

are tax deductible to the donor and tax-exempt bond financing. Nonprofit 

hospitals may also be exempt under state law from state and local income,

property, and sales taxes. The Joint Committee on Taxation (JCT)—a 

nonpartisan committee that assists Congress with tax legislation—

estimated that in 2002, nonprofit hospitals received tax benefits of 

$12.6 billion at the federal, state, and local levels.4

In 2006, there were about 2,900 nonprofit hospitals in the United States.1

These hospitals qualify for federal tax exemption from the Internal 

Revenue Service (IRS) if they meet certain requirements.2

 The exemption 

is based on the principle that the government’s loss of tax revenues is 

offset by its relief from financial burdens that it would otherwise have to

meet with appropriations from public funds, and by the benefits resulting 

from the promotion of general welfare.3

 In addition to federal income tax 

exemption, these hospitals also have access to charitable donations that 

are tax deductible to the donor and tax-exempt bond financing. Nonprofit 

hospitals may also be exempt under state law from state and local income,

property, and sales taxes. The Joint Committee on Taxation (JCT)—a 

nonpartisan committee that assists Congress with tax legislation—

estimated that in 2002, nonprofit hospitals received tax benefits of 

$12.6 billion at the federal, state, and local levels.4

To qualify for tax-exempt status, IRS requires nonprofit hospitals to be 

organized and operated exclusively for a charitable purpose. Before 1969,

To qualify for tax-exempt status, IRS requires nonprofit hospitals to be 

organized and operated exclusively for a charitable purpose. Before 1969,

 1

For purposes of this report, nonprofit hospitals refer to nongovernmental, acute care, 

general hospitals organized and operated for a charitable purpose and not designed 

primarily for profit-making purposes. Nonprofit hospitals qualify for tax-exempt status if 

they meet the requirements of section 501(c)(3) of the Internal Revenue Code. 

2

These requirements include restrictions on the entity’s organizational and operational 

structure, and political activities. 

3

See H.R. Rep. No. 1860, 75th Cong., 3d Sess., 19 (1938). 

4

JCT estimated the following values of exemptions for nonprofit hospitals and their 

supporting organizations in 2002: $2.5 billion in federal income tax, $1.8 billion in federal 

bond financing, $1.8 billion in federal charitable contributions, $500 million in state 

corporate income tax, $2.8 billion in state and local sales taxes, and $3.1 billion in local 

property tax. See Congressional Budget Office, Nonprofit Hospitals and Tax Arbitrage

(Washington, D.C.: December 2006). 

Page 1 GAO-08-880 Nonprofit Hospitals
IRS specified that hospitals must provide charity care to meet this 

requirement.5

 Since 1969, however, IRS has not specified that nonprofit 

hospitals have to provide charity care to meet this requirement, but they 

must provide a benefit to the community. This has become known as the 

community benefit standard and has remained substantially unchanged 

since 1969. In addition to charity care, services and activities that can 

qualify as community benefits include the provision of health education 

and screening to specific vulnerable populations within the community 

and activities that benefit the greater public good, such as education for 

health professionals and medical research. 

Many of these community benefit activities—especially charity care—are

intended to benefit individuals who need financial and other help to obtain

medical care. In 2006, there were approximately 47 million uninsured 

individuals in the United States.6 These individuals are more likely than 

insured individuals to rely on hospital emergency rooms for medical care.7

Some of these individuals with serious illness or injuries are admitted as 

inpatients to the hospital, incurring substantial treatment costs.8

 Because 

uninsured individuals may lack the ability to pay for their medical care, 

hospitals absorb some of the costs associated with providing 

uncompensated care—either through a charity care program or as 

 5

Charity care is generally defined as care provided to patients whom the hospital deems 

unable to pay all or a portion of their bills. 

6

U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United

States: 2006 (Washington, D.C., 2007). See also GAO, 21st Century Challenges:

Reexamining the Base of the Federal Government, GAO-05-325SP (Washington, D.C.: 

Feb. 1, 2005), in which ensuring that all Americans have access to a defined minimum core

of essential health services and allocating responsibility for financing such services are 

identified as major health care challenges for the 21st century. 

7

The Emergency Medical Treatment and Active Labor Act applies to hospitals participating 

in Medicare. See 42 U.S.C. § 1395dd (2000). According to federal regulations, a hospital that

provides emergency services must medically screen all persons who come to the hospital 

seeking emergency care to determine whether an emergency medical condition exists. If

the hospital determines that a person has an emergency medical condition, the hospital 

must provide treatment necessary to stabilize that person or arrange for an appropriate 

transfer to another facility. See 42 C.F.R. § 489.24 (2007).

8

Institute of Medicine, Hidden Costs, Values Lost: Uninsurance in America (Washington,

D.C.: National Academies Press, 2003). 

Page 2 GAO-08-880 Nonprofit Hospitals
expenses written off as bad debt.9,10 Given the benefits available to taxexempt hospitals, policymakers have been interested in determining the 

extent to which hospitals share the burden of caring for uninsured 

individuals.

In 2005, we reported on the amount of uncompensated care that nonprofit, 

for-profit, and government hospitals provided.11 We found that nonprofit 

hospitals devoted only slightly more of their patient operating expenses to

uncompensated care, on average, than their for-profit counterparts. We 

also found that the burden of uncompensated care was not evenly 

distributed among nonprofit hospitals—a small number of nonprofit 

hospitals provided substantially more uncompensated care than other 

hospitals receiving the same tax preference. In 2006, the Congressional 

Budget Office (CBO) also reported wide variation in the provision of 

uncompensated care among nonprofit hospitals.12 These studies indicated 

that nonprofit hospitals may not be defining community benefit in a 

consistent manner that would enable policymakers to hold them 

accountable for providing benefits commensurate with their tax-exempt 

status. 

 9

Hospitals may not absorb all the costs associated with caring for the uninsured because

they receive direct payments from different government sources to help cover their 

unreimbursed costs, including those for charity care, bad debt, and low-income patients.

For example, Medicare and Medicaid make payments to hospitals that serve a 

disproportionate share of low-income patients under their respective disproportionate 

share hospital programs. Other state payments may also be available to hospitals, although

their specific types vary widely. For example, hospitals may receive payments from special 

revenues, such as tobacco settlement funds; uncompensated care pools that are funded by

provider contributions; and payment programs targeted at certain services, such as

emergency services. 

10Bad debt is generally defined as the uncollectible payment that the patient is expected to, 

but does not, pay. 

11For this study, we analyzed 2003 data from five geographically diverse states—California, 

Florida, Georgia, Indiana, and Texas—with substantial representation of the three 

ownership groups. For each state, we determined the three ownership groups’ percentages 

of total uncompensated care costs and patient operating expenses devoted to 

uncompensated care. See GAO, Nonprofit, For-Profit, and Government Hospitals: 

Uncompensated Care and Other Community Benefits, GAO-05-743T (Washington, D.C.: 

May 26, 2005). 

12CBO found that, on average, nonprofit hospitals provided more uncompensated care than

otherwise similar for-profit hospitals, although the ranges of uncompensated care provided

by the two types of hospitals largely overlapped. See Congressional Budget Office, 

Nonprofit Hospitals and the Provision of Community Benefits (Washington, D.C.: 

December 2006). 

Page 3 GAO-08-880 Nonprofit Hospitals
Congress has since continued to raise questions about whether nonprofit 

hospitals sufficiently accept and share the burden of uncompensated care.

As part of this effort, in 2007, you distributed a paper discussing potential

reforms to the community benefit standard.13 Among other things, you 

sought feedback on whether hospitals should be required to devote a 

minimum percentage of patient operating expenses or revenues 

(whichever is greater) to charity care in order to continue to qualify for 

federal tax exemption. You also expressed interest in gaining a better 

understanding of nonprofit hospitals’ provision of community benefits in

relation to their tax-exempt status, and raised concerns about the extent to

which nonprofit hospitals define, measure, and report community benefits

in a consistent and transparent manner. 

To obtain more information on these topics, you asked us to describe 

IRS’s community benefit standard and the states’ community benefit 

requirements, and to examine guidelines nonprofit hospitals use to define, 

measure, and report the components of community benefit. In this report, 

we (1) determine the community benefit standard and requirements that 

IRS and the states have established; (2) examine the standards and 

guidance nonprofit hospitals use to define community benefit activities 

and their effects on reported community benefits; and (3) examine the 

standards and guidance nonprofit hospitals use to measure the costs of 

community benefit activities and their effects on reported community 

benefits. 

To determine the community benefit standard that IRS has established, we 

examined relevant provisions of the Internal Revenue Code, IRS 

regulations, revenue rulings, and federal case law. To review states’ 

community benefit requirements, we examined codified statutes and 

regulations of the states.14

To examine what activities are defined as community benefit, we reviewed 

standards and guidance from the following government agencies and 

industry groups: the Centers for Medicare & Medicaid Services (CMS), 

IRS, the American Hospital Association (AHA), the Catholic Health 

 13U.S. Senate, Committee on Finance, minority staff, Tax-Exempt Hospitals: Discussion 

Draft, July 19, 2007. 

14For purposes of this report, unless otherwise apparent, “states” refers to the 50 states and 

the District of Columbia. 

Page 4 GAO-08-880 Nonprofit Hospitals
Association of the United States (CHA), VHA Inc.,15 and the Healthcare 

Financial Management Association (HFMA). CMS, the agency that 

administers Medicare,16 requires cost information—including charity care 

costs and bad debt expenses—from hospitals that participate in 

Medicare.17 AHA officials stated that it represents over three-fourths of the 

hospitals in the nation, including nonprofit hospitals. CHA represents 

Catholic health care organizations, including hospitals, and is the nation’s 

largest group of nonprofit health care sponsors, systems, and facilities. 

VHA represents about 28 percent of the nation’s community-owned, 

nonprofit hospitals. In 2006, CHA and VHA jointly released a set of 

detailed community benefit guidelines—A Guide for Planning and 

Reporting Community Benefit.

18 HFMA represents health care financial

management executives and leaders in all areas of health care, including

hospitals. In 2006, the organization issued financial reporting guidance on 

community benefit activities, including details on charity care and bad 

debt. In addition to examining standards and guidance from these 

organizations, we interviewed their officials and representatives. We also 

interviewed representatives from the Association of American Medical 

Colleges, which represents medical schools, teaching hospitals, and their 

faculty, residents, and students, as well as academic and professional 

societies; the Federation of American Hospitals, which represents forprofit community hospitals and health systems; the National Association 

of Children’s Hospitals; state hospital associations and state health 

officials from California, Indiana, Massachusetts, and Texas; and seven

nonprofit health care systems.19

 15For the remainder of this report, we will refer to VHA Inc., formerly known as Voluntary 

Hospitals of America, as VHA.

16Medicare, financed by the federal government, provides health care coverage to eligible 

individuals aged 65 years or older, certain individuals with disabilities, and individuals with 

end-stage renal disease. 

17While CMS is not responsible for administering U.S. tax law, the agency was directed by 

Congress to collect data on costs incurred by hospitals for providing services for which the

hospitals are not compensated. Many of these services and their associated costs are 

defined as community benefit by both IRS and industry groups. 

18For purposes of this report, we refer to CHA and VHA in tandem because they jointly 

issued the guidance. 

19For purposes of this report, we refer to the nonprofit health systems, hospital systems, 

and health care systems we interviewed as “health care systems.” 

Page 5 GAO-08-880 Nonprofit Hospitals
To examine the effects of including or excluding various community 

benefit activities on reported community benefit, we analyzed 2006 state 

data from California, Indiana, Massachusetts, and Texas. We selected 

these four states because they represent diverse areas both geographically

and in the percentage of hospitals that are nonprofit, and because they 

collected data on nonprofit hospitals’ community benefits, which not 

many states maintain.20 The state data were also the most recent available 

at the time of our analysis. We limited our analysis to nonprofit, 

nongovernmental, acute care, general hospitals that reported gross patient 

revenues and total operating expenses. We calculated and compared a 

variety of hospital expenses, including charity care costs, bad debt, 

unreimbursed costs of government health care programs,21 and the costs of 

other activities that benefit the community, as percentages of total 

operating expenses. To assess the reliability of the state data from 

California, Indiana, Massachusetts, and Texas, we reviewed relevant 

documentation for each of the data sets and interviewed knowledgeable 

state officials about the accuracy of the data. Based on this information we 

determined that the state-collected data were reliable for the purposes of 

this report. 

To examine practices nonprofit hospitals use to measure community 

benefit activities, we reviewed the standards and guidance from CMS, IRS, 

AHA, CHA and VHA, and HFMA. To examine the effects of these practices

on reported community benefit, we analyzed 2006 state data from 

California, Indiana, Massachusetts, and Texas. Specifically, we compared 

the different ways hospitals calculate expenses, including charity care 

costs and the unreimbursed cost of Medicaid,22 as percentages of total 

operating expenses. Appendix I contains a more complete description of 

our methodology. We conducted our work from July 2007 through August 

2008 in accordance with generally accepted government auditing 

standards. 

 20Reliable, hospital-specific, nationwide data were not available. 

21The unreimbursed costs of government health care programs—commonly referred to by 

industry groups as “shortfalls”—are generally defined as the difference created when a 

facility receives payments that are less than the facility’s costs of caring for public program 

beneficiaries. 

22Medicaid provides health care coverage to eligible low-income people, and is jointly 

financed by the federal government and the states. 

Page 6 GAO-08-880 Nonprofit Hospitals
IRS’s community benefit standard allows nonprofit hospitals broad 

latitude to determine the services and activities that constitute community 

benefit. Furthermore, state community benefit requirements that hospitals 

must meet in order to qualify for state tax-exempt or nonprofit status vary 

substantially in scope and detail. For example, 15 states have community 

benefit requirements in statutes or regulations, and 10 of these states have 

detailed requirements. 

Results in Brief 

Among the standards and guidance used by nonprofit hospitals, consensus 

exists to define charity care, the unreimbursed cost of means-tested 

government health care programs (programs for which eligibility is based 

on financial need, such as Medicaid), and many other activities that benefit 

the community as community benefit. However, consensus does not exist 

to define bad debt and the unreimbursed cost of Medicare as community 

benefit. Variations in the activities nonprofit hospitals define as 

community benefit lead to substantial differences in the amount of 

community benefits they report. 

Even if nonprofit hospitals define the same activities as community 

benefit, they may measure the costs of those activities differently, which 

can lead to inconsistencies in reported community benefits. For example, 

standards and guidance vary on the level at which hospitals may report 

their community benefit (e.g., at an individual hospital level or a health 

care system level); the method hospitals may use to estimate costs of all 

community benefit activities; and the methods hospitals may use to 

measure costs of charity care, government health care programs, and 

other activities that benefit the community. State data demonstrate that 

differences in how nonprofit hospitals measure charity care costs and the 

unreimbursed costs of government health care programs can affect the 

amount of community benefit they report. 

With the added attention to community benefit has come a growing 

realization of the extent of variability among stakeholders in what should 

count and how to measure it. At present, determination and measurement 

of activities as community benefit for federal purposes are still largely a 

matter of individual hospital discretion. Given the large number of 

uninsured individuals, and the critical role of hospitals in caring for them, 

it is important that federal and state policymakers and industry groups 

continue their discussion addressing the variability in defining and 

measuring community benefit activities. An encouraging prospect for the 

future is the potential availability of two national data sources derived 

from mandatory reporting to IRS and CMS. National data should be helpful 

in standardizing reporting on community benefit activities and informing 

Page 7 GAO-08-880 Nonprofit Hospitals
public policy on the community benefit standard. However, the data from

these two sources will not be available for analysis for several years, and it

remains to be seen whether the data will be consistent and reliable. 

CMS and IRS reviewed a draft of this report. CMS stated that it did not 

have any comments. IRS stated that the report in general was accurate, 

although the agency noted several concerns regarding the description of 

the community benefit standard. We addressed IRS’s concerns as 

appropriate.

In 2006, the majority—59 percent—of the roughly 4,900 nonfederal, acute 

care general hospitals in the United States were nonprofit. The rest 

included government hospitals (25 percent) and for-profit hospitals 

(17 percent).

23 States varied—generally by region of the country—in their 

percentages of nonprofit hospitals (see fig. 1). States in the Northeast and 

Midwest had relatively high concentrations of nonprofit hospitals, whereas 

the concentration was relatively low in the South. For example, 88 percent 

of Massachusetts’ hospitals were nonprofit, whereas only 32 percent of 

Texas’ hospitals were nonprofit. 

Background 

 23Percentage total is greater than 100 due to rounding. 

Page 8 GAO-08-880 Nonprofit Hospitals
Figure 1: Geographic Distribution of Nonprofit Hospitals in 2006 

D.C.

Fla.

La.

Miss. Ga. Ala.

Ark. S.C.

Tex.

N.C. Tenn.

N.Mex.

Ariz. Okla.

Ky.

Va.

Md.

Del.

Kans. Mo.

Colo. W.Va.

N.J.

Ind. Ohio Nev.

Utah

Calif.

R.I.

Pa. Conn.

Ill.

Mass.

Nebr.

Iowa

Wyo.

N.Y.

Vt.

N.H.

Mich.

S.Dak.

Ore.

Wis.

