Many hospitals could become appreciably richer, at least on paper, if a proposed clarification of accounting rules is adopted.
The "windfall" comes by way of an accounting maneuver that would take revenue from independent foundations and transfer it to the balance sheets of private, not-for-profit hospitals.
Simply put, the proposal transfers any asset restricted for use by a hospital to the hospital's financial statement. The foundation that collected the asset would post a liability on its books. The proposed change aims to clarify existing standards on accounting for contributions, including gifts of endowment. But many foundation executives are confounded by the proposal.
"There are a lot of unhappy presidents of foundations because what you've done is take a fair amount of what would have been their revenues and not report them," said Ernest Iannotta, a partner of the healthcare services group with Coopers & Lybrand in Chicago.
Foundation executives say the changes will confuse donors, alienate board members, ruin cost-of-fund-raising ratios and threaten the viability of independent foundations as fund-raisers for hospitals and health systems.
"It would appear to challenge the purpose of why (foundations) exist," said William McGinly, president of Falls Church, Va.-based Association for Healthcare Philanthropy.
Defeating the purpose. Ironically, one reason many independent foundations were spun off by hospitals in the late 1970s and early 1980s was "to keep those numbers off the books for very legitimate reasons," explained J. David Seay, vice president, secretary and counsel of the United Hospital Fund, a New York-based philanthropy and research organization.
Before the birth of Medicare's diagnosis-related-groups payment system, there were fears that Medicare would reduce hospital reimbursement rates based on the total assets of an institution. "The effect was to penalize hospitals that were successful in fund raising," Seay said.
The AHP's McGinly said that by creating foundations, "what they were doing is protecting those dollars that were raised from those offsets."
The proposed accounting change also may lead to public relations problems for some hospitals, healthcare attorneys suggest. Although assets being transferred would be restricted for certain uses, the overall increase in hospitals' net worth could draw renewed scrutiny by revenue-starved states and counties, critics in the for-profit hospital sector, and members of Congress who want to slash Medicare and Medicaid spending.
Clarification sought. Despite those risks, healthcare finance executives appear to be far less resistant to the proposed accounting change. The Healthcare Financial Management Association doesn't plan to resist the interpretation of the Financial Accounting Standards Board. The HFMA is a longtime proponent of comparability in accounting standards, but it does plan to seek clarification on numerous points.
"As we look at what they're proposing, it's really not in a state of being ready to implement," said Wendy Herr, vice president of policy services at the HFMA.
Corliss Montesi, assistant program manager at the FASB, said reaction to the proposal has been mixed. Basically, foundations aren't happy, but others think it makes sense from a "conceptual standpoint," she said.
An "exposure draft" of the proposed accounting change was issued Dec. 29, 1995, by the FASB, an independent board that establishes and interprets generally accepted accounting principles. The proposal attempts to clear up misunderstandings involving the "transfer of assets" in the FASB's June 1993 standards on accounting for contributions. Those standards, better known as FAS 116, apply to all types of not-for-profit organizations and businesses that receive or make contributions.
If the proposal is adopted, foundations that receive donations on behalf of another organization would no longer record those assets as revenues because, in FASB speak, the foundation is acting as an "agent or trustee" of the assets. The assets really belong to the "beneficiary" designated by the donor.
"If the donor specifies the beneficiary and really gives the foundation no other power (to determine how to use the contribution, the foundation) would be acting as an agent or trustee," Montesi said.
In many cases, an independent foundation would qualify as an agent for the hospital because the assets received by the foundation are restricted for specific, hospital-related purposes, experts said.
"What the FASB is trying to create is an accurate picture of what an organization looks like financially," McGinly said. "But this rule doesn't do that."
Industry experts said the draft, released just seven weeks ago, hasn't been widely distributed, so many fund-raisers aren't familiar with the proposed accounting change. With little time to meet the FASB's Feb. 15 comment deadline, the AHP, the HFMA and other interested parties were requesting an extended comment period. At deadline, the FASB was scheduled to consider whether to keep the comment period open through April 1.
