Group Raises Concerns About New Hospital Schedule Under Redesigned Form 990

Dear Hank --

I serve on the Board of New York Presbyterian Hospital along with Jim Weinberg and John Weinberg Jr. and hope you or one of your staff can focus on the IRS proposed revisions to Form 990 and its severe implications for not-for-profit hospitals, specifically Schedule H. I am attaching a copy of the memo from the Greater New York Hospital Association which outlines the importance of revising Schedule H before it is finalized.

I congratulate you on your plan for struggling homeowners.

Warmest regards and best wishes to you and Wendy for the holiday season.

FROM: David Rich

RE: Secretary Paulson and Tax-Exempt Hospital Issues

Thank you very much for your willingness to explore some of the significant tax-exempt issues currently facing hospitals with some of your trustees, and, in particular, your willingness to see if trustees may be willing to contact Treasury Secretary Paulson to discuss these issues with him on behalf of the hospital community. I have attached talking points prepared by the AHA as well as excerpts from GNYHA's comments no the now proposed Form 990 for your use.

In summary:

• The Internal Revenue Service (IRS) has proposed revisions to the Form 990. Filing the Form 990, as you know, is required of all not-for-profit entities.

• The new proposed 990 has particular implications for not-for-profit hospitals because, in addition to changes to the overall form, there is a new proposed "Schedule H" designed exclusively for hospitals.

• While the hospital community has expressed general support for greater transparency and uniformity is reporting of community benefits provided by not-for-profit hospitals, the community is concerned about regulatory and legislative efforts to inappropriately narrow the definition of "community benefits" that must be provided by hospitals to justify their not-for-profit status.

• We are concerned that the questions asked on the new Form 990 -- besides adding additional and onerous reporting requirement -- may further the agenda of narrowing the community benefit standard that has been in place since 1969.

• Specifically, the new Schedule H does not include losses from patient bad debts and Medicare underpayments in the definition of "community benefits." The broader hospital community believes that hospitals incurring these losses are providing a significant community benefit, and, as such, these losses should be included in the community benefit standard¹.

• The AHA and GNYHA also believe that burdensome questions that do not relate to community benefit, such as questions related to billing and collections, should be removed from the new Schedule H.

• Finally, the mm proposed Schedule H should be revised and re-issued before it is finalized. We expect the IRS to finalize its proposal in early December 2007.

Background

The IRS has proposed a revision of the Form 990 which requires increased reporting by non-profit organizations to demonstrate accountability for tax-exempt status. Hospitals generally support this effort to increase transparency and provide information in a uniform manner on how they are complying with the "community benefit standard" under current policy. This standard recognizes that hospitals may meet their tax-exempt status requirements in a manner that is tailored to the needs of individual communities, and include a variety of activities and services in addition to the provision of charity care.

While hospitals support this approach, there are several changes that are recommended to the IRS proposal. The proposed "Schedule H" -- which addresses community benefits provided by hospitals has important policy implications . . . and it is "more than just a form."

It is our understanding that the IRS will finalize their proposal in early December.

Changes Recommend by Hospitals to IRS Schedule H Reporting Form for Tax Exempt Hospitals

• Patient bad debt and Medicare underpayments should be counted as community benefit and included in the community benefit chart on the form. This better represents the "full value" of services provided by hospitals.¹

• Burdensome questions that don't relate to community benefit should be removed such as Part II related to billing and collections.

• Schedule H should be revised and re-issued for comment before it is finalized to deal with these and other serious concerns that hospitals have about it.

• The AHA supports the "community benefit" standard that has been in place since 1969 because it permits hospitals to tailor their programs and services to the unique needs of their own communities.

• In May of 2006 the AHA Board of Trustees unanimously passed a resolution calling for standardized and public reporting of community benefit.

• The policy for reporting was anchored in the CHA/VHA Guide for Planning and Reporting Community Benefit, with two additions: the actual costs of Medicare underpayments and patient bad debt.¹

• Support for including Medicare underpayments as community benefit

  • Serving Medicare and Medicaid patients is a condition for tax exemption; therefore both should count as community benefit.

  • Medicare, like Medicaid, does not pay the full cost of care and hospitals are required to absorb the underpayment while continuing to serve Medicare patients.