N.Dak. Maine

Idaho

Mont.

Wash.

Minn.

Hawaii

Alaska

Sources: GAO analysis of 2006 CMS data; Map Resources (map).

High percentage of nonprofit hospitals (75 to 100%)

Medium percentage of nonprofit hospitals (50 to 74%)

Low percentage of nonprofit hospitals (0 to 49%)

Note: Hospitals include nonfederal, acute care, general hospitals. 

Among nonprofit hospitals we examined in California, Indiana, 

Massachusetts, and Texas, the average size of these hospitals, as measured 

by total operating expenses, varied (see table 1). For example, the average

total operating expenses of nonprofit hospitals in Massachusetts were 

98 percent higher than average total operating expenses of nonprofit 

hospitals in Indiana. 

Page 9 GAO-08-880 Nonprofit Hospitals
Table 1: Number of Nonprofit Hospitals and Their Average Total Operating 

Expenses in Selected States, 2006 

Number of hospitals

Average total operating expenses 

(in millions)

California 166 $201.3

Indiana 78 141.3

Massachusetts 64 279.6

Texas 119 148.9

Source: GAO analysis of 2006 California, Indiana, Massachusetts, and Texas data. 

Note: Nonprofit hospitals include nongovernmental, acute care, general hospitals. 

Federal Tax-Exemption 

Criteria for Nonprofit 

Hospitals 

Federal tax exemption for charitable organizations has been in existence 

since the beginning of federal income tax law. This exemption is based on 

the principle that the government’s loss of tax revenue is offset by its relief

from financial burdens that it would otherwise have to meet with 

appropriations from public funds, and by the benefits resulting from the 

promotion of general welfare. Nonprofit hospitals have never been 

expressly categorized as tax-exempt organizations under section 501(c)(3)

of the Internal Revenue Code. However, these hospitals are able to qualify 

for federal tax exemption under section 501(c)(3) of the Internal Revenue

Code since IRS and courts have recognized the promotion of health for the 

benefit of the community—where medical assistance is afforded to the 

poor or where medical research is promoted—as a charitable purpose.24

Specifically, nonprofit hospitals must be organized and operated 

exclusively for the promotion of health, ensuring that no part of their net 

earnings inure to the benefit of any private individual, and may not 

participate in political campaigns on behalf of any candidate or conduct 

substantial lobbying activities.25

IRS has also issued revenue rulings specifying how nonprofit hospitals can 

meet the requirements of federal tax exemption.26 In a 1956 revenue ruling,

IRS required tax-exempt hospitals to provide charity care to the extent of

 24See, e.g., Geisinger Health Plan v. Comm’r, 985 F.2d 1210, 1216 (3rd Cir. 1993) (discussing 

IRS policy and cases construing exemption provisions for hospitals). 

25Harding Hospital, Inc. v. U.S., 505 F.2d 1068, 1071-72 (6th Cir. 1974). 

26Revenue rulings are published IRS administrative decisions stating how the agency 

applies provisions of tax law to a particular set of circumstances. 

Page 10 GAO-08-880 Nonprofit Hospitals
their financial abilities, which was known as the financial ability 

standard.27 However, through another revenue ruling in 1969, IRS 

established the community benefit standard, which modified the charity 

care-based financial ability standard as to how hospitals could qualify for 

tax-exempt status.28 The community benefit standard specified that 

nonprofit hospitals were not required to provide charity care to qualify for 

federal tax exemption, but they must provide a benefit to the community.29

Therefore, nonprofit hospitals could qualify for tax-exempt status so long 

as they benefited the community in a way that relieved a governmental 

burden and promoted general welfare, even if not every member of the 

community received a direct benefit.

In the 1969 revenue ruling that established the community benefit 

standard, IRS recognized five factors that would support a nonprofit 

hospital’s tax-exempt status. These five factors were (1) the operation of 

an emergency room open to all members of the community without regard 

to ability to pay;30 (2) a governance board composed of community 

members; (3) the use of surplus revenue for facilities improvement, patient 

care, and medical training, education, and research; (4) the provision of 

inpatient hospital care for all persons in the community able to pay, 

including those covered by Medicare and Medicaid; and (5) an open 

medical staff31 with privileges available to all qualifying physicians. IRS 

further stated that tax-exempt status would be determined based on the 

facts and circumstances of each case, and that neither the absence of 

particular factors set forth in the 1969 revenue ruling nor the presence of 

other factors would be necessarily conclusive. 

 27Rev. Rul. 56-185, 1956-1 C.B. 202. 

28Rev. Rul. 69-545, 1969-2 C.B. 117. 

29Specifically, the 1969 revenue ruling removed the 1956 revenue ruling requirement 

relating to caring for patients without charge or at rates below cost, and indicated that

hospitals could qualify for federal tax exemption if they provided a benefit to the

community. 

30In a 1983 revenue ruling, IRS provided that at least in the case where a state health 

planning agency made an independent determination that operation of an emergency room 

would be unnecessary and duplicative, a hospital could still qualify for tax exemption even 

though it did not operate an emergency room. Rev. Rul. 83-157, 1983-2 C.B. 94. 

31All qualified physicians who meet the hospital’s guidelines can be part of the hospital 

staff. 

Page 11 GAO-08-880 Nonprofit Hospitals
Nonprofit hospitals that qualify for tax-exempt status are exempt from 

federal income taxation, have access to bond financing that generates taxfree interest earnings for the bondholder—allowing these hospitals to 

borrow funds at a lower cost than nonexempt entities—and are eligible to

receive contributions that are tax deductible for the donors. In addition, 

these hospitals may also be exempt under state law from state and local 

income, property, and sales taxes, which in some cases are of a greater 

value than the federal income tax exemption. 

Reporting of Community 

Benefit Information 

Once nonprofit hospitals have applied for and are granted tax-exempt 

status by IRS, they must file Form 990 with IRS on an annual basis.32 

Form 990 collects information such as revenues and expenses, and 

program service accomplishments. In December 2007, IRS released a 

revised Form 990 to include a schedule specific to hospitals— 

Schedule H—that requires nonprofit hospitals to report their provision of 

activities that benefit the community in specified categories: charity care,

bad debt, unreimbursed cost of government health care programs, and 

other activities that benefit the community.33 The new hospital schedule 

will be mandatory starting in filing year 2010 for tax year 2009, and IRS 

 32Starting in tax year 2008, exempt organizations with gross receipts less than $25,000 will 

need to file Form 990-N. Those with gross receipts less than $1,000,000 (to be reduced to 

$200,000 by tax year 2010) and total assets less than $2,500,000 (to be reduced to $500,000

by tax year 2010) will file Form 990-EZ, instead of the full Form 990. Forms 990-N and 

990-EZ are shorter than the full Form 990. 

33We examined IRS’s final version of the Form 990, which was pending the Office of 

Management and Budget’s approval at the time this report was issued. Form 990’s new 

Schedule H requires nonprofit hospitals to report their provision of bad debt, the

unreimbursed cost of Medicare, and community-building activities in Parts II and III of the

schedule, but not as part of the Part I quantifiable community benefit table. Prior to this 

revision, Form 990 did not collect and IRS did not have information on hospitals’ provision 

of activities that benefit the community in specified categories. IRS officials indicated that 

for tax years 2001 to 2006, none of the nonprofit hospital examinations the agency 

conducted were selected specifically to ascertain whether these hospitals complied with 

the community benefit standard. Rather, IRS conducted these examinations in the course 

of the agency’s other work. These officials also told us that some of these examinations 

were full-scale examinations where in addition to reviewing other issues, IRS conducted a 

limited review of community benefit focusing on the five factors listed in the 1969 revenue 

ruling.

Page 12 GAO-08-880 Nonprofit Hospitals
officials have stated that complete data from the schedule may not be 

available until 2011, at the earliest.34

In addition to meeting IRS’s community benefit reporting requirements, 

hospitals that participate in the Medicare program—including nonprofit 

hospitals—must file hospital cost reports with CMS.35 The required cost 

report includes Worksheet S-10, which collects revenue and cost 

information on Medicaid, state and local indigent care programs, the State 

Children’s Health Insurance Program,36 and other uncompensated care—

defined by CMS as charity care and bad debt—provided by the hospitals. 

CMS, in consultation with the Medicare Payment Advisory Commission 

(MedPAC),37 is revising Worksheet S-10 as part of broader efforts to update 

the Medicare hospital cost report. 

Beyond these two federal requirements, some states also require hospitals 

to report their provision of community benefits using state-specific 

reporting instruments. In addition, when requested, some hospitals also 

report their community benefits to the state hospital associations or other 

trade organizations to which they belong. 

 34While Part V, Facility Information, of Schedule H is required for tax year 2008, Parts I, II,

III, IV, and VI do not become mandatory until tax year 2009. Depending on when a 

hospital’s fiscal year begins, tax year 2009 can start on any date during calendar year 2009

and end 12 months later, which could be as late as November 30, 2010. IRS officials have 

noted that hospitals have until 5 months after the end of their fiscal year to file Form 990 

and its schedules. Beyond this filing deadline, hospitals may also obtain filing extensions 

for an additional 6 months. 

35Medicare-certified institutional providers are required to submit an annual cost report.

The cost report contains provider information, such as facility characteristics, as well as 

utilization, cost, charge, and financial statement data. For cost report periods beginning on 

or after October 1, 2001, section 112(b) of the Medicare, Medicaid, and SCHIP Balanced 

Budget Refinement Act of 1999 (BBRA) requires short stay, acute care hospitals to submit 

cost reports containing data on costs incurred by the hospital for providing inpatient and

outpatient hospital services for which the hospital is not compensated, including nonMedicare bad debt, charity care, and charges for Medicaid and indigent care. Pub. L. 

No. 106-113, App. F., § 112(b), 113 Stat. 1501, 1501A-330. 

36The State Children’s Health Insurance Program provides health care coverage to 

uninsured children in families whose incomes exceed the eligibility requirements of 

Medicaid. States have some flexibility in how they design their programs. 

37MedPAC was established by the Balanced Budget Act of 1997, § 4022, 42 U.S.C. § 1395b-6

(2000), to advise Congress on issues affecting the Medicare program.

Page 13 GAO-08-880 Nonprofit Hospitals
IRS’s community benefit standard to qualify for tax-exempt status allows 

nonprofit hospitals broad latitude to determine the services and activities 

that constitute community benefit. Furthermore, state community benefit

requirements that hospitals must meet in order to qualify for state taxexempt or nonprofit status vary substantially in scope and detail. 

IRS’s Standard 

Provides Broad 

Latitude for Nonprofit 

Hospitals to 

Determine 

Community Benefit 

Activities; State 

Requirements Vary 

Substantially in Scope 

and Detail 

IRS’s Community Benefit 

Standard Provides Broad 

Latitude to Nonprofit 

Hospitals 

IRS’s community benefit standard that hospitals must meet to qualify for 

federal tax exemption provides broad latitude to the hospitals in 

determining the nature and amount of the community benefits they 

provide.38 Specifically, IRS, in a 1969 revenue ruling that established the 

current community benefit standard, modified the existing tax-exemption 

requirement that focused primarily on the level of charity care that a 

hospital provided. This 1969 revenue ruling also listed the five factors that 

demonstrated how a nonprofit hospital could benefit the community in a 

way that relieved governmental burden and promoted general welfare.39

While IRS recognized these five factors as supportive of a nonprofit 

hospital’s tax-exempt status, it also stated that a nonprofit hospital seeking 

exemption need not meet all five factors to qualify for tax-exempt status; 

instead, the determination is based on all the facts and circumstances, and 

the absence of a particular factor may not necessarily be conclusive. As 

stated by the Commissioner of Internal Revenue, some of the five factors 

are now common practice in the hospital community and are less relevant 

 38See Geisinger Health Plan v. Comm’r, 985 F.2d 1210, 1217 (3d Cir. 1993) (“[N]o clear test 

has emerged to apply to nonprofit hospitals seeking tax exemptions.”). 

39The five factors were (1) the operation of an emergency room open to all members of the 

community without regard to ability to pay; (2) a governance board composed of 

independent civic leaders; (3) the use of surplus revenue for facilities improvement, patient

care, and medical training, education, and research; (4) the provision of inpatient hospital 

care for all persons in the community able to pay, including those covered by Medicare and 

Medicaid; and (5) an open medical staff with privileges available to all qualifying 

physicians. 

Page 14 GAO-08-880 Nonprofit Hospitals
in distinguishing tax-exempt hospitals from their for-profit counterparts.40

For example, having an open medical staff, participating in Medicare and

Medicaid, and treating all emergency patients without regard to ability to 

pay are common features of both tax-exempt and for-profit hospitals. 

Although the focus of IRS policy is no longer the level of charity care that 

hospitals provide, the 1956 revenue ruling remains relevant, and IRS and 

various courts have continued to take into account the extent to which a 

hospital provides charity care when determining an organization’s taxexempt status. For example, among the factors that the Tax Court and 

several United States Courts of Appeals have considered in determining 

whether an organization met IRS’s tax exemption requirements were 

existence of a charity care policy,

41 provision of free or below-cost services 

to individuals financially unable to make the required payments,42 and 

provision of additional community benefit—other than making hospital 

services available to all in the community—that either further the function

of government-funded institutions or would not likely be provided within 

the community without a hospital subsidy.43

 40Statement of Mark Everson, Commissioner of Internal Revenue, testimony before the full 

House Committee on Ways and Means, May 26, 2005. 

41Harding Hosp. Inc. v. United States, 505 F. 2d 1068, 1077 (6th Cir. 1974). 

42IHC Health Plans, Inc. v. Comm’r, 325 F.3d 1188, 1197 n.16 (10th Cir. 2003) (citing 

Geisinger Health Plan v. Comm’r, 985 F.2d 1210, 1218 (3d Cir. 1993); Fed’n Pharmacy Serv., 

Inc. v. Comm’r, 625 F.2d 804, 807 (8th Cir. 1980); and Sound Health Ass’n v. Comm’r, 71 T.C.

158, 1978 WL 3393 (1978)). 

43IHC Health Plans, Inc., 325 F.3d at 1197–98.

Page 15 GAO-08-880 Nonprofit Hospitals
State community benefit requirements that hospitals must meet in order to

qualify for state tax-exempt or nonprofit status vary substantially in scope 

and detail. Specifically, 15 of the states have community benefit 

requirements in statutes or regulations and 36 do not (see fig. 2).44 Of the 

15 states with requirements, 5 states—Alabama, Mississippi, Pennsylvania, 

Texas, and West Virginia—specify a minimum amount of community 

benefits required in order for hospitals to be compliant with state 

requirements. Another 4 of the 15 states—Illinois, Indiana, Maryland, and

Texas—have penalties for hospitals that fail to comply with their 

community benefit requirements.45 Appendixes III, IV, V, VI, and VII 

contain more information on state community benefit requirements and 

other related provisions. 

State Community Benefit 

Requirements That 

Nonprofit Hospitals Must 

Meet Vary Substantially in 

Scope and Detail 

 44Some of the 36 states that do not have community benefit requirements have provisions 

or other resources related to community benefit. Some states, including Massachusetts, 

New Mexico, and Rhode Island, have community benefit provisions tied to their hospital 

licensure requirements rather than requirements needed to obtain and maintain tax-exempt 

or nonprofit status. At least five states—Connecticut, Georgia, Minnesota, Nevada, and

Oregon—require that hospitals periodically report to the relevant authorities the 

community benefits they provide but do not require that hospitals actually provide any

community benefits. At least two states—Massachusetts and Utah—describe their 

community benefit provisions in sources other than statutes or regulations, such as

attorney general guidelines or property tax exemption standards. We provide examples of

states that fall into these categories as anecdotal evidence; they do not represent a 

comprehensive analysis of states without community benefit requirements as we define 

that term.

45For state requirements tied to tax-exempt or nonprofit status, a hospital can be assessed a 

civil penalty if it fails to comply with state community benefit requirements. Hospitals in 

such states may also be denied tax exemption, although we did not consider that to be a

penalty for purposes of this report. If a state has no community benefit requirement but ties 

community benefit provisions to licensure, such as Massachusetts, New Mexico, and

Rhode Island, a hospital in that state may be denied licensure for failure to comply with 

state community benefit provisions (or if already licensed, its license can be suspended or 

revoked). Some state requirements do not provide any penalty for failure to comply. 

Page 16 GAO-08-880 Nonprofit Hospitals
Figure 2: State Community Benefit Requirements 

D.C.

Fla.

La.

Miss. Ga. Ala.

Ark. S.C.

Tex.

N.C. Tenn.

N.Mex.

Ariz. Okla.

Ky.

Va.

Md.

Del.

Kans. Mo.

Colo. W.Va.

N.J.

Ind. Ohio Nev.

Utah

Calif.

R.I.

Pa. Conn.

Ill.

Mass.

Nebr.

Iowa

Wyo.

N.Y.

Vt.

N.H.

Mich.

S.Dak.

Ore.

Wis.

N.Dak. Maine

Idaho

Mont.

Wash.

Minn.

Hawaii

Alaska

Sources: GAO analysis of state statutes and regulations; Map Resources (map).

