Although publicly traded, for-profit companies adjust to new corporate integrity rules, not-for-profit hospitals soon could be compelled to spiff up their own financial practices. The Internal Revenue Service is considering adding new requirements to the Form 990, the annual disclosure document for tax-exempt organizations.
The agency said this month that it's seeking to increase confidence in the 990 by improving the content and quality of information. It cited the Sarbanes-Oxley Act of 2002, signed by President Bush on Aug. 2, which imposes new financial reporting requirements on public companies.
"It may be argued that there are similarities between the need for veracity in the public information used by shareholders in making investment decisions and the need for veracity in the public information used by contributors and others in making decisions regarding exempt organizations," the IRS said.
Possible measures cited by the agency include requiring tax-exempt organizations to disclose whether they have adopted conflict-of-interest policies or have independent audit committees, and increasing disclosure requirements regarding transactions with substantial contributors, officers, directors, trustees and key employees.
The IRS also is considering whether to extend disclosure requirements for transactions involving key officials and donors to noncharitable exempt organizations, such as not-for-profit health plans and property holding companies. Currently, those organizations are not required to report such deals to the public.
The agency has set a Jan. 28 deadline for public comments on the possible changes.
Not everyone who follows healthcare governance agrees on the need for heightened disclosure, because there are already strict laws prohibiting abuses of tax-exempt assets.
Gerald Griffith, a partner at the Honigman Miller Schwartz and Cohn law firm in Detroit, said that with broader disclosure, organizations that don't adopt better practices might have difficulty attracting contributions. "Either there would be more public pressure for organizations to adopt (better practices) voluntarily, or the IRS would decide it needs to come in and mandate some of these standards," he said.
Healthcare lawyers said most hospitals and health systems have conflict-of-interest policies, although many have been strengthening them. "To the extent that there are organizations that don't follow better corporate practices, this should be a wake-up call," said Jim Schwartz, a partner at the Manatt, Phelps and Phillips law firm in Los Angeles.
Some systems are ahead of the curve. Trinity Health, Novi, Mich., recently reviewed a host of new recommendations and requirements for publicly traded companies, including the Sarbanes-Oxley legislation, to see how its own practices measured up. "We found that in the vast majority of cases we already did what those various groups were recommending (or requiring)," said Dan Hale, Trinity's general counsel.
But in some areas, not-for-profits have been slow to adopt controls. For example, an April survey of 110 hospitals and systems by the Governance Institute in San Diego showed 39% of multihospital systems that responded and 75% of freestanding hospitals lacked an audit committee.
Linda Miller, president of the Voluntary Trustees Foundation, Washington, said maintaining separate audit finance committees might be impractical for boards of small hospitals. "Requiring an audit committee for every nonprofit might not be as appropriate as making sure that the audit function occurs," she said.