  • • The total Medicare underpayment for not-for-profit hospitals has risen to $15.8 billion

    • Medicare pays 91 ¢ for every dollar hospitals spend caring for Medicare patients -- Medicaid pays 86 ¢, only slightly less than Medicare

    • MedPAC's March report to Congress cautioned that Medicare margins for hospital services will reach a 10-year low in 2007 at negative 5.4 percent

    • • MedPAC has not weighed in officially on whether Medicare underpayments should be included as community benefit and is not likely to do so

  • Medicare serves a large number of poor elderly patients:

  • • 30% of Medicare spending is for "dual eligibles," who can generally be thought of as poor patients who aged out of exclusive Medicaid coverage and into Medicare;

    • 40% of Medicare beneficiaries have incomes at or below 200% of the federal poverty level and at least 46.5% of Medicare spending is for their care.

  • To the argument that serving Medicare patients does not differentiate tax exempt; from for-profit hospitals, the facts show that both types of hospitals serve Medicare and Medicaid patients in roughly equal numbers, albeit a 2006 CBO report on community benefit that looked at 5 states, reported "nonprofit hospitals . . . were found to provide care to fewer Medicaid-covered patients as a share of their total patient population [compared to for-profit hospitals]."

  • Although CHA would allow "programs to target and assist [vulnerable] seniors to be included in subsidized health services," the amount likely to be attributed to such programs would likely amount to only a fraction of the $15-8 billion in Medicare underpayments to not-for-profit hospitals.

  • A majority of the states that have community benefit or community benefit-like reporting requirements ask hospitals to report Medicare underpayments (including CA, ID, IL, NV, NH, NC, PA, TX and UT).

   

  Support for including patient bad debt as community benefit

  • The great majority of bad debt is attributable to low-income patients who -- for many reasons -- decline to complete the forms required to establish eligibility for hospitals' charity care and/or financial assistance programs.

  • A recent CBO report confirmed those findings, noting that while there was little research on the topic, the two studies they found showed that "the great majority of bad debt was attributable to patients with incomes below 200% of the federal poverty level"

  • • The report concluded that if the studies they found were generalizable nationwide '[t]hose findings support the validity of the use of uncompensated cure [charity care plus bad debt] as a measure of community benefit . . ." Anecdotal evidence from hospitals throughout the nation suggests that those findings would be consistent with most hospitals' experience.

    • • It is worth noting that both studies were done in Massachusetts -- a state in which hospitals also have a financial incentive to classify patients as charity care because the hospital can be reimbursed from a state fund for a portion of the care provided to poor patients. Despite this additional incentive, hospitals were unable to document many patients' income, thereby requiring that these patients' bills be written off as bad debt rather than charity.

GNYHA has two over-arching concerns about Schedule H. First, the implementation of the form should be deferred at least to tax year 2010. In addition, we believe the Schedule veers far from the fundamental elements of the community benefit standard, and we find this change troubling. On a more operational level, we are uncertain about which entities will have to complete Schedule H and respectfully request a more precise definition of "hospital" for this purpose.

GNYHA requests delayed implementation until tax year 2010.

GNYHA members are concerned about the resource required to capture and report community benefit pursuant to the proposed form. Despite years of commitment to the tenets of community benefit and a genuine dedication to its value, it will be understandably and excessively difficult for our members to master and refine the IRS's proposed community benefit measurement and reporting practices in the coming year.

The hospitals in out membership that have been working with such data collection systems attest to their inherent difficulties and nuances; they warn that it is unrealistic to believe hospitals will be able to accurately report their community benefit work within the timeline the IRS is proposing for implementation of Schedule H. Such goal is virtually impossible for the GNYHA members -- and hospitals around the country -- that do not yet have practical experience working with the type of community benefit data sought by the IRS.

One hospital in our membership reports that it takes significant investment of dedicated resources at senior levels of management and throughout each department just to do a baseline of the necessary data. Thereafter, it takes roughly one-half an PTE for populating the database on an ongoing basis, which does net include necessary finance functions. (Typically, finance departments will generate the data to be loaded on to the database, and such generation is its own considerable task.) Respectfully, the difficulty of this task is heightened by the IRS's acknowledgement that final directions and definitions will not be finalized until Jane 2008.

Thus, we suggest that the IRS allow at least a two-year transition for implementation of the entire Form 990 and for Schedule H in particular. Operationally, the IRS might consider issuing a second draft of the proposed Schedule H in 2008 with an appropriate comment and review period. Working together, the IRS and hospital community could finalize a satisfactory Schedule and instructions by December 31, 2008. This would give hospitals all of 2009 to revise their financial and data record-keeping systems so that they could accurately capture the new information that would be repotted for tax year 2010.

GNYHA seeks revisions to better reflect the community benefit standard and all of its components.