Detailed community benefit requirement

Less-detailed community benefit requirement

No community benefit requirement

In addition to the variation in scope among state community benefit 

requirements, the level of detail among such requirements also varies 

substantially. Specifically, of the 15 states with community benefit 

requirements, 10 states have detailed requirements and 5 states have lessPage 17 GAO-08-880 Nonprofit Hospitals
detailed requirements.46,47 The community benefit requirements of the 10 

detailed states typically include some combination of the following 

factors: a definition of community benefit, requirements for a community 

benefit plan that sets forth how the hospital will provide community 

benefits, community benefit reporting requirements, and penalties for 

noncompliance. For example, California requires its nonprofit hospitals to 

adopt and annually update a community benefit plan, and annually submit 

a description of community benefit activities provided and their economic 

values, among other things.48 Similarly, Illinois requires its hospitals to 

develop an organizational mission statement and a community benefits 

plan for serving the community’s health care needs, and to submit an 

annual report of its community benefits plan, including a disclosure of the 

amount and types of community benefits actually provided.49 These states 

also typically define community benefit using examples of, and guidance 

on, the types of activities considered to be community benefit. For 

example, Illinois defines community benefit using examples of activities 

that the state considers to be community benefit and Maryland defines 

community benefit using both examples and guidance.50 In contrast, the 

remaining five states with less-detailed requirements either only require 

the provision of charity care or do not provide guidance on what counts as 

community benefit. For example, Alabama’s requirement only provides 

that charity care must constitute at least 15 percent of a hospital’s 

business in order for the hospital to be exempt from property tax; and

 46The 10 states with detailed requirements are California, Idaho, Illinois, Indiana, Maryland, 

New Hampshire, New York, Pennsylvania, Texas, and West Virginia.

47The five states with less-detailed requirements are Alabama, Colorado, Mississippi, North 

Dakota, and Wyoming. 

48Cal. Health & Safety Code §§ 127350, 127355 (2008). 

49210 Ill. Comp. Stat. 76/15, 76/20 (2008). 

50Illinois defines community benefit to include the unreimbursed cost of providing charity 

care, language assistant services, government-sponsored indigent health care, donations, 

volunteer services, education, government-sponsored program services, research, 

subsidized health services, and collecting bad debts. Illinois’ definition explicitly excludes

the cost of paying taxes or other governmental assessments. Maryland defines community 

benefit as an activity that is intended to address community needs and priorities primarily 

through disease prevention and improvement of health status, including health services

provided to vulnerable or underserved populations, such as Medicaid, Medicare, or

Maryland Children’s Health Program enrollees; financial or in-kind support of public health

programs; donations of funds, property, or other resources that contribute to a community

priority; health care cost containment activities; and health education, screening, and 

prevention services. 

Page 18 GAO-08-880 Nonprofit Hospitals
Wyoming’s requirement does not specify which activities its nonprofit 

hospitals must provide, but makes clear that hospitals must provide 

benefit to the community to obtain or maintain tax-exempt status. 

Variations in the activities nonprofit hospitals define as community benefit 

lead to substantial differences in the amount of community benefits they 

report. Among the government standards and industry guidance used by

nonprofit hospitals, consensus exists to define many activities and their 

associated expenses—charity care, the unreimbursed cost of means-tested 

government programs, and many other activities that benefit the 

community—as community benefit. However, consensus does not exist to 

define bad debt and the unreimbursed cost of Medicare—each of which 

represents a substantial cost for nonprofit hospitals, according to the state 

data we analyzed—as community benefit. 

Differences in the 

Activities Nonprofit 

Hospitals Define as 

Community Benefit 

Substantially Affect 

the Amount of 

Community Benefits 

They Report 

Community Benefits May 

Include Charity Care, Bad 

Debt, Government Health 

Care Programs, and Other 

Activities That Benefit the 

Community 

Activities that benefit the community and their associated expenses, as 

defined by the community benefit standards and guidance that nonprofit 

hospitals use, generally fall into one of four categories: charity care, care 

for patients whose accounts result in bad debt (referred to as bad debt for 

the rest of the report), care for beneficiaries of government health care 

programs and their associated unreimbursed costs, and other activities 

that benefit the community. In these standards and guidance, charity care

is generally defined as care provided to patients whom the hospital deems 

unable to pay all or a portion of their bills. Bad debt is generally defined as

the uncollectible payment that patients are expected to, but do not, pay. 

The unreimbursed cost of government health care programs is generally 

defined as the shortfall created when a facility receives total payments 

that are less than the total costs of caring for public program beneficiaries. 

Government health care programs include both means-tested programs for 

which eligibility is based on financial need, such as Medicaid, and nonmeans-tested programs for which eligibility is not based on financial need, 

such as Medicare. Lastly, other activities that benefit the community 

typically include activities that address a community need, and exclude 

activities that generate revenue for the hospital or are provided primarily 

for marketing purposes. These other activities generally fall into one of 

seven groups that the CHA and VHA guidance has identified, such as 

health professions education and medical research. Appendix II contains

descriptions and examples of all seven groups. 

Page 19 GAO-08-880 Nonprofit Hospitals
Consensus exists among the standards and guidance that nonprofit 

hospitals use to define charity care as community benefit. Specifically, 

among the five government and industry guidance documents we 

examined, four—IRS, AHA, CHA and VHA, and HFMA—define charity

care as community benefit, as did all four state hospital associations we 

interviewed. While CMS does not have a position on community benefit,

its reporting instrument collects information on uncompensated care and

defines the term to include charity care.51 In addition, of the 15 states with 

community benefit requirements, 14 either explicitly define community 

benefit to include charity care or, in the absence of a definition, mention 

charity care as an example of community benefit.

While Consensus Exists to 

Define Charity Care as 

Community Benefit, 

Disagreement Exists over 

Bad Debt, Which Is a 

Substantial Cost for 

Nonprofit Hospitals 

However, consensus does not exist among the standards and guidance

that nonprofit hospitals use to define bad debt as community benefit.

Among the five government and industry guidance documents we 

examined, two—CHA and VHA, and HFMA—specify that bad debt should

not be defined as community benefit. CHA and VHA state that hospitals 

have the responsibility to better identify patients eligible for charity care,

and thus distinguish charity care from bad debt.52 Citing the difficulty of 

obtaining appropriate documentation to determine charity care eligibility, 

HFMA, while it does not define bad debt as community benefit, has stated 

that hospital charity care policies should address how to determine 

eligibility when patients do not provide sufficient information to formally 

 51CMS added this reporting instrument pursuant to section 112(b) of the BBRA, which does

not use the term “community benefit,” but requires short stay, acute care hospitals to 

submit data on costs incurred by the hospital for providing services for which the hospital 

is not compensated, including non-Medicare bad debt, charity care, and charges for 

Medicaid and indigent care. 

52Making such charity care determinations is based in large part on information supplied by 

the patient or on the patient’s behalf in the form of documentation, such as federal tax 

returns, pay stubs, bank statements, etc. There are many reasons that hospitals may be 

unable to obtain the necessary documentation. For example, a hospital association official

we spoke with stated that hospitals are required to treat and stabilize emergency patients 

before inquiring about the patients’ need for charity care, but patients may leave the 

hospital before hospital officials can speak to them about financial assistance. Other 

reasons include patient embarrassment or a lack of understanding of the hospital’s charity 

care policy. 

Page 20 GAO-08-880 Nonprofit Hospitals
make a determination.53 In contrast, AHA defines bad debt as community 

benefit, as do three of the four state hospital associations we interviewed.

AHA asserts that it should be defined as community benefit because the 

majority of bad debt is attributable to low-income patients who would 

qualify for charity care if hospitals were able to obtain the necessary 

documentation to formally make this determination. 

IRS, on the other hand, has not taken a position on whether to define bad

debt as community benefit (see table 2). The agency recognizes the 

divergence of practices and views in this area and, as stated by its officials, 

would like more information on the amount of bad debt attributable to 

low-income patients. As a result, IRS’s community benefit reporting 

instrument—Form 990, Schedule H—will collect data on bad debt 

separately from the list of hospital activities that are traditionally included

as community benefit, permit hospitals to explain why certain portions of 

bad debt should be defined as community benefit, and allow hospitals to 

estimate how much bad debt is attributable to low-income patients. CMS 

does not have a position on community benefit; however, its reporting 

instrument collects information on uncompensated care and defines the 

term to include bad debt. State community benefit requirements vary in 

whether they define bad debt as community benefit. Of the 15 states with 

community benefit requirements, 3 states explicitly include bad debt as 

community benefit, 2 states explicitly exclude bad debt, and 10 states do 

not specify.

 53Specifically, HFMA stated that hospitals may refer to external sources, such as credit 

reports, to help support charity care determinations. Some of the hospital and hospital 

association officials we spoke with are either using or exploring the possibility of using

external sources, such as zip codes in conjunction with per-capita income data, credit 

reports, and migrant worker status, as proxies to make charity care eligibility 

determinations in the absence of patient-provided documentation. HFMA further stated 

that providers should make every effort to determine charity care eligibility before or at the 

time of service, but such determinations can also be made during a specific time period 

following patient care. 

Page 21 GAO-08-880 Nonprofit Hospitals
Table 2: Charity Care and Bad Debt as Community Benefit—Analysis of Selected

Government Agency and Industry Group Standards and Guidance 

Source: GAO analysis of government agency and industry group standards and guidance.

 Charity care Bad debt

Government agencies

 CMS {a {a

 IRS 9 {

Industry groups

 AHA 9 9

 CHA/VHA 9 2

 HFMA 9 2

9 Defined as community benefit

2 Defined as not community benefit

{ No position on whether to define as community benefit

a

CMS does not have a position on community benefit; however, its reporting instrument collects 

information on uncompensated care and defines the term to include both charity care and bad debt. 

Whether nonprofit hospitals define bad debt as community benefit has an 

important effect on the resulting amount of community benefit reported. 

Specifically, nearly all of the nonprofit hospitals in the four states we 

examined reported bad debt,54 and the amounts were typically substantial 

when compared to charity care (see fig. 3). For example, in 2006 in 

California, the average percentage of total operating expenses devoted to

bad debt was 7.4 percent—almost five times the average percentage

devoted to charity care costs. Moreover, the amounts of hospitals’ bad 

debt varied widely across hospitals. For example, among nonprofit 

hospitals in Texas, which had the most variation, the middle 50 percent of

hospitals reported bad debt ranging from 7.4 to 19.1 percent of total 

operating expenses in 2006. Among the middle 50 percent of nonprofit 

hospitals in Massachusetts, which had the least variation, the span was 

still notable with bad debt ranging from 2.2 to 4.6 percent of total 

operating expenses in 2006. 

 54We did not reduce bad debt expenses to costs because we found that hospitals did not

consistently report bad debt in costs or charges.

Page 22 GAO-08-880 Nonprofit Hospitals
Figure 3: Average Percentage of Total Operating Expenses Devoted to Charity Care

Costs and Bad Debt among Nonprofit Hospitals in Selected States, 2006 

Source: GAO analysis of 2006 California, Indiana, Massachusetts, and Texas data.

Percentage

State

0

5

10

15

20

25

Charity care costs

Bad debt

California IndianaMassachusettsTexas 

In all four states, 

charity care costs 

represent smaller 

percentages than 

bad debt.

1.5

7.4

3.6

6.2

2.9

3.6

5.3

14.7

Texas

Massachusetts

Indiana

California

Notes: Nonprofit hospitals include nongovernmental, acute care, general hospitals. Percentages are 

calculated only among those hospitals that reported having charity care costs and bad debt 

expenses. Ninety-six percent of hospitals in California, 81 percent of hospitals in Indiana, 97 percent 

of hospitals in Massachusetts, and 100 percent of hospitals in Texas reported charity care costs. 

Ninety-nine percent of hospitals in California, 99 percent of hospitals in Indiana, 97 percent of 

hospitals in Massachusetts, and 91 percent of hospitals in Texas reported bad debt.

Page 23 GAO-08-880 Nonprofit Hospitals
Consensus exists among the standards and guidance nonprofit hospitals 

use to define the unreimbursed cost of means-tested government health

care programs, such as Medicaid, as community benefit. Among the five 

government and industry guidance documents we examined, four—IRS, 

AHA, CHA and VHA, and HFMA—define the unreimbursed cost of such 

programs as community benefit, as did all four state hospital associations 

we interviewed. While CMS does not have a position on community 

benefit, its reporting instrument collects information on uncompensated 

care and includes the unreimbursed cost of such programs as a type of 

uncompensated care. In addition, state community benefit requirements 

generally include the unreimbursed cost of such programs as community 

benefit. Specifically, of the 15 states with community benefit requirements, 

9 states explicitly include the unreimbursed cost of means-tested 

government health care programs as community benefit, none of the states 

explicitly exclude this cost, and 6 states do not specify. 

While Consensus Exists to 

Define Means-Tested 

Programs, Such as 

Medicaid, as Community 

Benefit, the Unreimbursed 

Cost of Medicare, Which Is 

a Sizable Cost for 

Hospitals, Remains 

Contentious 

Consensus does not, however, exist to define the unreimbursed cost of 

Medicare as community benefit. Among the five government agencies and 

industry groups we examined, only the CHA and VHA guidance specifies 

that the unreimbursed cost of Medicare should not be defined as 

community benefit because, among other reasons, Medicare losses for 

some hospitals may be associated with inefficiency and not 

underpayment.55 CHA and VHA also note that all hospitals compete to 

attract Medicare beneficiaries, and CHA further stated that serving 

Medicare beneficiaries is not a differentiating feature of nonprofit 

hospitals. 

In contrast, AHA defines the unreimbursed cost of Medicare as community 

benefit, and HFMA states that hospitals should decide, based on their 

circumstances, whether the unreimbursed cost of Medicare should be 

defined as community benefit.56 AHA asserts that the unreimbursed cost of 

Medicare should be defined as community benefit because Medicare does 

not fully compensate hospitals for the cost of providing hospital care to

Medicare beneficiaries. AHA also notes that Medicare, like Medicaid,

serves a large number of low-income beneficiaries. HFMA states that the 

 55CMS has stated that Medicare payments to hospitals under the prospective payment 

system cover the costs of an efficient provider. 

56HFMA states that hospitals that choose to define the unreimbursed cost of Medicare as 

community benefit should disclose that cost separately from charity care, accompanied by

detail and context to help readers understand the reported cost. 

Page 24 GAO-08-880 Nonprofit Hospitals
unreimbursed cost of Medicare can be an important issue for many 

providers and that such losses can be material to the facility’s financial 

status; therefore, each hospital should decide, based on its circumstances, 

whether to report these costs as community benefit. Similarly, all four 

state hospital associations we interviewed stated that they define the 

unreimbursed cost of Medicare as community benefit. 

IRS has not taken a position on whether to define the unreimbursed cost 

of Medicare as community benefit (see table 3). Its officials have stated

that, similar to IRS’s position on bad debt, IRS’s community benefit 

reporting instrument will collect revenue and cost information related to

hospitals’ Medicare beneficiaries separately from the list of hospital 

activities that are traditionally included as community benefit, and permit 

hospitals to explain why they believe all or a portion of these costs should 

be defined as community benefit. CMS, which does not have a position on

community benefit, does not collect information on the unreimbursed cost 

of Medicare. State community benefit requirements vary in whether the 

unreimbursed cost of Medicare should be included as community benefit.

Of the 15 states with community benefit requirements, 6 states explicitly

include the unreimbursed cost of Medicare as community benefit,57 none 

of the states explicitly exclude this cost, and 

9 states do not specify. 

 57Texas considers the unreimbursed cost of non-means-tested government health care 

programs, including Medicare, as community benefit. 

Page 25 GAO-08-880 Nonprofit Hospitals
Table 3: Government Health Care Programs as Community Benefit—Analysis of

Selected Government Agency and Industry Group Standards and Guidance

Source: GAO analysis of government agency and industry group standards and guidance.

 Unreimbursed cost

 of means-tested

 government health

 care programs, such Unreimbursed cost

 as Medicaid of Medicare program 

Government agencies

 CMS {a {a

 IRS 9 {

Industry groups

 AHA 9 9

 CHA/VHA 9 2

 HFMA 9 9b

9 Defined as community benefit

2 Defined as not community benefit

{ No position on whether to define as community benefit

a

CMS does not have a position on community benefit; however, its reporting instrument collects 

information on uncompensated care and includes the unreimbursed cost of means-tested 

government health care programs, but not Medicare, as a type of uncompensated care. 

b

HFMA asserts that hospitals should decide, based on their circumstances, whether the unreimbursed

cost of Medicare should be defined as a community benefit. 

Whether nonprofit hospitals define the unreimbursed cost of Medicare as 

community benefit has an important effect on the resulting amount of 

community benefit reported. Specifically, most of the nonprofit hospitals 

in the four states we examined—over 90 percent in Texas and over 

80 percent in California, Indiana, and Massachusetts—reported having

unreimbursed costs of Medicare, and the amounts were typically 

substantial compared to charity care costs and the unreimbursed cost of 

Medicaid (see fig. 4). For example, in all four states the unreimbursed cost 

of Medicare as a percentage of total operating expenses was at least 

86 percent more than charity care costs as a percentage of the same 

expenses. Similarly, the unreimbursed cost of Medicare as a percentage of

total operating expenses was at least 54 percent more than the 

unreimbursed cost of Medicaid as a percentage of the same expenses. 

