The Internal Revenue Service last week moved to sharply expand public reporting of what not-for-profit hospitals do for their communities to justify federal tax breaks.
The proposed disclosure rules were unveiled June 14 as part of a long-awaited revamp of the IRS Form 990, the tax filing widely used by not-for-profits to report where their revenue comes from and how its spent. If adopted, the changes would establish a uniform, nationwide standard for how hospitals tally and report community benefits, including care to uninsured patients. No existing federal laws define such benefits or require comprehensive disclosure, a fact that has rankled some state attorneys general and members of Congress, who argue such criteria are needed to ensure not-for-profit hospitals earn the tax breaks they receive.
The community-benefit standard is a warm, fuzzy standard, said Lauren Mack, a healthcare tax lawyer with Sonnenschein Nath & Rosenthal in San Francisco. Proposed changes underscore the pressure from Congress to quantify tax-exempt hospitals community aid, she said. Standardized information will allow all of the various constituencies to see whats going on, Mack said.
Notably, the agency did not include two expenses that the American Hospital Association lobbied to see counted as charity care: losses from patients who do not pay bills, or bad debt, and Medicare shortfalls. The Catholic Health Association endorsed leaving out such expenses and tax officials largely adopted the St. Louis-based CHAs template for reporting community benefits and charity care.
However, Lois Lerner, director of the IRS Exempt Organizations Division, stressed that the agency is seeking comment on criteria for community benefits and is open to alternative criteria. The agency will take comment on the draft until Sept. 14, and the IRS is expected to require the revamped form for fiscal 2008 returns.
Other significant changes in the draft include heightened disclosure of highly paid executives compensation, a new schedule for tax-exempt bond reporting and a one-page snapshot of governance and operations.
Lerner said that the sweeping redesign, the most significant overhaul since 1979, is a bid to improve transparency and compliance among tax-exempt organizations and simplify IRS reporting. The form has not kept pace with an evolving tax-exempt sector and fails to capture the increasingly complex operations among not-for-profits, she said. The present form is not particularly useful to anyone, she said.
Two congressional critics of the existing form said last week the draft would give a much-needed boost to transparency in the
$3 trillion tax-exempt sector. This new form will help the public and the IRS assess whether tax-exempt organizations are staying true to the reasons they were granted exempt status in the first place, said Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, in a written statement. Sen. Chuck Grassley of Iowa, the committees ranking Republican, questioned a new threshold for reporting executives, employees or director compensation, but said the draft was on the right track.
Richard Umbdenstock, the AHAs president and chief executive officer, in a written statement praised the agencys decision to expand hospitals tax filings to include community-benefit criteria, but stressed the most complete picture of tax-exempt hospitals charity includes Medicare shortfalls and bad debt. He also said that certain questions dont appear to relate to hospitals tax-exempt activities, (and) are likely to be confusing.
Melinda Hatton, senior vice president and general counsel for the trade group, said an initial review of the redesigned form turned up a handful of possible trouble spots. She cited as problematic the request for information on discounts won by private insurers, which Hatton called puzzling. We dont understand how its related to the hospitals tax-exempt purpose, she said.
Such discounts became a point of contention as scrutiny of tax-exempt healthcare intensified in recent years. Patients who pay for care out-of-pocketincluding the uninsuredlack the leverage to win discounted rates that health plans negotiate. As a result, those least able to pay end up being charged the highest price for care. Some hospitals voluntarily offer discounts to uninsured patients under charity-care policies.
The redesigned forms definition of uninsured patients also raises concerns, Hatton said. The hospital schedule defines the uninsured as those without private or public coverage or those eligible for insurance but without coverage because he or she failed to complete the required paperwork. Hatton, who called the guidance confusing, said its unclear how hospitals would have that information. Rural and small hospitals may also struggle to meet the new reporting requirements, she added.
Sister Carol Keehan, the CHAs president and CEO, said in a written statement that the trade group will review the changes and work with members to submit comments within the agencys comment window.
Ralph DeJong, a healthcare tax attorney with McDermott Will & Emery, said the agencys ambitious schedule leaves not-for-profits little time to review and change operations or governance policies, if necessary, before the start of fiscal 2008. While tax forms wont be filed until the end of the year, the filings must reflect policies in place at the fiscal years start, he said.
For hospitals and health systems, DeJong said the changes are likely to be substantial. In addition to community-benefit disclosure, another new schedule seeks a detailed breakout of pay, bonuses and perks, including itemized tax-exempt benefits and expenses for highly compensated executives.