Before Schedule H can be properly implemented, however, GNYHA seeks revisions to better reflect the requirements, or five elements, of the community benefit standard. GNYHA suggests a comprehensive reconsideration of the Schedule to more closely cleave to the five elements and the principles they represent. Indeed, we respectfully request that questions unrelated to community benefit be eliminated.

The community benefit standard allows hospitals to go beyond traditional health care to provide social, human, and preventative services where they are most needed. Hospitals should be commended for assuming these responsibilities, and their efforts should continue to be rightfully acknowledged as community benefits, The IRS cannot predict what a particular community needs and how a hospital can best serve those needs; such determinations should be left to an independent board of non-profit hospital trustees who live in and truly understand the community itself. As just one example, many New York City area hospitals do extensive work with their communities on proper responses in case of bio-terrorism or other similar emergency situations. These activities are meaningful to and necessary for the communities we serve and should be acknowledged as advancing our tax-exempt purpose, even though they might not be as compelling in more rural areas.

Though GNYHA hospitals are dedicated to charity care, such care is not the primary indicator of a hospital's value to its community, and it should not be the litmus test for tax-exempt status. The community benefit standard should be the test for hospital compliance, and it should be appropriately reflected in the proposed Schedule H, just as it is incorporated into other forms -- most notably, Form 1023, Schedule C -- and reflected in the IRS's own prior and long-standing rulings and legal precedents. A vast array of productive, community-serving institutions like schools, theatres, and museums appropriately maintain 501(c)(3) status while seeking payment fox their services, because of the steps they take to uphold their tax-exempt purpose properly. Hospitals should be treated no differently.

Overall, GNYHA is troubled by what appears to be a movement towards changing the community benefit standard and the requirements for hospital tax-exemption. Despite current criticism, the community benefit standard has served our communities well for nearly 40 years, and it should not be dismantled.

In New York State, for example, about two-thirds of the bad debt and charity care reported by hospitals is for outpatient care, mainly in emergency room and clinic settings. In such minute-to-minute environments serving ambulatory patients, it is very difficult to get completed applications from individuals who may be frightened of government contact for any number of reasons. Notably, the New York Stale Bad Debt ft Charity Care Pool recognizes this and includes equal consideration of both charity care and bad debts in the methodology to distribute pool funds. We believe that this is wholly appropriate as a public policy matter.

This experience is borne out by a seminal study of income levels of bed debt and free-care patients in Massachusetts hospitals. The study finds that even in Massachusetts hospitals, which have a considerable financial incentive to correctly identify charity care patients due to the composition and operation of their State's charity care pool, nearly 80% of emergency bad-debt cases belonged to patients with incomes below the Federal poverty line.¹ The authors concluded, "both free care and bad debt can be reasonable indicators of service to indigent patients in not-for-profit hospitals" and advised policy-makers to include at least some portion of bad debt in calculations of charity care for tax-exemption requirements.²

The Congressional Budget Office (CBO) reached similar findings in its 2006 report. Nonprofit Hospitals and the Provision of Community Benefits, reviewing existing literature to state that "the great majority of bad debt was attributable to patients with incomes below 200% of the Federal poverty line." The CBO concluded that its findings "support the validity of the use of uncompensated care [bad debt and charity care] as a measure of community benefits."

GNYHA believes that the IRS should recognize the resources tax-exempt hospitals expend to provide what is truly beneficial care to their communities. We respectfully urge the inclusions of bad debt in any quantification of the community benefit standard.

In addition, GNYHA raises the following specific points about Schedule H:

• Part I, seeking date on the provision of charity care as defined by the IRS: We agree that charity care cost, losses from Medicaid, and losses from other government programs should be included in the category of charity care. As we discussed earlier, bad debts must also be considered in this section. Furthermore, we recommend that if the IRS seeks to adopt a uniform measure of charity care, Stale laws or directives on the timing and data used to make charity care eligibility determinations should be explicitly recognized. New York hospitals, for example, have worked extensively with State legislators to create certain charity care requirements and metrics, and we would respectfully suggest our State's work as a national model if one is indeed necessary.

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  As of January 1, 2007, New York State hospitals are required to meet certain minimum standards with respect to the provision of financial assistance to patients who are unable to pay their bills. Compliance with these requirements is necessary for hospitals to receive critically needed funds from the State's $847 million Indigent Care Pool, which covers about 50% of documented hospital uncompensated care costs.