Moreover, the amount of hospitals’ unreimbursed cost of Medicare varied 

widely across hospitals. For example, among nonprofit hospitals in 

Indiana, which had the most variation, the middle 50 percent of hospitals

reported unreimbursed costs of Medicare ranging from 4.9 to 13.4 percent

Page 26 GAO-08-880 Nonprofit Hospitals
of total operating expenses in 2006. Among the middle 50 percent of 

nonprofit hospitals in Massachusetts, which had the least variation, the 

span was still notable with unreimbursed costs of Medicare ranging from 

2.4 to 8.0 percent of total operating expenses in 2006. 

Page 27 GAO-08-880 Nonprofit Hospitals
Figure 4: Average Percentages of Total Operating Expenses Devoted to Charity 

Care Costs, Bad Debt, and the Unreimbursed Costs of Medicaid and Medicare 

among Nonprofit Hospitals in Selected States, 2006 

0

5

10

15

20

25

30

35

40

Charity care costs

Bad debt

Unreimbursed cost of Medicaid

Unreimbursed cost of Medicare

California IndianaMassachusettsTexas 

Source: GAO analysis of 2006 California, Indiana, Massachusetts, and Texas data.

Percentage

State

The unreimbursed 

cost of Medicare 

represents a 

substantial portion 

of total operating 

expenses in all 

four states.

1.5

7.4

4.8

7.4

3.6

6.2

6.0

9.3

2.9

3.6

1.9

5.4

5.3

14.7

5.0

13.3

Texas

Massachusetts

Indiana

California

Notes: Nonprofit hospitals include nongovernmental, acute care, general hospitals. Percentages are 

calculated only among those hospitals that reported having charity care costs, unreimbursed costs of

Medicaid or Medicare, or bad debt expenses. Ninety-six percent of hospitals in California, 81 percent 

of hospitals in Indiana, 97 percent of hospitals in Massachusetts, and 100 percent of hospitals in 

Texas reported charity care costs. Ninety-nine percent of hospitals in California, 99 percent of 

hospitals in Indiana, 97 percent of hospitals in Massachusetts, and 91 percent of hospitals in Texas 

reported bad debt. Eighty-one percent of hospitals in California, 88 percent of hospitals in Indiana, 

89 percent of hospitals in Massachusetts, and 87 percent of hospitals in Texas reported 

unreimbursed costs of Medicaid. Eighty-four percent of hospitals in California, 83 percent of hospitals 

in Indiana, 81 percent of hospitals in Massachusetts, and 93 percent of hospitals in Texas reported 

unreimbursed costs of Medicare. 

Page 28 GAO-08-880 Nonprofit Hospitals
Consensus Exists to

Define Most Other 

Activities That Benefit the 

Community as Community 

Benefit 

Consensus exists among the standards and guidance nonprofit hospitals 

use to define six of the seven groups of other activities as community 

benefit: cash and in-kind contributions,58 community benefit operations,59

community health improvement services,60 health professions education,61

medical research,62 and subsidized health services.63 State community 

benefit requirements on these activities vary. For example, 13 of the 15

states with community benefit requirements cite additional activities—

other than charity care, bad debt, or government health care programs—as 

community benefit. For these states, the most commonly cited type of 

activity appears to be subsidized health services, although the exact term 

used varies among the states. 

In contrast, consensus does not exist to define the seventh group of 

activities—community-building activities—as community benefit.64 AHA, 

CHA and VHA, and HFMA define community-building activities as 

community benefit because these activities provide opportunities to 

address the underlying causes of health problems, such as poverty, 

homelessness, and environmental problems. IRS, however, has not taken a 

position on whether to define community-building activities, which 

include activities such as physical improvements and housing programs, 

economic development, and environmental improvements, as community 

benefit. The agency recognizes that there appears to be widespread 

support for including these activities, and while the agency believes that 

certain of these activities might constitute community benefit, more data 

 58Cash and in-kind contributions to others include cash donations, grants, and in-kind 

donations made to individuals or the community at large.

59Community benefit operations include dedicated staff, community health needs 

assessments, and other resources. 

60Community health improvement services include programs for community health 

education, community-based clinical services, and health care support services. 

61Health professions education includes education for physicians, medical students, nurses, 

nursing students, and other health professionals, and scholarships and funding for 

professional education. 

62Medical research includes both clinical and community health research. 

63Subsidized health services are clinical services provided at a financial loss and subsidized 

by the hospital; common examples include emergency and trauma services, and burn units. 

64Community-building activities include physical improvements and housing programs, 

economic development, community support, environmental improvements, leadership

development and leadership training for community members, coalition building, 

community health improvement advocacy, and workforce development. 

Page 29 GAO-08-880 Nonprofit Hospitals
and study are required. CMS also does not comment on what other 

activities should be defined as community benefit. 

While data are not available to evaluate the effect of defining communitybuilding activities as community benefit, data on groups of other activities 

that benefit the community indicate that they represent a relatively small 

proportion of total operating expenses for hospitals.65 Only two of the four 

states we examined—Indiana and Texas—collect data on other activities 

that benefit the community, though even these states do not collect any 

data on two of the seven categories of other activities that benefit the 

community. For the five groups of other activities with data, fewer 

hospitals in Indiana and Texas generally reported having unreimbursed 

costs for these activities when compared with other types of community 

benefits, such as charity care, and the unreimbursed costs of most 

activities account for less than 1 percent each of total operating expenses, 

on average (see fig. 5). For example, more hospitals in these two states 

reported having unreimbursed costs for community health improvement 

services than for the other four groups—over two-thirds of Indiana 

nonprofit hospitals and almost three-quarters of Texas nonprofit hospitals 

reported having these costs. Among Texas and Indiana nonprofit hospitals, 

the unreimbursed costs of these services averaged only 0.6 percent in 

2006. In contrast, few hospitals reported having unreimbursed costs for 

medical research—less than 15 percent of nonprofit hospitals in both 

states reported these costs. Among Indiana nonprofit hospitals reporting 

these costs, the unreimbursed costs of medical research averaged only 

0.1 percent of total operating expenses in 2006. In Texas, however, these

costs averaged 0.8 percent, and the top quarter of hospitals had 

unreimbursed costs at least twice the average—at 1.7 percent in 2006. 

 65Although there is consensus to include community benefit operations as community 

benefit, data are also not available to evaluate the cost associated with this activity 

compared to other community benefits. 

Page 30 GAO-08-880 Nonprofit Hospitals
Figure 5: Average Percentages of Total Operating Expenses Devoted to the 

Unreimbursed Costs of Other Activities That Benefit the Community among 

Nonprofit Hospitals in Selected States, 2006 

0

0.5

1.0

1.5

2.0

2.5

Subsidized health services

Research

Health professions education

Community health improvement services

Cash and in-kind contributions

Indiana Texas 

Source: GAO analysis of 2006 California, Indiana, Massachusetts, and Texas data.

Percentage

State

0.6 0.6

1.2

0.1

0.2

a

0.8 0.8

0.6

2.1

Notes: Nonprofit hospitals include nongovernmental, acute care, general hospitals that reported these 

other activities. We did not include California and Massachusetts because they do not collect data on

these activities. Percentages are calculated only among those hospitals that reported having 

unreimbursed costs of that activity. Cash and in-kind contributions to others include cash donations, 

grants, and in-kind donations made to individuals or the community at large. Community health 

improvement services include programs for community health education, community-based clinical 

services, and health care support services. Health professions education includes education for 

physicians, medical students, nurses, nursing students, and other health professionals, and 

scholarships and funding for professional education. Medical research includes both clinical and 

community-health research. Subsidized health services are clinical services provided despite a 

financial loss and subsidized by the hospital; examples include emergency services and burn units. 

Fifty percent of Texas hospitals reported unreimbursed costs of subsidized health services; Indiana 

does not collect data on these costs. Sixty-nine percent of Indiana hospitals and 75 percent of Texas 

hospitals reported unreimbursed costs of community health improvement services Fifty-four percent 

of Indiana hospitals and 60 percent of Texas hospitals reported unreimbursed costs of cash and inkind contributions. Thirteen percent of Indiana hospitals and 9 percent of Texas hospitals reported 

unreimbursed costs of research. Fifty percent of Indiana hospitals and 58 percent of Texas hospitals 

reported unreimbursed costs of health professions education. 

a

Indiana does not collect data on subsidized health services. 

Page 31 GAO-08-880 Nonprofit Hospitals
In addition to representing a small proportion of total operating expenses, 

the costs of other activities that benefit the community are generally 

smaller than the costs of other types of activities that benefit the 

community, such as charity care, bad debt, and the unreimbursed costs of 

Medicaid and Medicare (see fig. 6). For example, among nonprofit 

hospitals in Texas that incurred costs for providing other community 

benefits, the average cost of these activities—at 11 percent—is the 

smallest of the different groups of community benefits. 

Page 32 GAO-08-880 Nonprofit Hospitals
Figure 6: Charity Care Costs, Bad Debt, Unreimbursed Cost of Medicaid and Medicare, and Other Activities That Benefit the 

Community as Percentages of Their Sum among Nonprofit Hospitals in Selected States, 2006 

Source: GAO analysis of 2006 Indiana and Texas data.

Charity care costs

Bad debt

Unreimbursed costs of

other activities that

benefit the community

13%

22%

22%

34%

9%

Unreimbursed cost

of Medicare

Unreimbursed cost

of Medicaid

Charity care costs

Bad debt

Unreimbursed costs of

other activities that

benefit the community

12%

34%

12%

31%

11%

Unreimbursed cost

of Medicare

Unreimbursed cost

of Medicaid

Indiana Texas

Notes: Nonprofit hospitals include nongovernmental, acute care, general hospitals. We did not 

include California and Massachusetts because they do not collect data on other activities that benefit 

the community. Percentages are calculated only among those hospitals that reported having charity 

care costs; unreimbursed costs of Medicaid, Medicare, or other activities that benefit the community; 

or bad debt expenses. Other activities that benefit the community include cash and in-kind 

contributions to others, community health improvement services, health professions education, 

medical research, and subsidized health services. Eighty-one percent of hospitals in Indiana and 

100 percent of hospitals in Texas reported charity care costs. Ninety-nine percent of hospitals in 

Indiana and 91 percent of hospitals in Texas reported bad debt. Eighty-eight percent of hospitals in 

Indiana and 87 percent of hospitals in Texas reported unreimbursed costs of Medicaid. 

Eighty-three percent of hospitals in Indiana and 93 percent of hospitals in Texas reported 

unreimbursed costs of Medicare. Fifty percent of Texas hospitals reported unreimbursed costs of 

subsidized health services; Indiana does not collect data on these costs. Sixty-nine percent of Indiana 

hospitals and 75 percent of Texas hospitals reported unreimbursed costs of community health 

improvement services. Fifty-four percent of Indiana hospitals and 60 percent of Texas hospitals 

reported unreimbursed costs of cash and in-kind contributions. Thirteen percent of Indiana hospitals 

and 9 percent of Texas hospitals reported unreimbursed costs of research. Fifty percent of Indiana 

hospitals and 58 percent of Texas hospitals reported unreimbursed costs of health professions 

education. 

Page 33 GAO-08-880 Nonprofit Hospitals
Nonprofit hospitals may use a variety of practices to measure the costs of 

community benefit activities, and differences in these practices can affect

the amount of community benefits they report. For example, standards 

and guidance used by nonprofit hospitals specify a variety of levels at 

which hospitals can report their community benefit. Specifically, IRS 

requires hospitals to report community benefit on Form 990 by employer

identification number (EIN) because tax exemption is determined by 

EIN.66 An EIN may cover a single hospital, several hospitals, or other 

aggregates. In contrast, CMS requires hospitals to submit cost reports, 

which include Worksheet S-10 with data on uncompensated care, at an 

individual hospital level. Industry stakeholders, such as AHA and CHA, 

have stated that hospitals should have the choice to report community 

benefits on a health care system level or as individual hospitals. CHA has 

stated that hospitals should have this option because, for example, they 

may also have established foundations or free health clinics as separate 

taxable entities through which they provide community benefit; hospitals 

should therefore have the option to include this community benefit in their 

reports. HFMA does not specify the level at which hospitals should report 

community benefit. The percentage of expenses devoted to community 

benefit could differ for hospitals that belong to a system depending on 

whether they reported at a system or individual level, because reporting at

a system level aggregates the percentages of each hospital. One official

from a state hospital association noted that because individual hospital 

percentages would be aggregated when community benefits are reported 

at a system level, there is a potential for a health care system as a whole, 

and not necessarily each individual hospital, to meet a community benefit 

standard. 

Differences in How 

Nonprofit Hospitals 

Measure Costs of 

Community Benefit 

Activities Can Affect 

the Amount of 

Community Benefits 

They Report 

Data are not available that would allow us to evaluate the impact of 

differences in the level at which nonprofit hospitals report community 

benefit. IRS’s forthcoming Form 990, Schedule H, which will collect 

community benefit data, will be of limited use for comparing individual 

hospitals’ reported community benefits because, as noted, hospitals may 

report community benefit as a single hospital or a larger aggregate, such as 

a health care system. CMS’s Worksheet S-10 collects data on an individual 

hospital level, but we have found the data to be unreliable. MedPAC has 

stated that Worksheet S-10 should be improved, calling specifically for 

 66An EIN is an identification number used by IRS in the administration of tax laws. 

Page 34 GAO-08-880 Nonprofit Hospitals
differentiating charity care and bad debt.67,68 Although Worksheet S-10 

could yield reliable data in the future, it does not currently collect data on

all the activities IRS includes as community benefit, such as medical 

research or subsidized health services. 

Standards and guidance used by nonprofit hospitals also differ in how they 

instruct hospitals to estimate costs of community benefit activities. 

Specifically, CHA and VHA and HFMA advocate calculating costs, if 

possible, using a cost-accounting system.69 However, one state hospital 

association we spoke with stated that smaller hospitals may not be able to

use this method. In contrast, CMS instructs hospitals to estimate costs on 

Worksheet S-10 using a cost-to-charge ratio (CCR).70 CHA and VHA also 

suggest using a CCR when a cost-accounting system cannot be used. There 

are, however, many methods of calculating a CCR; CMS and CHA and VHA 

specify how hospitals should calculate the CCR used to determine charity 

care costs, but their formulas differ. AHA does not specify how to estimate 

costs, but supports the CHA and VHA guidance. IRS instructs hospitals to 

use a cost-accounting system, a CCR, or another cost-accounting method,

whichever is most accurate in estimating costs. Data are not available that

would allow us to evaluate the impact of the different practices hospitals 

use to estimate costs on the amount of reported community benefit. 

In addition to the different practices on reporting levels and 

methodologies for estimating costs, which affect every aspect of reported

community benefit, standards and guidance used by nonprofit hospitals 

also specify a variety of practices to measure the costs of charity care, 

government health care programs, and other activities that benefit the 

community, which can lead to inconsistent reporting of these activities. 

 67Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment 

Policy (Washington, D.C., 2007). 

68MedPAC has been consulting with CMS to revise Worksheet S-10 and the accompanying

instructions. 

69A cost-accounting system is a continuous and systematic process designed to accumulate 

and assign costs routinely or as desired by management. 

70CCRs are ratios applied to charges in order to estimate costs, which are used in Medicare. 

Page 35 GAO-08-880 Nonprofit Hospitals
Consensus does not exist on whether to add to charity care costs a 

nonprofit hospital’s contributions to uncompensated care pools or 

programs,71 or whether to offset charity care costs by payments to 

hospitals from uncompensated care pools or programs. AHA and CHA and 

VHA instruct hospitals to add their contributions and subtract the 

payments they receive to calculate charity care costs, but CMS and HFMA 

do not.72 IRS instructs hospitals to account for revenue from 

uncompensated care pools or programs as offsetting either charity care 

costs, the unreimbursed cost of Medicaid, or both, depending on the 

state’s primary purpose for the revenue. If the state’s primary purpose is 

unclear, IRS instructs hospitals to allocate portions of the revenue as 

offsetting either charity care costs or the unreimbursed cost of Medicaid, 

based on a reasonable estimate of the portions that are intended for 

charity care and Medicaid. 

Measurement Practices for 

Charity Care 

Differences in how nonprofit hospitals calculate charity care costs can 

have an important effect on the resulting amount of community benefit a 

hospital reports. For nonprofit hospitals in Massachusetts in 2006,73 the 

average percentage of total operating expenses devoted to charity care 

would increase from 2.9 to 3.9 percent—a 34 percent increase—if hospital 

contributions to uncompensated care pools were added to charity care 

costs. If payments Massachusetts hospitals receive from uncompensated 

care pools are then subtracted from the sum, the average percentage of 

total operating expenses devoted to charity care would decrease from 3.9 

to 1.8 percent, a 54 percent reduction. 

 71Uncompensated care pools are a financing mechanism to redistribute, within a state, 

hospitals’ financial burdens of caring for patients who do not have the ability to pay. 

Uncompensated care programs can include, for example, programs outside the hospital 

that provide health care services to financially indigent patients. 

