Update for Not-For-Profit Hospitals
Please read page 4 of Technical Letter 10 (released June 2003), released by OSHPD, for criteria of Charity Care.

Overview of Senate Bill 697

Senate Bill 697 (SB697) was sponsored by the California Association of Catholic Hospitals (CACH) and the California Healthcare Association and passed by the Legislature and signed by the governor in September 1994. It became effective January 1, 1995.

It required not-for–profit hospitals to r eaffirm its mission statement by July 1995 and to begin conducting a community needs assessment every three years, beginning in 1995. Each hospital is responsible to develop and adopt a community benefits plan by April 1996, and annually update the plan. They must annually submit a copy of the plan to the Office of Statewide Health Planning and Development (OSHPD) within 150 days after the hospital’s fiscal year end.

Background*

In exchange for favorable tax treatment, not-for-profit hospitals assume a social obligation to provide community benefits in the public interest. While it is important that not-for-profits generate a surplus in order to operate successfully, the surplus is invested back into the organization, to enhance performance and community services. Hospitals operating as not-for-profit facilities are expected to meet a “community benefit standard.”

Internal Revenue Service’s Community Benefit Standard

The community benefit standard was originally defined in 1969 by U.S. Internal Revenue Service Ruling 69-545 and subsequently revised in 1983. Ruling 83-157 provides the current IRS view of the charitable obligations of not-for-profit hospitals. The ruling states that “the promotion of health . . . is deemed beneficial to the community as a whole” and the criteria set forth by the IRS is quite broad and could be construed to include virtually any hospital activity as “promoting health.” Increasingly, not-for-profit hospitals across the nation have been asked to articulate and measure the value of the benefits they provide in exchange for the privilege of tax exemption. This is understandable. In 1990, these exemptions were estimated at $8.5 billion in the United States , for all non-profit hospitals (Tax Notes, 1990). In 1996, the estimated annual federal and state income tax exemption for all SB697 hospitals (excluding Kaiser Foundation hospitals) was $380 million. This estimate is based on a State corporate tax rate of 9.3% and an average federal tax rate of 35%, and it does not include property tax exemptions or the value of savings associated with tax-exempt financing.

The Office of Statewide Health Planning and Development (OSHPD)is the administrative agency in State government responsible for the implementation of SB697. The Office provides reporting formats and guidelines and various other services to facilitate the requirement. Overall, OSHPD has approached implementation of SB697 with the understanding that the bill called for a process of meaningful collaboration between hospitals and other local entities focused on community health improvement.

*OSHPD, Community Benefit Legislation, SB697 Report to the Legislature, January 1998.

SB697 Glossary

Community Benefits Plan – The written document prepared for annual submission to the Office of Statewide Health Planning and Development that shall include, but shall not be limited to, a description of the activities that the hospital has undertaken in order to address identified community needs within its mission and financial capacity, and the process by which the hospital developed the plan in consultation with the community.

Community – The service areas or patient populations for which the hospital provides health care services.

Community Benefit – A hospitals activities that are intended to address community needs and priorities primarily through disease prevention and improvement of health status.

Community Needs Assessment – The process by which the hospital identifies, for its primary service area as determined by the hospital, unmet community needs.

Community Needs – Those requisites for improvement or maintenance of health status in the community.

Hospital – A private not-for-profit acute hospital licensed under subdivision (a), (b), or (f) of Section 1250 and is owned by a corporation that has been determined to be exempt from taxation under the United States Internal Revenue Code.

Mission Statement – A hospital’s primary objectives for operation as adopted by its governing body.

Vulnerable Populations – Any population that is exposed to medical or financial risk by virtue of being uninsured, underinsured, or eligible for Medi-Cal, Medicare, California Childrens Services Program or county indigent programs.
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