  Under the State law, hospitals must, at a minimum, provide emergency services to any uninsured State resident, as well as non-emergency, medically necessary services to any uninsured resident of the hospital's defined primary service area (PSA) for all patients with income levels up to 300% of the Federal poverty level (FPL). The PSA for each hospital has been defined by the New York State Department of Health. For New York City, for example, each hospital's PSA includes all five boroughs plus Westchester county for hospitals in the Bronx, and plus Nassau County for hospitals in Queens. Therefore, each New York City hospital's PSA covers a total population of at least eight million people, a good portion of whom are uninsured. At or below 300% of the FPL, a patient's required payment is capped at the higher of what Medicare, Medicaid, or the highest volume commercial payer would have paid for the service.

  New York State and its hospital partners have collectively developed a model fox charity care provision that works for the intricacies of our communities. We would suggest that the IRS consider this deliberate process -- and similar ones around the country -- in any future charity care definition or data collection.

• Part I, Line 6, seeking information on health professions education: GNYHA members note that the worksheet line item seeking information on "other health professionals" requires clarification. They point out that they educate students in a range of fields and are uncertain about which of these the IRS means to include.

• Part I, Column (a), seeking information on certain community benefit activities and the number of activities or programs: This question is not well-tailored and may yield inconsistent information. In particular, it is difficult to quantify the reporting necessary for line 6, ("Health professions education"), line 8 ("Research"), and line 9 ("Cash and in-hind contributions to community groups."). Even with the IRS's instructions, hospitals may have difficulty sorting their programs, and there will be unanticipated inconsistencies across hospitals.

• Part I, Column (b), seeking information on the number of persons served by community benefit programs: We suggest that this definition be changed to identify patients encounters. It is difficult for hospitals to estimate persons served, particularly in the context of community benefit or charity care environment. Our members might see a patient in an emergency room setting, then again in a Medicaid clinic, and perhaps back again in the ER. As such, it would be nearly impossible for our hospitals to identify "individuals" served in each of the community benefit categories. In addition, it is difficult to count individuals served in something like an ongoing support group or through a health fair. As a result, we suggest that the definition be clarified such that each encounter provided to an individual is counted as a "person served."

• Part II, "Billing and Collections": GNYHA recommends removal of this chart. Respectfully, we believe that the proposed chart is problematic for a number of reasons. Primarily, it does not yield information that relates to the community benefit standard and, as such, does not contribute to the IRS's goal of promoting compliance with tax-exemption requirements.

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  In addition, the information sought here could be competitively sensitive. Third-party payers and others would be among those that could review it, which could be harmful to hospitals in the future in ways no doubt unanticipated by the IRS.

  Finally, we note that much of the underlying information sought here could be found elsewhere in the Form 990 or Schedule H. Like its counterparts around the country, GNYHA is committed to providing all appropriate information to the IRS: there is no attempt here to hide any facts. However, we would argue that the proposed billing chart itself is not the proper way to seek the necessary data.

• Part III, "Management Companies and Joint Ventures": GNYBA suggests that the IRS merge this section into other forms or eliminate it. Hospitals are already required to provide information on joint ventures in the Core Form and on Schedule R. As a result, these questions should be eliminated from Schedule H.

• Part IV, "General Information": This area seems to be asking about all elements of the community benefit standard, yet this inquiry is not made dear. Our members would suggest mat such a review be more explicit and broken down into mote definitive components to ensure proper and meaningful responses. This is particularly important for the question on emergency room policies, which should be reformulated to provide information consistent with the community benefit standard and with the experience gained by the IRS in asking similar questions as part of its Compliance Check Questionnaire project.

• Additional suggestions:

• • The IRS should reconfigure Schedule H to ensure that questions related to the community benefit standard and discretionary questions on non-quantifiable benefits precede the chart now labeled "Community Benefit Report."

  • The information provided by a hospital should be better contextualized. The IRS should include a section allowing filing organizations to indicate the type of facility or facilities making the report.

  • The IRS should permit live links to hospital information or attachments. For a number of questions, the space provided is not sufficient to fully describe the hospital's activities, programs, or policies. Quite often, a hospital will have preexisting documents or materials to provide this information appropriately. The IRS should permit (though not require) the insertion of live links to such information or allow attachments.

² Id. at 164.

GNYHA suggests a change to the threshold proposed in this section, particularly for hospitals and health systems. Part III of Schedule I requires an organization to report grants and other assistance to individuals in the United States if the grant amount is $5,000 or more. To require a report on every grant over $5,000 is extremely burdensome, and the resulting list would likely be too long to file electronically.