72HFMA specifies that while hospitals should not subtract payments from uncompensated 

care pools from charity care costs, these payments should be separately disclosed if they 

are of sufficient size. HFMA does not specify how hospitals should treat their contributions

to uncompensated care pools. 

73California, Indiana, and Texas state data did not have data on both contributions to and

payments from uncompensated pools or programs. The uncompensated care pool in 

Massachusetts is primarily funded by an assessment on hospitals, a surcharge on insurers, 

and an annual appropriation from the general fund. 

Page 36 GAO-08-880 Nonprofit Hospitals
Consensus does not exist on how nonprofit hospitals are instructed to 

offset community benefit costs by Medicaid disproportionate share 

hospital (DSH) payments.74 CHA and VHA specify that hospitals can 

account for these payments as offsetting either charity care costs or the 

unreimbursed cost of Medicaid. IRS instructs hospitals to account for 

Medicaid DSH payments as offsetting either charity care costs, the 

unreimbursed cost of Medicaid, or both depending on the state’s primary 

purpose for the payment. If the state’s primary purpose is unclear, IRS 

instructs hospitals to allocate portions of the payments as offsetting either 

charity care costs or the unreimbursed cost of Medicaid based on a 

reasonable estimate of the portions that are intended for charity care and 

Medicaid. CMS does not specify whether these payments should offset any 

specific costs. AHA and HFMA do not specify whether to include these 

payments, but support the CHA and VHA guidance. 

Measurement Practices for 

Government Health Care 

Programs 

Differences in how nonprofit hospitals calculate the unreimbursed cost of 

Medicaid can have an effect on the resulting amount of community benefit 

a hospital reports (see fig. 7). For example, in Texas, the unreimbursed 

cost of Medicaid (5.0 percent of total operating expenses) is 32 percent 

more than the unreimbursed cost of Medicaid net of DSH payments 

(3.8 percent of total operating expenses). In Massachusetts, however, the 

unreimbursed cost of Medicaid is the same as the unreimbursed cost of 

Medicaid net of DSH payments—1.9 percent of total operating expenses.

75

 74DSH payments are meant to compensate those hospitals that care for a disproportionate

number of low-income patients. 

75The percentages remain the same because only four nonprofit hospitals reported 

Medicaid DSH payments in the Massachusetts state data and the amount these hospitals 

reported was small in comparison to the amount of unreimbursed cost of Medicaid. 

Page 37 GAO-08-880 Nonprofit Hospitals
Figure 7: Average Percentages of Total Operating Expenses Devoted to the 

Unreimbursed Cost of Medicaid and to the Unreimbursed Cost of Medicaid Net of

DSH Payments among Nonprofit Hospitals in Selected States, 2006 

0

1

2

3

4

5

6

7

Unreimbursed cost of Medicaid net of DSH payments

Unreimbursed cost of Medicaid

California Indiana Massachusetts Texas 

Source: GAO analysis of 2006 California, Indiana, Massachusetts, and Texas data.

Percentage

State

4.8

4.1

6.0

5.2

1.9 1.9

5.0

3.8

Notes: Nonprofit hospitals include nongovernmental, acute-care, general hospitals. Medicaid provides

health care coverage to eligible low-income people and is jointly financed by the federal government 

and the states. DSH payments are meant to compensate those hospitals that care for a 

disproportionate number of low-income patients. Average unreimbursed costs of Medicaid are 

calculated only among those hospitals that reported having unreimbursed costs of Medicaid: 

81 percent of hospitals in California, 89 percent of hospitals in Indiana, 89 percent of hospitals in 

Massachusetts, and 87 percent of hospitals in Texas. 

Moreover, consensus does not exist on whether nonprofit hospitals should 

add provider taxes, which are used to match funds for federal Medicaid 

resources, to the unreimbursed cost of Medicaid.76 CHA and VHA instruct 

hospitals to include “Medicaid taxes” as a cost of Medicaid, describing 

 76States may receive federal matching funds for provider taxes only if such fees are broadbased (that is, imposed on all items or services in the class of services or providers

thereof); uniformly imposed (that is, all items or services in the class or providers thereof 

pay the same rate of tax); and do not result in any taxpayers being held harmless (that is, 

receiving state funds to reduce the net payment to the state to below the amount of the 

tax). 42 U.S.C. § 1396b(w)(3), (6) (2000). 

Page 38 GAO-08-880 Nonprofit Hospitals
these taxes as the provider fees that are used to match federal funds. In 

contrast, IRS instructs hospitals to account for these taxes as an element

of charity care costs, the unreimbursed cost of Medicaid, or both, 

depending on the state’s primary purpose for payments to hospitals from 

an uncompensated care pool or Medicaid DSH program. HFMA officials 

stated that provider taxes for Medicaid should be defined as community 

benefit because they are assessed for a means-tested program. CMS does 

not specify whether to include these taxes. AHA does not specify whether

to include these taxes either, but supports the CHA and VHA guidelines. 

State data we obtained did not contain information that would allow us to 

analyze the impact of including these taxes as part of the unreimbursed 

cost of Medicaid. 

While consensus exists to define most other activities as community 

benefit, the calculation of their costs using differing or nonexistent 

instructions may foster inconsistency. For example, the unreimbursed 

costs of subsidized health services may overlap with other reported 

community benefits. To account for this overlap, IRS, CHA and VHA, and 

HFMA specify that when reporting subsidized health services costs, 

hospitals should subtract the portion already counted as part of charity 

care costs and the unreimbursed costs of Medicaid. AHA does not specify

whether these costs should be subtracted, but supports the CHA and VHA 

guidelines. CMS does not state which other activities it considers 

community benefit and therefore does not have guidance on measuring 

their costs. State data we obtained did not contain information that would 

allow us to analyze the effect of this overlap for measuring the cost of 

subsidized health services. 

Since we last reported on the provision of uncompensated care by 

hospitals in 2005, both policymakers and the hospital industry have 

devoted considerable time and effort to the issue of community benefit. In 

particular, distinguishing between charity care and bad debt—two 

expenses that have historically been considered together as 

uncompensated care due to the difficulty of obtaining documentation 

necessary to distinguish patients unable to pay from those unwilling to 

pay—has emerged as a key technical issue whose resolution will go far in 

harmonizing positions in the policy debate. 

Measurement Practices for 

Other Activities That 

Benefit the Community 

Concluding 

Observations 

With the added attention to community benefit has come a growing 

realization of the extent of variability among stakeholders in what should 

count and how to measure it. At the national level, in particular, there is 

Page 39 GAO-08-880 Nonprofit Hospitals
substantial divergence of opinion on whether hospitals should be 

permitted to include bad debt and the unreimbursed cost of Medicare as 

community benefit. States vary considerably in the extent to which they 

have community benefit requirements, the nature of the requirements, and 

instructions on how to measure the components of community benefit. At 

present, determination and measurement of activities as community 

benefit for federal purposes are still largely matters of individual hospital 

discretion. 

Given the large number of uninsured individuals, and the critical role of 

hospitals in caring for them, it is important that federal and state 

policymakers and industry groups continue their discussion addressing 

the variability in defining and measuring community benefit activities. An 

encouraging prospect for the future is the potential availability of two 

national data sources derived from mandatory reporting to IRS and CMS. 

National data should be helpful in standardizing reporting on community 

benefit activities and informing public policy on the community benefit 

standard. However, the data from these two sources will not be available 

for analysis for several years, and it remains to be seen whether the data

will be consistent and reliable. 

CMS and IRS reviewed a draft of this report. CMS stated that it did not 

have any comments. The director of the Exempt Organizations Division of 

IRS provided us with oral comments, which are summarized below. IRS 

stated that the report in general was accurate, although the agency noted 

that it did not review GAO’s analysis of state community benefit 

requirements for accuracy. 

Agency Comments 

and Our Evaluation 

IRS Comments IRS stated that the phrase “broad latitude to determine community 

benefit” overstates the looseness of the IRS standard and that such 

formulation is not supported by case law or published guidance. 

Specifically, IRS stated that the fact that hospitals may in practice exercise

broad latitude does not make that the accepted IRS standard. In addition, 

IRS stated that the 1969 revenue ruling lists a specific set of factors, and 

court cases have closely followed the set of factors listed in that ruling. 

IRS stated that a correct characterization would be “some latitude” or 

“some flexibility,” citing Geisinger Health Plan v. Comm’r, 985 F.2d 1210, 

1217 (3rd Cir. 1993). We believe that because the standard affords 

considerable discretion to hospitals in both the determination and 

measurement of activities that demonstrate community benefit for federal 

Page 40 GAO-08-880 Nonprofit Hospitals
purposes, the IRS standard allows nonprofit hospitals broad latitude to 

determine community benefit. 

IRS commented that in the concluding observations section, the phrase “at 

present, determination and measurement of activities as community 

benefit for federal purposes are still largely matters of individual hospital 

discretion” was unclear as to whether the statement that follows “at 

present” refers to the state of things before or after IRS released the new 

Schedule H. IRS further stated that while in the years prior to IRS’s 

Form 990, Schedule H, the determination and measurement of community 

benefit was largely a matter of individual hospital discretion, the new 

Schedule H provides clear standards. Specifically these clear standards 

cover (1) the types of activities reportable or not reportable as community 

benefit; (2) the fact that community benefit must be reported at cost rather 

than charges or otherwise; (3) the fact that community benefit must be 

reported by EIN (not by hospital or by system); and (4) the fact that bad

debt, the unreimbursed cost of Medicare, and community-building 

activities cannot be included in the Part I quantifiable community benefit

table, although they are reported elsewhere on Schedule H and IRS allows 

hospitals to explain what they think should count as community benefit.

IRS stated that, going forward with Schedule H reporting requirements, 

there will be very little or no discretion regarding these measurement 

points. IRS further stated that the area where Schedule H provides 

individual organizations discretion is in whether the organization 

estimates the cost of community benefit activities using a CCR, a costaccounting system, or a blend, so long as it is the most accurate 

information the organization has available. We believe that while Schedule 

H provides guidance with respect to the types of activities reportable as 

community benefit, it does not provide clear guidance on whether these 

activities do or do not count as community benefit for purposes of 

complying with IRS’s community benefit standard. Schedule H indicates 

that bad debt, the unreimbursed cost of Medicare, and community-building 

activities cannot be included in the Part I quantifiable community benefit

table; however, IRS has not clearly indicated whether it considers these 

items as counting toward meeting the community benefit requirement. 

Page 41 GAO-08-880 Nonprofit Hospitals
IRS noted that because its Form 990, Schedule H, requires reporting of bad 

debt and the unreimbursed cost of Medicare separately from items 

identified as community benefit, it is misleading to include these two items 

in the list along with charity care following the phrase “activities that 

benefit the community” because the phrase sounds like “community 

benefit,” and Schedule H does not treat these items on par with Part I 

community benefit items such as charity care or unreimbursed cost of 

Medicaid. We agree with IRS’s concern and have modified our text to 

clarify this distinction. 

IRS stated that it would be an overstatement of the law to say 

uncategorically that a hospital need not meet all five factors to qualify for 

tax-exempt status.77 IRS suggested that “the determination is based on all 

the facts and circumstances, and the absence of a particular factor may 

not necessarily be determinative,” and cited the 1969 revenue ruling and

IHC Health Plans, Inc. v. Comm’r, 325 F.3d 1188 (10th Cir. 2003). We agree

with IRS’s concern and have modified our text accordingly. 

IRS also provided technical comments, which we incorporated as 

appropriate.

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

issuance date. At the time, we will send copies to the Acting Administrator 

of CMS, the Commissioner of Internal Revenue, and interested 

congressional committees. We will also provide copies to others on 

request. The report is also available at no charge on GAO’s Web site at 

http://www.gao.gov. 

 77These five factors are (1) the operation of an emergency room open to all members of the 

community without regard to ability to pay; (2) a governance board composed of 

community members; (3) the use of surplus revenue for facilities improvement, patient 

care, and medical training, education, and research; (4) the provision of inpatient hospital 

care for all persons in the community able to pay, including those covered by Medicare and 

Medicaid; and (5) an open medical staff with privileges available to all qualifying 

physicians. 

Page 42 GAO-08-880 Nonprofit Hospitals
If you or your staff have any questions, please contact me at (202) 512-7114

or steinwalda@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made major contributions to this report are listed in 

appendix VIII. 

Sincerely yours, 

A. Bruce Steinwald 

Director, Health Care 

Page 43 GAO-08-880 Nonprofit Hospitals
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

In conducting this study, we examined codified federal and state statutes 

and regulations. In addition, we analyzed state data on community benefits 

from California, Massachusetts, Indiana, and Texas. We selected these 

four states because they represent diverse areas geographically, and they 

collect data on nonprofit hospitals’ community benefits, which not all 

states maintain.1

 We interviewed officials from the Internal Revenue 

Service (IRS) and the Centers for Medicare & Medicaid Services (CMS). 

We also interviewed representatives from the American Hospital 

Association (AHA); Association of American Medical Colleges; Catholic 

Health Association of the United States (CHA); Federation of American 

Hospitals; Healthcare Financial Management Association (HFMA); 

National Association of Children’s Hospitals; VHA, Inc.; and state hospital 

associations and state health officials from California, Indiana,

Massachusetts, and Texas. In addition, we interviewed representatives 

from seven nonprofit health care systems,2

 including health care systems 

in each of the four analyzed states that were referred to us by 

representatives from the state hospital associations. 

To determine the community benefit standards IRS has established, we 

examined relevant provisions of the Internal Revenue Code, IRS 

regulations, revenue rulings, and federal case law. To review states’ 

community benefit requirements, we defined “community benefit 

requirement” as a legal standard that expressly obligates a hospital to 

provide health care services or benefits to the community served by the 

hospital as a condition of maintaining tax-exempt status or qualifying as a 

nonprofit hospital. It is generally something that hospitals are required to

do beyond their role of providing care for the sick and injured in exchange 

for remuneration or compensation. We considered the requirement to be 

one applicable to hospitals only if it either expressly referred to hospitals 

or expressly referred to care or services of the nature and type that one

would reasonably expect to be provided by or performed primarily at 

acute care hospitals. We also limited our research concerning community 

benefit requirements to acute care, general hospitals. We looked only for 

codified state statutes and regulations that impose this type of

requirement. If a statute or regulation described an activity that would fall 

into one of the commonly recognized “community benefit” categories 

identified by IRS, we considered it to present a community benefit activity.

 1

Reliable, hospital-specific, nationwide data were not available. 

2

For purposes of this report, we refer to the nonprofit health systems, hospital systems, and

health care systems we interviewed as “health care system.” 

Page 44 GAO-08-880 Nonprofit Hospitals
Appendix I: Scope and Methodology 

We searched only for state statutes or regulations that require hospitals to 

perform relevant activities in order to maintain tax exemption or nonprofit 

status.3

 Thus, we excluded statutes and regulations that require hospitals 

to perform activities that benefit the community as a condition of 

obtaining hospital licensure, or that have the indirect effect of benefiting

the community, such as state analogues to the Emergency Medical 

Treatment and Active Labor Act4

 and state vaccination provisions. We 

excluded standards that are very general, such as Hawaii’s requirement 

that hospitals be “maintained to serve, and...do serve the public” in order 

to be exempt from property tax, although we did include requirements 

that specified that nonprofit hospitals do more than provide health care in

exchange for compensation or remuneration. An example of the latter is 

Wyoming, which provides that “[t]he fundamental basis for [exemption 

from ad valorem taxation] is the benefit conferred upon the public by 

schools, orphan asylums and hospitals, and the consequent relief, to some 

extent, of the burden upon the state to educate, care and advance the 

interests of its citizens.” 

We limited our search to codified state statutes and regulations. In 

performing our search of state codes and regulations, we used some 

search terms, namely “community benefit,” “charity care,” “gift to the 

community,” and “community service plan,” but we did not limit our list of 

states with community benefit requirements to states that use only these 

terms. We then searched selected parts of state codes and administrative 

codes, limiting our search to the subject areas of hospitals, public health, 

tax, and corporations, to find community benefit requirements that do not

use readily searchable terms. If we found one provision in a state code or 

regulation that imposed a community benefit requirement, we did not 

continue searching that state’s authorities for additional or related 

provisions. Some state codes and regulations provided penalties for failing 

to comply with community benefit requirements. We noted penalty 

provisions only if the penalty provision made a direct and express 

reference to failure to comply with the community benefit requirement as 

the basis for the penalty. 

 3

Examples of provisions that we excluded using this criterion include vaccination 

mandates and newborn screening requirements. 

4

42 U.S.C. § 1395dd (2000). 

Page 45 GAO-08-880 Nonprofit Hospitals
Appendix I: Scope and Methodology 

We did not include in our scope state statutes and regulations that address 

community benefits but do not amount to requirements. These states 

include those whose statutes explicitly state that having a community 

benefits program is voluntary (Connecticut5

) and those that require that 

hospitals report on the community benefits that they provide but do not 

actually require that they provide any community benefits (Connecticut,6

Georgia,7

 Minnesota,8 Nevada,9 and Oregon10). Although we did not include 

these states in our count, we noted them in the report. 

