The Internal Revenue Service and the Senate Finance Committee last week delivered a one-two punch that threatened the complacency of any not-for-profit hospital that might still believe that tax exemption is a birthright.
An interim report released by the IRS that summarized the responses from almost 500 tax-exempt hospitals to a May 2006 survey about how they provide and report community benefits found that not-for-profit hospitals are all over the map with no uniform definition of what constitutes uncompensated care, among other things.
Meanwhile, in a separate but related move, Sen. Chuck Grassley (R-Iowa) released a discussion draft of possible reforms to ensure that hospitals provide an adequate level of charitable care and community benefit to justify their tax-free status. Perhaps of most concern to not-for-profit hospitals, the discussion paperwhich grew out of a Finance Committee hearing held last September when Grassley was still chairmansuggests a threshold test requiring a hospital to dedicate at least 5% of its annual net patient revenue to charity care to guarantee its tax-exempt status.
The discussion draft also prescribes discounting and billing policies both for the uninsured and the underinsured, and calls for triannual community needs assessments. It also weighs in on joint ventures with for-profit organizations and governance issues, suggesting a specific number of independent board members and limits on perks for top hospital executives, including country club fees, first-class travel and loans.
There are a few nuggets of good ideas but the overall approach is way overdone, said T.J. Sullivan, a partner in law firm Drinker Biddle & Reath in Washington, about the discussion draft. Its like charging ants with a sledgehammer.
In a written statement, Grassley stressed that the staff draft is the beginning of a discussion, not the end. While many nonprofit hospitals do good work, too many nonprofit hospitals get big tax breaks but provide small benefits to those in need.
According to the IRS, which cautioned that the interim report contains preliminary information and demands further analysis, 97% of the responding hospitals said they have a written uncompensated care policy. But the agency also complained about significant differences in the way community benefits and uncompensated-care are reporteda nagging issue for hospitals for several years now. Preliminary as it was, Grassley apparently felt validated by the IRS report, reiterating his impatience with the status quo at many hospitals.
Noting that the report found that 22% of not-for-profit hospitals reported spending less than 1% of total revenue on uncompensated care, The report makes clear that we need to change business as usual at many of our nations nonprofit hospitals, Grassley said in a written statement.
Although the data were self-reported and measures vary, the IRS reported that uncompensated care represented 56% of the total community benefit dollars reported by the responding hospitals. After uncompensated care, the next largest categories of community benefit expenditures were medical education and training (23%), research (15%) and community programs (6%).
But there were significant variations in how hospitals reported uncompensated care: Fifty-six percent of the hospitals said they did not include bad debt expensean issue that divides the Catholic Health Association from the American Hospital Association. Hospitals also varied in reporting uncompensated care on the basis of costs or charges and shortfalls in reimbursement from Medicare, the IRS said.
As a percentage of total revenue, the average self-reported community benefit expenditures as a percentage of total revenues was 9% and the median was 5%, according to the interim report.
The IRS stressed that the data gathered by the report have not been independently verified or analyzed completely. That comes later. The lack of consistency or uniformity in classifying and reporting uncompensated care and various types of community benefit often makes it difficult to assess whether a hospital is in compliance with current law, said Lois Lerner, director of the IRS exempt organizations division, in a news release. While the interim report is only a summary and not an analysis, the IRS hospital project team did recommend developing a separate Form 990 schedule for hospitals to address the lack of uniformity, the agency noted (June 18, p. 8).
Officials at Christus Health, Irving, Texas, which participated in the IRS survey, said that they feel very comfortable that the system meets all of the proposed standards and then some. Texas is one of a handful of states that requires not-for-profit hospitals to meet criteria in providing charity care and community benefits, but Christus doubles that requirement, providing 9.7% of its net patient revenue to charity care and another 1.5% to community services, said Thomas Royer, Christus president and chief executive officer. In compliance with the Finance Committee draft discussion, Christus also applies its charity-care standards to its joint ventures, and executive compensation is scrutinized regularly by its board, he said.
We are a totally transparent organization, Royer said. I think its better if we could live in a voluntary world rather than a legislative world; however, we recognize that is probably not the reality today.
The Finance Committee staff discussion was applauded by the Access Project, a Boston-based community action group. It represents a milestone in the discussion because it articulates an important floora minimum floor, said William Lottero, an Access Project field director. In lieu of billions of dollars of tax relief, there is a legitimate expectation that the public would receive meaningful charity care in return.
Sullivan, the attorney, said Grassley should be commended for getting us where we are, but perhaps it is time to sit back and take a breather. I find it confusing that the minority staff keeps harping on issues around narrow aspects of compensation like first-class airfare and club dues, he said. It seems to me many members of Congress and top executives of (corporate organizations) are routinely flying first class. The notion that it is not appropriate to do so just strikes me as wrong.
At the same time, it is not objectionable to establish charity care requirements on joint ventures and it also is a very good idea to have a board-approved charity-care policy that is readily available to patients, Sullivan added. Whether we need a legal requirement for that is debatable, but it is not a bad idea. But by far the worse idea other than expenditure standards is that the loss of tax exemption should result in the loss of Medicare certification, Sullivan said. How is that going to help?