Ronald Kovener, former head of the HFMA's Washington office, is helping draft the AHP's response to the proposal. Kovener said he's identified several areas in which the proposal violates the FASB's own definitions.
For example, the FASB seems to have overlooked the fact that the function of a foundation is to raise money, while the function of a trust company is "to collect money to manage it," Kovener said. "I think that, unfortunately, the FASB is looking at a foundation as if it were a trust company."
How much of a threat? Ron Bianchi, president of St. Vincent's Medical Center Foundation in Bridgeport, Conn., thinks the proposed asset transfer will prompt questions about whether foundations should be collapsed back into hospitals.
"For the freestanding foundation, I think (the proposal) represents a number of significant threats to viability," Bianchi warned. About 80% of the money raised by the foundation, benefits 289-bed St. Vincent's Medical Center in Bridgeport; the remainder goes to community needs and St. Vincent's College. The foundation has $20 million in assets.
Bianchi said the change in the ownership of restricted assets will significantly distort foundations' cost of fund raising at a time when the public is becoming increasingly sensitive to that issue.
Indeed, while foundations assume all the expense of raising contributions, the new accounting interpretation doesn't allow them to record the income generated from that expense, McGinly said. "In our view, it's not a fair recording of what's actually happening."
However, the proposal does allow a foundation to report those contributions on its financial statement before deducting the amount transferred to the hospital. And foundations may continue to solicit and receive contributions on hospitals' behalf.
"I think the foundations can keep working the way they have been. It's just that the financial reporting will be different," said Coopers & Lybrand's Iannotta. "An accounting pronouncement typically isn't going to put an organization at risk."
Foundation leaders obviously don't agree. For many smaller foundations, the transfer of assets will affect their ability to borrow money and appeal to donors, McGinly added.
The foundations also will appear as though they have performed poorly and may have difficulty attracting and retaining successful board members, Bianchi said.
On the other hand, moving endowment funding information to hospitals' financial statements may enhance efforts to assess hospitals' credit risk.
"A key measure in credit analysis is liquidity, especially cash-based liquidity, and to the extent that these large sums of money are in entities outside the organization, it makes it difficult," said Steven Renn, first vice president and portfolio manager at AMBAC, a New York-based provider of bond insurance and other financial services.
If a hospital has access to cash from the foundation, that can make a big difference when cash is tight. "I've seen a lot of hospitals where there were some emergency transfers of fairly large sums of money (out of the foundation) to cover huge operating losses," Renn said.
To simplify matters, Standard & Poor's Corp. does not count endowment money as a part of hospitals' cash unless specifically identified as being available for debt service, said Cara Bowers, a director in the healthcare group at the New York-based credit-rating agency.
But knowing how much is tucked away in the foundation's coffers does provide "some degree of comfort" in rating a hospital, she added. Yet some hospitals are uncomfortable about revealing that information, and the foundations are under no obligation to share those numbers with the agency, Bowers said.
"What's difficult is you don't see the (endowment) balances in the (hospital) audits," Renn said. The foundations are audited separately, and some hospitals "are reluctant" to have those sums divulged, he noted.
Healthcare administrators fear the public's negative reaction and potential questions about hospitals' not-for-profit,
If the proposed accounting change is adopted, hospitals will appear richer and may draw unwanted attention.
"Theoretically, it should just be seen by we accountants as an accounting difference," said Paul DeMuro, a partner with Latham & Watkins in San Francisco. But DeMuro said he can foresee situations in which the arguably improved net worth of hospitals will be used as leverage by Congress in attempting to reduce payments and by states and county governments in assessing payments in lieu of taxes.
"There are obviously going to be some PR prices to be paid," said Jim Dechene, a partner in the healthcare group of Sidley & Austin in Chicago.