Due to our selection criteria, we included some states that organizations 

such as CHA, VHA, and Community Catalyst do not list in their compendia 

of states with community benefit laws, guidelines, and standards, and 

excluded some states that those organizations do include. We chose to use 

a broader definition of community benefit requirement, one that 

encompasses state statutes and regulations that may not use common 

community benefit terms, but nonetheless encompasses the same goals 

and types of activities as states that do use those terms. This reasoning led

us to include Alabama, Colorado, Mississippi, North Dakota, and 

Wyoming. 

We excluded provisions dealing with hospital conversions, mergers, or 

sales. These provisions often require that hospitals going through one of 

these processes take steps to ensure that levels of community benefits are

maintained or safeguarded. We feel that such provisions should not be 

included in a general compendium of state community benefit 

requirements.11 This means that we excluded some provisions that actually 

use the term “community benefit” and may even provide a detailed 

definition. We did this because such provisions apply in a limited context. 

They apply only to a limited number of hospitals (those that are going 

 5

Conn. Gen. Stat. Ann. § 19a-127k(a), (c) (West 2008). 

6

Conn. Gen. Stat. Ann. § 19a-127k(b) (West 2008). 

7

Ga. Code Ann. § 14-3-305(d) (2008). 

8

Minn. Stat. Ann. § 144.698, .699 (West 2008). 

9

Nev. Rev. Stat. 449.490(3)(b) (2008). 

102007 Or. Laws 3290. 

11This position is shared by Community Catalyst in developing its compendium of state 

community benefit requirements. See Community Catalyst, Health Care Community

Benefits: A Compendium of State Laws (Boston, 2007). 

Page 46 GAO-08-880 Nonprofit Hospitals
Appendix I: Scope and Methodology 

through conversion, merger, or sale), and they apply for a limited amount 

of time. 

We excluded provisions granting tax exemption by merely incorporating 

by reference the standard contained in section 501(c)(3) of the Internal 

Revenue Code and provisions that used section 501(c)(3)-like language 

restricting nonprofit hospital activities. However, we did include 

provisions that by their language incorporated the 501(c)(3) standard and 

had a reporting requirement. An example of the latter is Idaho, which 

grants property tax exemption only to hospitals that have received tax 

exemption from IRS pursuant to section 501(c)(3).12 In addition, Idaho 

hospitals granted tax exemption must annually submit a community 

benefits report.13 An example of the former is Arizona, which grants tax 

exemption to organizations that are exempt from federal income tax.14

To examine what activities are defined as community benefits among the 

standards and guidance used by nonprofit hospitals, we reviewed the 

standards and guidance of federal agencies and industry groups.15 To 

examine the effects of these standards and guidance on reported 

community benefit, we analyzed 2006 state data from California, Indiana, 

Massachusetts, and Texas. The state data were the most recent available

at the time of our analysis. We limited our analysis to nonprofit, 

nongovernmental, acute care, general hospitals that reported gross patient 

revenues and total operating expenses. We calculated and compared a 

variety of hospital expenses, including charity care costs, bad debt, 

unreimbursed costs of government health care programs, and the costs of 

other activities that benefit the community, as percentages of total 

operating expenses. Charity care is generally defined as care provided to 

patients who the hospital deems unable to pay all or a portion of their 

bills. Bad debt is generally defined as the uncollectible payment that the 

patient is expected to, but does not, pay. The unreimbursed costs of 

government health care programs are generally defined as the shortfall 

created when a facility receives payments that are less than the costs of 

caring for public program beneficiaries. Other activities that benefit the 

 12Idaho Code § 63-602D(4) (Michie 2008). 

13Idaho Code § 63-602D(7) (Michie 2008). 

14Ariz. Rev. Stat. § 43-1201 (2008). 

15We examined IRS’s final version of the Form 990, which was pending the Office of 

Management and Budget’s approval at the time this report was issued. 

Page 47 GAO-08-880 Nonprofit Hospitals
Appendix I: Scope and Methodology 

community include health professions education and medical research. 

Not all of the four states we examined had data on all of these expenses; 

therefore, we calculated each expense as a percentage of total operating 

expenses whenever possible. We reduced charges to costs where possible 

in the data from all four states using cost-to-charge ratios. We did not 

reduce bad debt expenses because we found that hospitals did not 

consistently report bad debt in costs or charges. 

To examine practices nonprofit hospitals use to measure community 

benefit activities, we reviewed the standards and guidance from IRS, CMS, 

AHA, CHA and VHA, and HFMA. To examine the effects of these practices

on reported community benefit, we analyzed 2006 state data from 

California, Indiana, Massachusetts, and Texas. We compared the different 

ways hospitals calculate expenses, including charity care costs and the 

unreimbursed cost of Medicaid,16 as percentages of total operating 

expenses. Not all of the four states had data to compare the different 

practices to measure all of these expenses; therefore, we calculated each 

expense as a percentage of total operating expenses whenever possible. 

We assessed the reliability of the state data from California, Indiana, 

Massachusetts, and Texas in two ways. First, we performed tests of data 

elements for all four states. For example, we examined the values for total 

operating expenses and gross patient revenues to determine whether these 

data were complete and reasonable. Second, we interviewed state officials 

knowledgeable about the data and reviewed documentation related to the 

data. We determined that all four states employed various data

consistency checks, including outlier and trend analysis and targeted 

follow-up with hospitals on a case-by-case basis, to assess the quality of 

the data they collected. We determined that the data we used in our 

analyses were sufficiently reliable for our purposes. 

We conducted our work from July 2007 through August 2008 in 

accordance with generally accepted government auditing standards. 

 16Medicaid provides health care coverage to eligible low-income people, and is jointly 

financed by the federal government and the states. 

Page 48 GAO-08-880 Nonprofit Hospitals
Appendix II: Other Activities That Benefit the 

Community Identified in Industry Guidance 

Groups of other

activities that benefit 

the communitya

Description

Examples of activities 

included in the group 

Examples of activities not

included in the group 

Cash and in-kind 

contributions 

Donations and grants provided 

to individuals or the community 

at large, and fundraising for 

community programs. 

• Contributions provided to 

 charity events and individuals

 for emergency assistance. 

• Program, operating, and 

 education grants; matching 

 grants; and event sponsorship.

• Meeting room overhead and 

 space for nonprofit or 

 community groups, emergency 

 medical care at a community 

 event, and provision of facility

 parking vouchers for patients 

 and families in need. 

• Grant writing and other 

 fundraising efforts specific to 

 community programs. 

• Employee-donated funds and

 fees for sporting event tickets. 

• Employee community 

 involvement when activities are 

 on employees’ own time and 

 volunteer hours by employees 

 on own time. 

Community benefit 

operations 

Community benefit strategic 

planning and operations. 

• Staff costs to coordinate 

 community benefit volunteer 

 programs. 

• Community health needs 

 assessment and community 

 asset assessments, such as a 

 youth asset survey. 

• Volunteer time of individuals for

 community benefit volunteer 

 programs. 

• Market share assessment or 

 marketing survey process. 

Community-building 

activities 

Activities intended to enhance 

the development of community 

health programs and 

partnerships. 

• Community gardens, 

 neighborhood improvement, 

 and revitalization projects. 

• Small business development 

 and participation in an 

 economic development council 

 or chamber of commerce. 

• Neighborhood watch groups 

 and child care for community 

 residents with qualified need.

• Lead or radon programs and 

 efforts to reduce community 

 environmental hazards. 

• Training in conflict resolution, 

 cultural skills, civics skills, or 

 language skills, and 

 community leadership 

 development. 

• Hospital representation at 

 community coalitions. 

• Housing for employees and 

 health facility construction and 

 improvements, such as a 

 meditation garden or parking 

 lot. 

• Routine financial investments. 

• Routine and mandated disaster

 preparedness. 

• Interpreter training programs 

 for hospital staff as required by

 law. 

• Advocacy specific to hospital 

 operations and financing. 

• Programs that address only the

 workforce needs of the health 

 care organization rather than

 community-wide issues. 

Appendix II: Other Activities That Benefit the 

Community Identified in Industry Guidance 

Page 49 GAO-08-880 Nonprofit Hospitals
Appendix II: Other Activities That Benefit the 

Community Identified in Industry Guidance 

Groups of other

activities that benefit 

the communitya

Description

Examples of activities 

included in the group 

Examples of activities not

included in the group 

• Local, state, and national 

 advocacy related to access to

 health care and public health

 issues. 

• Recruitment of health 

 professionals for areas 

 identified by the government

 as medically underserved. 

Community health 

improvement services 

Programs for community health 

education, community-based 

clinical services, and health care 

support services. 

• Prenatal and childbirth classes

 serving at-risk and low-income

 persons, public service 

 announcements with health

 messages, support groups,

 and self-help programs. 

• Screenings, one-time or 

 occasionally held clinics, 

 clinics for underinsured and

 uninsured persons, and mobile

 units used to deliver primary

 care services.

• Information and referrals to 

 community services and 

 assistance with enrollment in

 government health care

 programs. 

• Health education classes 

 designed to increase market

 share, support given to 

 patients and families in the

 course of their hospital visits, 

 and employee wellness and

 health promotion provided as

 an employee benefit. 

• Screenings provided primarily

 for public relations or 

 marketing, screenings and 

 clinics for which a fee is 

 charged and a profit is 

 realized, volunteers’ time, and

 mobile units that provide 

 specialty care that is an 

 extension of the hospital’s 

 outpatient department. 

• Routine discharge planning 

 and enrollment assistance 

 services designed to increase 

 facility revenue. 

Health professions 

education 

Education for physicians, 

medical students, nurses, 

nursing students, and other 

health professionals, and 

scholarships and funding for 

professional education. 

• Internships, clerkships, and 

 residencies. 

• Providing a clinical setting for 

 undergraduate training or 

 vocational training to students

 enrolled in an outside

 organization, and the costs of

 high school student job 

 shadowing and mentoring 

 projects. 

• Nursing scholarships or tuition

 payments for professional 

 education to non-employees

 and volunteers. 

• Continuing medical education

 restricted to members of the 

 medical staff. 

• Education required of nursing

 staff and staff time spent 

 delivering care that is 

 concurrent with job shadowing.

• Tuition reimbursement 

 provided as an employee 

 benefit. 

Page 50 GAO-08-880 Nonprofit Hospitals
Appendix II: Other Activities That Benefit the 

Community Identified in Industry Guidance 

Groups of other

activities that benefit 

the communitya

Description

Examples of activities 

included in the group 

Examples of activities not

included in the group 

Medical research Clinical and community-health 

research to be shared with 

persons outside the 

organization. 

• Research development, using

 formal research protocols; 

 studies on therapeutic 

 protocols; evaluation of 

 innovative treatments; and 

 research papers prepared by

 staff for professional journals. 

• Studies on health issues for 

 vulnerable persons, community

 health, and innovative health

 care delivery models. 

• Research where findings are

 used only internally. 

Subsidized health 

services 

Clinical services provided 

despite a financial loss, even 

after removing the effects of 

charity care and unreimbursed 

cost of Medicaid. If no longer 

offered, these services would

either be unavailable in the area 

or fall to the responsibility of 

government or another nonprofit 

organization. 

• Subsidies provided to maintain

 the availability of these clinical

 services. 

• Emergency and trauma 

 services, neonatal intensive

 care, burn units, women’s and

 children’s services, renal 

 dialysis services, subsidized

 continuing care, behavioral

 health services, and palliative 

 care. 

• Charity care, bad debt, and 

 unreimbursed cost of Medicaid.

• Services provided in order to

 attract physicians or health 

 plans. 

• Routine pain control program.

Source: Catholic Health Association of the United States, A Guide for Planning and Reporting Community Benefit (St. Louis, 2006). 

a

Activities that benefit the community, as defined by the standards and guidance used by nonprofit 

hospitals, generally fall into one of four categories: charity care, bad debt, unreimbursed costs of 

government health care programs, and other activities that benefit the community. 

Page 51 GAO-08-880 Nonprofit Hospitals
Appendix III: S

Requi

tate Community Benefit 

rements 

Page 52 GAO-08-880

Appendix III: State Community Benefit 

Requirements 

As of March 2008, 15 states require that hospitals provide community 

benefits in order to receive tax exemption or achieve nonprofit status. 

However, state community benefit requirements1

 vary greatly in scope and

level of detail (see app. IV).2

States with Detailed 

Community Benefit 

Requirements 

Of the 15 states with community benefit requirements, 10 have detailed 

community benefit requirements.3

 We considered states to provide a 

“detailed” definition if they provided some combination of the following: a 

definition of community benefit, requirements for a community benefits 

plan that sets forth how the hospital will provide community benefits, 

reporting requirements, and penalties for noncompliance. These states 

typically set forth a detailed definition of community benefit, specifying 

numerous categories of activities that qualify, and are consistent with the 

level of detail of community benefit definitions used by the Catholic 

Health Association of the United States and other similar entities (see 

app. II). Illinois, for example, includes the unreimbursed cost of providing 

charity care, language assistant services, government-sponsored indigent 

health care, donations, volunteer services, education, governmentsponsored program services, research, subsidized health services, and

collecting bad debts.4 Illinois specifically excludes the cost of paying taxes

or other governmental assessments. Maryland defines community benefit

as “an activity that is intended to address community needs and priorities

primarily through disease prevention and improvement of health status, 

including...[h]ealth services provided to vulnerable or underserved 

populations such as Medicaid, Medicare, or Maryland Children’s Health 

Program enrollees...[f]inancial or in kind support of public health 

programs...[d]onations of funds, property, or other resources that 

 1

We defined “community benefit requirement” as a legal standard that expressly obligates a 

hospital to provide health care services or benefits to the community served by the hospital 

as a condition of maintaining tax-exempt status or qualifying as a nonprofit hospital. It is

generally something that hospitals are required to do beyond their role of providing care 

for the sick and injured in exchange for remuneration or compensation. We considered the

requirement to be one applicable to hospitals only if it either expressly referred to hospitals 

or expressly referred to care or services of the nature and type that one would reasonably 

expect to be provided by or performed primarily at acute care hospitals. 

2

For purposes of this report, unless otherwise apparent, “states” refers to the 50 states and 

the District of Columbia. 

3

The 10 states with detailed community benefit requirements are California, Idaho, Illinois, 

Indiana, Maryland, New Hampshire, New York, Pennsylvania, Texas, and West Virginia.

4

210 Ill. Comp. Stat. 76/10 (2008). 

Nonprofit Hospitals
Appendix III: State Community Benefit 

Requirements 

contribute to a community priority...[h]ealth care cost containment 

activities; and...[h]ealth education, screening, and prevention services.”5

These 10 states also tend to have very detailed instructions on how 

community benefits should be provided and reported. They may include a 

description of the required elements of and the process by which a 

hospital should compose its community benefits plan and the required 

elements to be provided in a hospital’s annual report to the relevant 

authority. A typical example is California, which requires each of its 

nonprofit hospitals to have a mission statement that requires that 

hospital’s policies to integrate and reflect the public interest in meeting its 

responsibilities as a nonprofit organization; complete a community needs 

assessment in consultation with community groups and government 

officials; update its community needs assessment every 3 years; adopt and 

annually update a community benefits plan for providing community 

benefits either alone or in conjunction with other entities; and annually 

submit its community benefits plan, including a description of the 

activities undertaken and the economic value of community benefits 

provided.6

Other States with 

Community Benefit 

Requirements 

The remaining five states with community benefit requirements have 

provisions that are less detailed.7

 Alabama requires that charity care 

constitute at least 15 percent of a hospital’s business in order for it to be 

exempt from property tax.8

 Wyoming provides that “[t]he fundamental 

basis for [exemption from ad valorem taxation] is the benefit conferred 

upon the public by schools, orphan asylums and hospitals, and the 

consequent relief, to some extent, of the burden upon the state to educate, 

care and advance the interests of its citizens.”9

 States such as Wyoming do 

not specify activities that their nonprofit hospitals must provide, but their 

 5

Md. Code Ann., Health–Gen. § 19-303(a)(3) (2008). 

6

Cal. Health & Safety Code § 127350 (West 2008). 

7

Those five states are Alabama, Colorado, Mississippi, North Dakota, and Wyoming. These

states typically do not use the term “community benefit” or similar terms such as 

“community service” or “gift to the community,” although they may refer to “charity care” 

or “charity patients.” Rather, the language of their provisions approximates the concept of

community benefit, and so we consider them to have community benefit requirements. See 

our definition of “community benefit” in appendix I.

8

Ala. Code § 40-9-1(2) (2008). 

9

Wyo. R. & Regs. Rev. Gen. Ch. 14 § 10(a) (2008). 

Page 53 GAO-08-880 Nonprofit Hospitals
Appendix III: State Community Benefit 

Requirements 

provisions make clear that, in order to receive tax exemption or achieve

nonprofit status, hospitals must provide benefit to the community. In 

contrast to the 10 detailed states, these 5 states typically either require the

provision of a certain amount of charity care without mentioning other 

categories of community benefit or do not give guidance as to what counts 

as a community benefit. For the latter states, such as Wyoming, it is not 

always clear what types of community benefit activities would fulfill a 

hospital’s obligations. 

