Measuring the “Charitability” of Hospitals: Putting Meat on the Bones of the Grassley-Hatch Request

On February 15, 2018, Senators Chuck Grassley (R-Iowa) and Orrin Hatch (R-Utah) requested specific information from the Internal Revenue Service (IRS) on its oversight activities of nonprofit hospitals. Skeptical about whether some or many nonprofit hospitals actually operate as charities, they sought evidence that they provide “community benefits.”

To provide evidence well beyond what the IRS considers, I suggest that they and the hospitals themselves adopt a tool I developed to help assess whether a charity fully utilizes the charitable resources available to it. It turns out that a hospital can qualify for tax exemption and provide community benefits while operating more as a partnership serving its doctors, staff, and managers than as a charity. The main value of this tool, however, is not for a top-down assessment by an understaffed IRS wading through a measurement swamp, but for self-assessment of charitable operations by truly mission-driven hospitals.

This measurement tool is simply a variation on the accountant’s most powerful tools: the income statement and the balance sheet. Using this tool goes beyond the traditional balancing of cash flows in and cash flows out, or of assets with liabilities, to what I call the uses and sources of those “resources” gathered to pursue the charitable activities of the hospital. Of course, it can be used by almost all charities, not just hospitals.