For tax-exempt healthcare organizations, disclosure can be the better part of valor.
Few organizations face as bright a spotlight as community hospitals. Participation in the Medicare and Medicaid programs, for instance, requires public release of delicate business information. Moreover, the media, politicians and concerned citizens are acutely interested in charity-care commitment, executive compensation and other performance breakdowns.
That's why not-for-profit hospitals and health systems need to let the sunshine in, especially if they expect to maintain the credibility needed to raise charitable funds. The challenge of disclosure becomes even more daunting as healthcare providers begin accepting risk and functioning like quasi-insurance companies. The shift to capitation will prompt money-hungry government tax collectors to take a harder look at the tax-exempt status of hospital-based organizations.
Despite the corporatization of healthcare, the public continues to take great interest in local hospitals by donating billions of dollars and millions of volunteer hours. The Association for Healthcare Philanthropy said overall giving to its members, most of which are community hospitals, soared to $4.9 billion last year.
In addition, most Americans view medical research as vital to national interests and say they're willing to help fund it. That trump card will be played frequently as government cutbacks escalate and employers rebel against cost shifting to support research, physician training and care for the indigent.
But maintaining philanthropic support and protecting the not-for-profit hospital from the clutches of the taxman will take a concerted trust-building effort.
One concept that makes sense has been advanced by Regina Herzlinger, a professor of business administration at Harvard University. Herzlinger believes public trust in not-for-profit organizations can be restored through a system she calls DADS-disclosure, analysis, dissemination and sanctions.
The Securities and Exchange Commission, which helped boost faith in the capital markets following the 1929 stock market crash, offers a comparative model. Despite broad rulemaking powers and the ability to enforce them, the SEC has taken a restrained attitude. It works well with financial industry groups and views itself more as a data clearinghouse, as long as the markets and their individual components operate legally and efficiently.
Herzlinger, writing in the March-April issue of the Harvard Business Review, says the government can play a similar role in restoring the trust in not-for-profits-if hospitals and other tax-exempt organizations follow the rules.
The current situation is messy. Consider the four pillars of the DADS program:
Disclosure. Although not-for-profit organizations are required to file an Internal Revenue Service Form 990, the information often is incomplete, confusing and difficult to access.
Analysis. Some organizations don't file on time, while others fail to conform to generally accepted accounting principles.
The National Charities Information Bureau, which tracks 400 charities, said some 990s don't tell the whole story. Bureau Vice President Matt Landy said many hospitals have created for-profit subsidiaries, which are not required to publicly disclose their tax information. In some cases, salaries, costs and revenues are hidden in the taxable subsidiary. Furthermore, the volume of financial data provided by hospitals can be overwhelming.
Dissemination. The IRS is notoriously slow in responding to 990 requests, and not-for-profit organizations have a spotty record for providing easy access to the information.
Over the years, MODERN HEALTHCARE*reporters have encountered a number of annoying tactics when requesting 990s. It's not uncommon for organizations to demand that a reporter pick up the 990 in person, instead of mailing or faxing the document. One trade group went as far as only allowing the reporter to hand-copy information off the form.
Sanctions. Publicly owned companies face fines and cease-and-desist orders for failing to provide accurate and timely information. No comparable sanctions exist for not-for-profit organizations, unless it is the rarely used death penalty of revoking the tax-exempt status.
A more orderly system would necessitate easier access to complete financial statements that follow accepted accounting principles. Herzlinger also believes disclosure of nonfinancial quantitative measures of performance will help the public understand whether an organization is fulfilling its mission.
"A nonprofit hospital might report the number of open-heart surgeries it performed, the quality of the procedures as indicated by the rates of mortality and morbidity in comparison to similar hospitals, and an assessment of the number of uninsured and fully insured patients treated," she said.
That could be part of an annual management discussion and analysis report, which would be attached to the 990. Again, such a report would need substance and comparability with peer groups.
As far as enforcement, Herzlinger envisions an independent, privately funded organization that would set standards. Sanctions could include civil or criminal penalties for managers and board members who fail to comply.
The federal government also needs to make improvements in the way information is disseminated. The House already has approved a bill that would require most tax-exempt groups to send 990 forms within 30 days of a request. It also would encourage organizations to make copies available on the Internet. The Senate is eyeballing the bill before giving it the expected passage.
But the real commitment must come from the private sector. Healthcare executives can play a leading role in developing and guiding improvements in the disclosure process. As Herzlinger sees it, DADS should increase contributions to not-for-profit organizations the way securities laws helped bolster financial markets.
"DADS will enhance donors' confidence that their support will be used for worthy causes, rather than private inurement or the pursuit of ill-conceived ventures," she said.