States without Community 

Benefit Requirements 

The remaining 36 states do not have community benefit requirements in 

codified statutes or regulations that hospitals must meet to qualify for taxexempt or nonprofit status. Among these states are three groups of states 

that address community benefit in some way but do not have “community

benefit requirements” as we define that term. Some states apply their 

community benefits provisions to all hospitals, such as in the context of 

hospital licensure, rather than to tax exemption or nonprofit status (see 

app. V). Examples of states that fall into this category are Massachusetts, 

New Mexico, and Rhode Island, and they require all hospitals, both forprofit and nonprofit, to provide some form of community benefits. A 

second group requires that hospitals periodically report to the relevant 

authority the community benefits that they provide but do not require that 

hospitals actually provide any community benefits (see app. VI).10 A third 

group discusses community benefit in sources other than codified statutes 

or regulations, such as attorney general guidelines or property tax 

exemption standards (see app. VII). One state, Utah, discusses community 

benefit in a set of standards of practice for property tax exemptions and 

through its case law.11 Although Massachusetts has a statute requiring 

community benefits for licensure purposes, the bulk of its community 

benefit discussion is found in a set of attorney general guidelines.12 We did 

 10Examples of these states include Connecticut, Georgia, Minnesota, Nevada, and Oregon.

Oregon is the most recent state to pass a community benefit law. Its law, passed in 2007,

became effective on January 1, 2008. The law includes a detailed definition of community 

benefit, directs the Office for Oregon Health Policy and Research to adopt a cost-based 

community benefit reporting system for hospitals operating in Oregon that is consistent 

with established national standards for hospital reporting of community benefits, and sets

forth civil penalties for health care facilities that fail to comply with the reporting system. 

2007 Or. Laws 3290 (effective Jan. 1, 2008; to be added to Or. Rev. Stat. Ch. 442). 

11See Property Tax Division, Utah State Tax Commission, Property Tax Exemptions

Standards of Practice (2007). 

12See Office of Attorney General, Commonwealth of Mass., The Attorney General’s

Community Benefits Guidelines for Non-Profit Acute Care Hospitals (2007). 

Page 54 GAO-08-880 Nonprofit Hospitals
Appendix III: State Community Benefit 

Requirements 

not include these groups of states in our count of states with community 

benefit requirements, and we provide information on these states as 

examples rather than as the product of a comprehensive analysis of state 

sources. 

Penalties Hospitals may be penalized if they fail to comply with community benefit

requirements. Of the 15 states with community benefit requirements, 4 

have explicit penalties for failure to comply and 11 states do not specify a

penalty.13 Examples of states with explicit penalties include Indiana, 

Maryland, and Texas, where civil penalties may be assessed against 

nonprofit hospitals that fail to submit their annual reports in a timely 

fashion.14 Of the 11 states that do not specify a penalty, if the requirement 

is tied to tax exemption, a nonprofit hospital could be denied tax 

exemption for a period of time. 

For states without community benefit requirements but with community 

benefit provisions tied to hospital licensure requirements, a hospital that

has not complied with the community benefit provisions will not be 

licensed (or its license may be suspended or revoked).15 In addition, states 

may include explicit penalties for failure to comply with community 

benefit provisions tied to hospital licensure requirements. For example, in 

Rhode Island, a state that applies its community benefits provisions to all

hospitals through licensure requirements, failure to comply with statewide 

standards for community benefits may result in criminal penalties: the 

Superior Court may, after notice and opportunity for a prompt and fair 

hearing, impose a prison term of up to 5 years for a person who knowingly 

violates or fails to comply with the requirements or willingly or knowingly 

gives false or incorrect information in connection with its licensure 

requirements.16

 13Some state codes and regulations provided penalties for failing to comply with 

community benefit requirements. We noted penalty provisions only if the penalty provision 

made a direct and express reference to failure to comply with the community benefit 

requirement as the basis for the penalty. We do not include statutory or regulatory 

references to denial of tax exemption for failure to comply as a penalty.

14Ind. Code 16-21-9-8 (2008); Md. Regs. Code tit. 10, § 37.01.03(N) (2008); and Tex. Health & 

Safety Code Ann. § 311.047 (Vernon 2008). 

15N.M. Admin. Code tit. 7, § 7.2.8(L) (2008) and R.I. Gen. Laws § 23-17.14-30 (2008). 

16R.I. Gen. Laws § 23-17.14-30 (2008). 

Page 55 GAO-08-880 Nonprofit Hospitals
Appendix III: State Community Benefit 

Requirements 

Most states do not specify a minimum quantity of community benefits that

must be provided in order to satisfy requirements. Five states require that

hospitals provide a specified amount of community benefit.17 Alabama 

requires that “[t]o be exempt from ad valorem taxation, the treatment of 

charity patients must constitute at least 15 percent of the business of the 

hospital,”18 while Texas requires that its hospitals comply with one or more 

of three standards: a level reasonable in relation to community needs; at 

least 100 percent of its tax-exempt benefits, excluding federal income tax; 

or at least 5 percent of its net patient revenue (in which case charity care 

and government-sponsored indigent care must be at least 4 percent of net 

patient revenue).19 In other states, the required minimum quantity is not a 

specified dollar amount or percentage. For example, Mississippi requires 

that, to be exempt from property tax, hospitals must maintain at least one 

ward for charity patients.20 West Virginia requires that charitable hospitals 

provide free and below-cost necessary medical services in an amount 

determined by their boards of trustees consistent with their ability to do 

so.21

Quantity 

In addition to states that specify a minimum quantity of community 

benefits that must be provided in order to satisfy community benefit 

requirements, the remaining states—those without minimum quantity 

requirements and those without community benefit requirements as we 

define that term—tend to require the submission of community benefits 

plans, annual reports, or both to relevant state authorities. Even without 

an explicit requirement to provide community benefits, these provisions 

may bring a measure of accountability as to quantity, since relevant 

authorities have an opportunity to review hospital activities. An example 

of a state without a minimum quantity requirement is California, which 

provides that hospitals must annually report on the economic value of 

community benefits provided in furtherance of their community benefits

plans.22

 17These states include Alabama, Mississippi, Pennsylvania, Texas, and West Virginia.

18Ala. Code § 40-9-1(2) (2008). 

19Tex. Health & Safety Code Ann. § 311.045(b)(1) (Vernon 2008). 

20Miss. Code Ann. § 27-31-1(f) (2008). 

21W. Va. Code St. R. § 110-3-24.9.8 (2008). 

22Cal. Health & Safety Code § 127350(d) (West 2008). 

Page 56 GAO-08-880 Nonprofit Hospitals
Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

State Description of requirements

Activities included in the definition 

of community benefit Penalties 

Alabama To be exempt from ad valorem 

taxation on property up to $75,000, 

the treatment of charity patients must 

constitute at least 15 percent of the 

business of the hospital. 

(Ala. Code § 40-9-1) 

• Charity. 

(Ala. Code § 40-9-1) 

None specified.

California 1. Update community needs 

 assessment at least once every 

 3 years. 

2. Annually adopt and update a

 community benefits plan, including 

 mechanisms to evaluate its 

 effectiveness, measurable 

 objectives, and community 

 benefits categorized into a 

 specified framework. 

3. Annually submit the community 

 benefits plan, including activities 

 undertaken and economic value of

 community benefits provided.

(Cal. Health & Safety Code 

§§ 127350, 127355) 

• Charity care and unreimbursed 

costs of health care services. 

• Community-oriented wellness and 

health promotion services. 

• Prevention service (screenings, 

immunizations, disease 

counseling, education). 

• Adult day care and child care. 

• Medical research and medical

education. 

• Nursing and other professional 

training. 

• Home-delivered meals to the 

homebound. 

• Sponsorship of free food, shelter, 

and clothing to the homeless. 

• Outreach clinics in 

socioeconomically depressed 

areas. 

• Financial or in-kind support of

public health programs. 

• Donations that contribute to a 

community priority. 

• Health care cost containment. 

• Enhancement of access to health 

care. 

• Services offered without regard to 

financial return. 

• Goods or services that help 

maintain a person’s health. 

(Explicitly not limited to this list of 

activities.) 

(Cal. Health & Safety Code § 127345)

None specified.

Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

Page 57 GAO-08-880 Nonprofit Hospitals
Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

State Description of requirements

Activities included in the definition 

of community benefit Penalties 

Colorado Property must be owned and used 

solely and exclusively for strictly 

charitable purposes. 

(Colo. Rev. Stat. Ann. § 39-3-108) 

• A gift for the benefit of an indefinite 

number of persons by relieving

their bodies from disease, by 

assisting them to establish 

themselves in life, or by erecting or 

maintaining public buildings or

works, or otherwise lessening the 

burdens of government. 

(8 Colo. Code Regs. 1304-2)

None specified.

Idaho 1. Show that the hospital is 

organized as a nonprofit 

corporation in Idaho or another 

state and has received an 

exemption from taxation from IRS 

pursuant to § 501(c)(3) of the 

Internal Revenue Code. 

2. Exempt hospitals with at least 150 

patient beds must prepare and file 

an annual community benefits

report that itemizes the community 

benefits provided and indicates the 

process the hospital used to 

determine general community

needs. 

(Idaho Code § 63-602D) 

• Charity care. 

• Bad debt. 

• Under-reimbursed care covered 

through government programs.

• Services and programs provided 

below actual cost. 

• Donated time, funds, subsidies, 

and in-kind services. 

• Additions to capital. 

(Idaho Code § 63-602D) 

None specified.

Illinois 1. Organization mission statement. 

2. Community benefits plan. 

3. Annual report of the community 

benefits plan. 

4. Statement noting that the annual 

report is public information. 

5. Provide the report as a matter of 

community information. 

(210 Ill. Comp. Stat. 76/15, 76/20) 

• Charity care. 

• Language assistant services.

• Government-sponsored indigent 

health care. 

• Donations. 

• Volunteer services. 

• Education. 

• Government-sponsored program 

services. 

• Research. 

• Subsidized health services. 

• Bad debt. 

Does not include the cost of paying 

taxes or other governmental

assessments. 

(210 Ill. Comp. Stat. 76/10) 

The Attorney General may assess a 

late filing fee against a nonprofit 

hospital that fails to file the annual 

report. The fee must not exceed 

$100; the Attorney General may 

grant extensions for good cause. 

(210 Ill. Comp. Stat. 76/25) 

Other rights and remedies available 

to the state are retained. 

(210 Ill. Comp. Stat. 76/30) 

Page 58 GAO-08-880 Nonprofit Hospitals
Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

State Description of requirements

Activities included in the definition 

of community benefit Penalties 

Indiana 1. Organization mission statement. 

2. Community benefits plan. 

3. Communitywide needs 

 assessments in aid of community 

 benefits plan.

4. Annual report of the community 

 benefits plan.

5. Statement notifying the public that

 the annual report is public 

 information. 

6. Written notice about any charity 

 care program.

(Ind. Code §§ 16-21-9-4, -5, -6, -7) 

• Charity care. 

• Government-sponsored indigent 

health care. 

• Donations. 

• Education. 

• Government-sponsored program 

services. 

• Research. 

• Subsidized health services. 

Does not include the cost of paying 

taxes or other governmental

assessments. 

(Ind. Code § 16-21-9-1) 

The state department may assess a 

civil penalty against a nonprofit 

hospital that fails to submit its 

annual report. The penalty may not 

exceed $1,000 for each day a report 

is late. 

(Ind. Code § 16-21-9-8) 

Maryland 1. Identify community health care 

 needs. 

2. Annual community benefits report,

 which includes the hospital’s

 mission statement, a list and costs

 of each community benefit

 initiative, a description of efforts 

 undertaken to evaluate the 

 effectiveness of each initiative, 

 and a description of gaps in

 availability of specialist providers 

 to serve the uninsured. 

(Md. Code Ann., Health-Gen. § 19-

303) 

• Health services provided to 

vulnerable or underserved 

populations, such as Medicaid, 

Medicare, or Maryland Children’s 

Health Program enrollees. 

• Financial or in-kind support of

public health programs. 

• Donations that contribute to a 

community priority. 

• Health care cost containment 

activities. 

• Health education, screening, and 

prevention services. 

(Md. Code Ann., Health-Gen. § 19-

303) 

For failure to file the community 

benefits report: civil penalty of $100 

per day unless an extension is

granted. The Health Services Cost 

Review Commission may refuse to 

grant a rate increase to any hospital 

that does not file a required report. 

Any substantially incomplete or

inaccurate report may not be 

considered timely filed. Institutions 

may request reasonable extensions 

of time to file required reports. 

(Md. Regs. Code tit. 10, § 37.01.03) 

Mississippi Must maintain one or more charity 

wards for charity patients. 

(Miss. Code Ann. § 27-31-1(f)) 

• Charity. 

(Miss. Code Ann. § 27-31-1)

None specified.

Page 59 GAO-08-880 Nonprofit Hospitals
Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

State Description of requirements

Activities included in the definition 

of community benefit Penalties 

New Hampshire 1. Annual report of community 

benefits plan, which includes a 

mission statement, community

needs assessment, community 

benefit activities expected to be

undertaken or supported, 

community benefit activities 

undertaken in the previous year 

and a description of results or

outcomes, means used to solicit 

community views, an evaluation 

of the plan’s effectiveness, an 

estimate of the cost of each 

activity expected, and a report on 

the unreimbursed cost of 

activities undertaken in the 

previous year. 

2. Community needs assessment. 

3. Make the community benefits

plan available to the public. 

(N.H. Rev. Stat. Ann. §§ 7.32-e, -f, -g) 

• Charity care. 

• Financial or in-kind support of

public health programs, including 

support of recommendations in any 

state health plan. 

• Allocation of resources that 

promote or support a healthier

community, enhanced access to 

health care or related services,

health education and prevention 

activities, or services to a 

vulnerable population. 

• Medical research and education 

and training of health care 

practitioners, including the pooling 

of funds with other providers. 

(Explicitly not limited to the listed 

activities.) 

(N.H. Rev. Stat. Ann. § 7.32-d)

None specified.

New York 1. Issue an organizational mission

statement. 

2. At least every 3 years: 

-review and amend the mission 

 statement, 

-solicit community views, 

-demonstrate operational and 

 financial commitment to meeting

 community health care needs, 

 and 

-prepare and make available to 

 the public a statement of the

 hospital’s financial resources and

 allocation to hospital purposes, 

 including the provision of free or 

 reduced charge services. 

3. Annually prepare and make 

 available to the public an 

 implementation report. 

4. File with the Commissioner of 

 Health its mission statement, 

 annual implementation report, 

 and 3-year report. 

(N.Y. Pub. Health Law § 2803-l) 

• Meeting community health care

needs. 

• Charity care. 

• Improving access to health care

services by the underserved. 

(N.Y. Pub. Health Law § 2803-l) 

None specified.

Page 60 GAO-08-880 Nonprofit Hospitals
Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

State Description of requirements

Activities included in the definition 

of community benefit Penalties 

North Dakota To receive sales and use tax 

exemptions, must be organized and 

operated exclusively in providing 

services for the purposes of 

preventing and alleviating human 

illness and injury. 

(N.D. Cent. Code §§ 57-39.2-04, 57-

40.2-04) 

• Education. 

• Research. 

• Community service. 

• Direct patient services, income 

being derived solely from private 

donations with some exceptions of 

a minimal membership fee. 

(N.D. Cent. Code §§ 57-39.2-04, 57-

40.2-04) 

None specified.

Pennsylvania 1. Must advance a charitable 

purpose. 

2. Must donate or render 

 gratuitously a substantial portion 

 of its services. 

3. Must benefit a substantial and 

 indefinite class of persons who 

 are legitimate subjects of charity. 

4. Must relieve the government of 

 some of its burden. 

(10 Pa. Cons. Stat. § 375) 

• Charity care. 

• Goods or services to individuals 

eligible for government programs. 

• Donations to institutions of purely 

public charity or government 

agencies. 

• Uncompensated goods or 

services, including the difference 

between full cost and fee received 

for all goods or services provided, 

education and research programs, 

and unreimbursed costs of 

government programs, including 

Medicare and Medicaid, and 

unreimbursed community services.

• Reasonable value of volunteer

assistance. 

• Cost of goods or services provided 

to individuals who are unable to

pay, provided that reasonable and 

customary collection efforts have 

been made. 

• Services to the public that directly 

or indirectly reduce dependence on 

government programs or relieve or 

lessen the burden borne by 

government for the advancement 

of social, moral, educational, or

physical objectives. 

(10 Pa. Cons. Stat. § 375) 

None specified.

Page 61 GAO-08-880 Nonprofit Hospitals
Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

State Description of requirements

Activities included in the definition 

of community benefit Penalties 

Texas 1. Provide health care services to the

community. 

2. Comply with all federal, state, and 

local government requirements for 

tax exemption in order to maintain 

such exemption. 

3. Provide a specified minimum 

 amount of community benefits. 

4. Admission policy must provide for 

 the admission of financially 

 indigent and medically indigent 

 persons. 

5. Organizational mission statement. 

6. Community benefits plan. 

7. Communitywide needs 

 assessments to develop the 

 community benefits plan. 

8. Annual report of the community 

 benefits plan, including amount 

 and types of community benefits 

 provided. 

(Tex. Health & Safety Code Ann. 

§§ 311.043, 311.044, 311.045)

• Charity care. 

• Government-sponsored indigent 

health care. 

• Donations. 

• Education. 

• Government-sponsored program 

services. 

• Research. 

• Subsidized health services. 

Does not include the cost of paying 

taxes or other governmental

assessments. 

(Tex. Health & Safety Code Ann. 

§ 311.042; 25 Tex. Admin. Code 

§ 13.13) 

A nonprofit hospital that fails to

make a report of the community 

benefits plan is subject to a civil 

penalty not exceeding $1,000 per 

day. No penalty may be assessed 

against a hospital until 10 business 

days have elapsed after written 

notification to the hospital of its 

failure to file a report. 

(Tex. Health & Safety Code Ann. 

§§ 311.047, 311.048) 

1. Subject to a civil penalty of not

more than $1,000 for each day

of noncompliance. 

2. If a nonprofit hospital/system 

 does not submit a report of the 

 community benefits plan within 

 the established reporting 

 period, the Department of 

 Health may institute the 

 following procedures: 

A. Notify the entity that it is in 

 noncompliance with the 

 Department of Health’s 

 reporting requirements and 

 that the Commissioner of 

 Health may request that the

 Attorney General institute 

 and conduct a suit in the 

 name of the state to recover

 civil penalties if the hospital 

 fails to submit the report to 

 the Department of Health 

 within 10 days of receipt of 

 the letter. 

B. If the Department of Health 

 does not receive the report 

 of the community benefits plan

 from the nonresponding 

 hospital within the specified

 time frame, the 

 Commissioner of Health 

 may notify the Attorney 

 General in writing of the 

 entity’s noncompliance. The

 Department of Health will 

 send a copy to the hospital. 

(25 Tex. Admin. Code § 13.18) 

Page 62 GAO-08-880 Nonprofit Hospitals
Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

State Description of requirements

Activities included in the definition 

of community benefit Penalties 

West Virginia 1. Must provide an amount of free 

and below-cost necessary 

medical services as determined 

by its board of trustees, 

consistent with other provisions, 

to those who are unable to pay. 

2. Charitable use (determined by an 

examination of several factors,

including charity care, promotion 

of health, relief of burdens of 

government, and volunteer and 

community services). 

3. Charity care plan that reflects

specified minimum criteria. 

4. Review charity care plan not less 

than every 2 years. 

(W. Va. Code St. R. § 110-3-24) 

• Charity care. 

• Activities that promote the health 

of the community and/or decrease 

the burdens of state, county, and 

municipal governments. 

• Shortfall between approved

charges and payments received 

from Medicaid and similar 

governmental programs. 

• Volunteer and community services.

• Public education programs. 

• Donations. 

• Free, low-cost, or below-cost 

health screenings and 

assessments. 

• Social services

assistance/counseling. 

• Free or reduced-charge medical 

clinics. 

• Operation of poison control 

centers. 

• Free or below-cost blood banking 

services. 

• Free or below-cost assistance, 

material, equipment and training to 

emergency medical services and 

ambulance services. 

• Disaster planning. 

• Unreimbursed costs for education 

and training. 

(W. Va. Code St. R. § 110-3-24) 

None specified.

Page 63 GAO-08-880 Nonprofit Hospitals
Appendix IV: States with Community Benefit 

Requirements Related to Hospitals 

State Description of requirements

Activities included in the definition 

of community benefit Penalties 

Wyoming 1. The fundamental basis for ad

valorem tax exemption is the 

benefit conferred upon the public 

and the consequent relief, to 

some extent, of the burden upon 

the state to educate, care, and 

advance the interests of its 

citizens. Such institutions thus

confer a benefit upon the general 

citizenry of the state and render 

an essential service for which 

they are relieved of certain 

burdens of taxation. 

2. Indigent care shall be afforded

through admission to the 

institution based on the clinical

judgment of the physician, not 

upon the patient’s financial ability 

or inability to pay. 

(Wyo. Stat. Ann. § 39-11-105; Wyo. 

R. & Regs. Rev Gen Ch. 14 § 10) 

• Benefit conferred upon the public. 

• Consequent relief of the burden

upon the state. 

• Indigent care. 

• Promote health care. 

• Provide health-related assistance 

to the general public. 

(W.S. 1977 § 39-11-105; Wyo. R. & 

Regs. Rev Gen Ch. 14 § 10) 

None specified.

Source: GAO analysis of Alabama, California, Colorado, Idaho, Illinois, Indiana, Maryland, Mississippi, New Hampshire, New York, 

North Dakota, Pennsylvania, Texas, West Virginia, and Wyoming statutes and regulations.

Notes: We did not consider loss of tax exemption to be a penalty. We considered only those states

whose statutes or regulations require the provision of community benefits for purposes of tax 

exemption or nonprofit status to have community benefit requirements. 

Page 64 GAO-08-880 Nonprofit Hospitals
Appendix V: Examples of States with 

Licensure-Related Community Benefit 

Provisions 

State Description of requirements

Activities included in the 

definition of community benefit Penalties 

Massachusetts Applicants for a license to establish or 

maintain an acute-care hospital must 

agree to maintain or increase the 

percentage of revenues allocated to free 

care and submit a plan for the provision of 

community benefits. 

(Mass. Gen. Laws Ann. ch. 111, § 51G) 

• Identification and provision of 

essential health services. 

• Primary and preventive health

care services. 

(Mass. Gen. Laws Ann. ch. 111, 

§ 51G) 

None specified.

New Mexico 1. Acute-care or general hospitals can 

be licensed only if they agree to 

provide emergency services and 

general health care to nonpaying 

patients and low-income reimbursed 

patients in the same proportion as 

the patients are treated in acute-care 

general hospitals in the local 

community. The annual cost of this 

care shall not exceed 5 percent of the 

hospital’s annual revenue. 

2. These hospitals must annually report 

the cost of care for emergency and 

general health care to nonpaying and 

low-income reimbursed patients and 

the number of nonpaying and lowincome reimbursed patients treated. 

(N.M. Stat. Ann. § 24-1-5.8(C); 

N.M. Admin. Code tit. 7, § 7.2.8) 

• Emergency services and general 

health care provided to nonpaying 

patients and low-income 

reimbursed patients. 

(N.M. Stat. Ann. § 24-1-5.8(C); 

N.M. Admin. Code tit. 7, § 7.2.8(D)) 

Failure to provide proportional

services to nonpaying and lowincome reimbursed patients in

any year following licensure may 

result in the Department of 

Health’s imposition of one or 

more of the following penalties: 

1. an approved plan of 

correction that remedies the 

failure through the additional 

provision of services in 

subsequent years, 

2. a civil monetary penalty not 

to exceed $500,000, 

3. suspension or revocation of 

the hospital’s license, and 

4. referral to CMS for 

sanctions under the 

Medicare and Medicaid 

programs. 

(N.M. Admin. Code tit. 7, 

§ 7.2.8(L)) 

Appendix V: Examples of States with 

Licensure-Related Community Benefit 

Provisions 

Page 65 GAO-08-880 Nonprofit Hospitals
Appendix V: Examples of States with 

Licensure-Related Community Benefit 

Provisions 

State Description of requirements

Activities included in the 

definition of community benefit Penalties 

Rhode Island As conditions of initial and continued 

licensure, all licensed hospitals shall 

1. meet the statewide community 

standard for the provision of charity 

care; 

2. meet standards for uncompensated 

 care; 

3. meet the statewide standards for the 

 provision of community benefits; 

4. not discourage persons who cannot 

 afford to pay from seeking medical 

 services; 

5. not encourage persons who cannot 

 afford to pay to seek essential medical 

 services from other providers; 

6. must annually report on compliance 

 with these conditions, including 

 (1) cost of charity care, (2) bad debt, 

 (3) contract Medicaid shortfalls, and 

 (4) any additional information 

 demonstrating compliance with this 

 section; and 

7. must have a formal, Board-approved 

 plan for the provision of community 

 benefits. The plan shall be updated 

 and Board-approved at least every 

 3 years. 

(R.I. Gen. Laws §§ 23-17-43, 23-17.14-15; 

R.I. Code R. 14 090 007, 14 090 028) 

• Charity care. 

• Uncompensated care. 

• Bad debt. 

• Medicaid shortfall. 

• Programs, procedures, and 

protocols that meet the needs of 

the medically indigent. 

• Linkages with community partners 

that focus on improving the health 

and well-being of community 

residents. 

• Non-revenue-producing services 

made available to the community, 

such as fitness programs, health 

screenings, or transportation 

services. 

• Public advocacy on behalf of 

community needs. 

• Scientific or medical research, or 

educational activities. 

(R.I. Gen. Laws §§ 23-17-43, 23-

17.14-15; R.I. Code R. 14 090 007, 

14 090 028) 

If any person knowingly violates 

or fails to comply or willingly or

knowingly gives false or 

incorrect information the Director 

of the Department of Health 

may, after notice and opportunity 

for a prompt and fair hearing, 

deny, suspend, or revoke a 

license, or may order the 

licensee to admit or provide 

health services to no additional 

persons to the facility or to take 

corrective action necessary to 

secure compliance under the 

act; or the Superior Court may, 

after notice and opportunity for a 

prompt and fair hearing, impose 

a fine of not more than 

$1,000,000 or impose a prison

term of not more than 5 years. 

(R.I. Gen. Laws § 23-17.14-30) 

If the Department of Health 

receives sufficient information

indicating that a licensed 

hospital is not in compliance with 

this section, the Director of the 

Department of Health shall hold 

a hearing upon 10 days notice to 

the licensed hospital and shall

issue in writing findings and 

appropriate penalties. 

(R.I. Gen. Laws § 23-17.14-15) 

Source: GAO analysis of Massachusetts, New Mexico, and Rhode Island statutes and regulations. 

Note: Although these states have community benefit provisions tied to licensure requirements, we did 

not include them in our list of states with community benefit requirements because their community

benefit provisions are not tied to tax exemption or nonprofit status. 

Page 66 GAO-08-880 Nonprofit Hospitals
Appendix VI: Examples of States with Only 

Community Benefit Reporting Provisions

State Description of requirements

Activities included in the definition of 

community benefit Penalties 

Connecticut Biennial report on whether the hospital

has in place a community benefits 

program. If the hospital has chosen to 

have a community benefits program, the 

report shall include a number of specified 

elements. 

(Conn. Gen. Stat. Ann. § 19a-27k) 

• Preventive care. 

• Programs that improve the health 

status for working families and

populations at risk in the community. 

(Conn. Gen. Stat. Ann. § 19a-127k) 

The Commissioner of Public 

Health may, after notice and 

opportunity for a hearing, 

impose a civil penalty on any 

hospital that fails to submit the

required report by the specified 

date. Such penalty shall be not 

more than $50 a day for each 

day after the required submittal 

date that such report is not 

submitted. 

(Conn. Gen. Stat. Ann. § 19a127k(f)) 

Georgia Nonprofit hospitals must file an annual 

community benefit report disclosing the 

cost of indigent and charity care provided 

during the preceding year not later than 90

days after the close of the fiscal or 

calendar year. The report shall include a 

statement of the cost and type of indigent 

and charity care provided by the authority, 

including the number of indigent persons 

served, categorization of those persons by 

county of residence, as well as the cost of 

indigent and charity care provided by the 

authority, including the number of indigent 

persons served, categorization of those 

persons by county of residence, as well as 

the cost of indigent and charity care 

provided in dollars. 

(Ga. Code Ann. §§ 14-3-305; 31-7-90.1) 

• Indigent care. 

• Charity care. 

(Ga. Code Ann. § 31-7-90.1) 

None specified.

Minnesota Annual report of services provided to 

benefit the community. 

(Minn. Stat. §§ 144.698, 144.699) 

• Services provided at no cost or for a 

reduced fee to patients unable to pay. 

• Teaching and research activities. 

• Community care. 

• Underpayment for services provided 

under state health care programs. 

• Research. 

• Community health services. 

• Financial and in-kind contributions. 

• Community building activities. 

• Community benefit operations. 

None specified.

Appendix VI: Examples of States with Only 

Community Benefit Reporting Provisions 

Page 67 GAO-08-880 Nonprofit Hospitals
Appendix VI: Examples of States with Only 

Community Benefit Reporting Provisions

State Description of requirements

Activities included in the definition of 

community benefit Penalties 

• Education. 

• Subsidized services. 

Does not include bad debt and 

underpayment for Medicare services. 

(Minn. Stat. Ann. §§ 144.698, 144.699) 

Nevada Each hospital with at least 100 beds must 

file as required by the Director of the 

Department of Health and Human 

Services but at least annually the 

expenses incurred for providing 

community benefits, a statement of its 

policies and procedures for providing 

discounted services to persons without 

health insurance, and a statement of its 

policies regarding collection. 

(Nev. Rev. Stat. § 449.490) 

• Goods, services, and resources 

provided by a hospital to a community 

to address the specific needs and 

concerns of that community. 

• Services provided by a hospital to 

uninsured and underserved persons. 

• Training programs for employees. 

• Health care services provided in areas 

that have a critical shortage of such 

services. 

(Nev. Rev. Stat. § 449.490) 

None specified.

Oregon Within 90 days of filing a Medicare cost 

report, a hospital must submit a 

community benefit report to the Office for 

Oregon Health Policy and Research of the 

community benefits provided by the 

hospital. 

(2007 Or. Laws 3290 (effective Jan. 1, 

2008)) 

• Charity care. 

• Losses related to Medicaid, Medicare, 

State Children’s Health Insurance 

Program, or other publicly funded 

health care program shortfalls. 

• Community health improvement 

services. 

• Research. 

• Financial and in-kind contributions to 

the community. 

• Community-building activities affecting 

health in the community. 

(2007 Or. Laws 3290 (effective Jan. 1, 

2008)) 

Any health care facility that fails 

to comply may be subject to a 

civil penalty, not to exceed 

$500 per day of violation, 

determined by the severity of 

the violation. Civil penalties 

may be remitted or mitigated

upon such terms and conditions 

as the Administrator of the 

Office for Oregon Health Policy

and Research considers proper 

and consistent with the public 

health and safety. 

(2007 Or. Laws 3290 (effective 

Jan. 1, 2008)) 

Source: GAO analysis of Connecticut, Georgia, Minnesota, Nevada, and Oregon statutes and regulations. 

Notes: We did not consider these states to have community benefit requirements because their 

community benefit provisions do not require the provision of any community benefits. Connecticut’s 

community benefit provisions are voluntary. Georgia, Minnesota, Nevada, and Oregon’s community 

benefit provisions only require that hospitals report their community benefits without explicitly 

requiring the provision of community benefits. 

Page 68 GAO-08-880 Nonprofit Hospitals
Appendix VII: Examples of States with 

Community Benefit Provisions Located Appendix VII: Examples of States with Outside of Statutes and Regulations 

Community Benefit Provisions Located 

Outside of Statutes and Regulations 

State Description of requirements Activities included in the definition of community benefit Penalties

Massachusetts Voluntary.

(The Attorney General’s 

Community Benefits Guidelines 

for Non-Profit Acute Care 

Hospitals at 1)

• Community health education.

• Free preventive care or health screening services. 

• Mobile health vans. 

• Home care consistent with the definition of net charity care. 

• Medical and clinical education and research.

• Support for and participation in community-oriented training

programs. 

• Low- or negative-margin services offered in response to an

identified community need. 

• Violence-reduction education and counseling.

• Anti-smoking education. 

• Substance abuse education, prevention, and treatment. 

• Domestic violence reduction education and training. 

• Early childhood wellness programs. 

• Expanded prescription drug programs. 

• Volunteer services. 

• Net financial assistance to community health centers. 

• Unfunded services ancillary to Medicaid or Medicare 

services. 

(The Attorney General’s Community Benefits Guidelines for 

Non-Profit Acute Care Hospitals at 10–11) 

None specified

(program is 

voluntary). 

Utah “Gift to the community” standard 

for property tax exemption: the 

hospital must establish that its 

total gift to the community 

exceeds on an annual basis its 

property tax liability for that year. 

(Property Tax Exemptions 

Standards of Practice at 2-35)

• Indigent care. 

• Community education and service, including research and 

professional education. 

• Medical discounts, including unreimbursed care covered by

Medicare, Medicaid, or other similar government entitlement 

programs. 

• Donations of time. 

• Donations of money. 

(Property Tax Exemptions Standards of Practice at 2-35–2-36) 

None specified.

Source: GAO analysis of the Massachusetts Attorney General’s Community Benefit Guidelines for Non-Profit Acute Care Hospitals and

Utah’s Property Tax Exemptions Standards of Practice. 

Note: Although these states have community benefit provisions outside of codified statutes and 

regulations, we did not include them in our list of states with community benefit requirements. 

Page 69 GAO-08-880 Nonprofit Hospitals
Appendix VIII: 

A

GAO Contact and Staff 

cknowledgments 

Page 70 GAO-08-880

Appendix VIII: GAO Contact and Staff 

Acknowledgments 

GAO Contact A. Bruce Steinwald, (202) 512-7114 or steinwalda@gao.gov 

In addition to the contact named above, Jenny Grover and Thomas Walke, 

Assistant Directors; Joanna L. Hiatt; Xiaoyi Huang; Jessica T. Lee; 

Drew Long; Kevin Milne; and Lisa Motley made major contributions to this 

report. 

Nonprofit Hospitals

Acknowledgments 

(290648) 
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