David May: Thank you for joining Modern Healthcare's editorial webcast. Today we'll listen to a discussion with three experts on the topic of tax exemptions for not-for-profit healthcare organizations. What does the future hold for these tax breaks? And how are threats to hospitals' charitable status different today from those in the past? Before we start we have a few housekeeping items to address: Your phones will stay in listen-only mode during the entire webcast. However, listeners can send questions throughout this event. Our moderator will ask as many as possible before the hour is up. You can find the questions window on the right-hand side of your screen connected to the webcast dashboard that appeared when you first joined the call. A recording of today's discussion will be available on our website, ModernHealthcare.com/webcast. Within a few days, all attendees will receive a follow-up email, including a link to that recording. Slides used during today's presentations will also be available online. And now, I'd like to turn the webcast over to Joe Carlson, a Modern Healthcare reporter and the moderator for today's webcast. He will introduce our panelists today. Joe.
Webcast Transcript: Taxing times
Joe Carlson: Great. Thanks, Dave. Thanks for listening to “Taxing Times” everyone. This is our Modern Healthcare webcast on the future of tax exemptions at not-for-profit hospitals. This will be a round-table discussion, and then we'll be taking many questions from the audience. The three speakers who we will hear from today are: Nicholas Mirkay, visiting associate professor of law at Creighton University in Omaha, Neb. Then we will hear from Thomas Glynn, lecturer at the Harvard Kennedy School. He spent 14 years as the chief operating officer of Partners HealthCare in Boston. And then we will hear from Jane Haderlein, senior vice president of external affairs at Huntington Memorial Hospital in Pasadena, Calif. I'm going to open with just a brief introduction of the issue and then we'll move into individual presentations from speakers. And then we'll move into some questions from the audience.
First slide please. So the not-for-profit hospitals like all tax-exempt identities receive their special tax status under the theory that government loss on taxes is offset by the benefits to the larger population, benefits that the government would otherwise have to provide itself. In 1956 the IRS specifically included the provision of charity care in its criteria for receiving tax-exempt status saying that hospitals must be operated to the extent of its financial ability for those not able to pay for the services rendered. Thirteen years later, the IRS loosened the rules and they established the community benefit standard for justifying the exemption from tax, and that's the standard that remains in place today. In 1983—there's been a number of loosenings of the definition over the years including the one in 1983—and that ruling, you know, that ruling noted that a hospital could receive federal tax income exemption if it did not operate an emergency room. Next slide, please.
So scrutiny is ratcheting up, and I don't think too many of our listeners here will be surprised to hear that. Healthcare delivery organizations are becoming more sophisticated over the years, and they're involving business models and revenue streams that transform their operations from the humble charities that they started out as a century before. Not-for-profit, they try hard to find ways to deal with the rise of investor-owned hospitals in the 1980s and the 1990s. Critics find that for-profit hospital chains seem to be providing many of the benefits similarly to the tax-exempt hospitals that are out there. But for-profit chains are also paying taxes. I'm sure that many will remember in 2005 the hearings that were held in Congress. There was the House Ways and Means Committee as well as the Senate Finance Committee all holding hearings and promising legislation. You have the Joint Committee on Taxation studying the various benefits received by tax-exempt hospitals in five states. The Joint Committee on Taxation concluded that in 2002 not-for-profit hospitals devoted only about 1% more of their total expenses to uncompensated care than for-profit hospitals in those five states. That figure is still with us today. You still hear it frequently raised, but that number does date to '02, so I'd be interested if anyone else here on the panel has any newer information.
Another piece of information that's done from that 2002 Joint Committee on Taxation study was the value of taxation. Many people have tried to estimate how much benefit are not-for-profit hospitals receiving by being exempted from tax. In 2002, the number was $12.6 billion, given, again, a rough estimate based on that analysis of those five states. By the way, those include exemptions from federal and state corporate income taxes, federally tax exempt bond financing, federal taxes on charity donations, state and local sales taxes and local property taxes. Next slide, please.
I'm sure that we will be hearing more about Illinois during this webcast. I think we mentioned Illinois is rather proactive in this department. During this period of time, several states developed their own tax exemption standards for hospitals—five actually requiring hospitals to provide mandated levels of community benefits. Those by the way are Alabama, Mississippi, Pennsylvania, Texas and West Virginia. Another four states are imposing penalties for not complying with community benefits requirements, those being Illinois, Indiana, Maryland and Texas. Those, by the way, are taken from the 2008 GAO report, so if somebody here has more current information, it would be interested to hear that. Many hospitals around the country are finding themselves negotiating specific deals to avoid taxation from their local municipalities, which in many cases provide the direct fire and police support that have become—municipalities have become less willing to simply accept tax exemptions of any entity that is a federal tax exemption. Case in point in 2003, local tax officials and the Illinois revenue director decided to strip Provena Covenant Medical Center in Urbana, Ill., of its tax exemption because the $831,000 the hospital provided in free care that year was not enough to justify the exemption, according to those officials. The state Supreme Court in Illinois in 2010 eventually agreed with the local tax officials and they removed the exemption. The postscript: In 2011, the Illinois Department of Revenue stripped three more hospitals of their tax exemption and invited them to appeal those decisions. However the governor in Illinois, Pat Quinn, has asked those revenue officials to hold off on any decision until he can negotiate with the hospitals to find a new basis for the hospital tax exemption. Those talks are ongoing, and the report is due in March. Final slide, please.
In this introduction there's just one last thing I would like to draw some attention to: There was an interesting court case that played out over a number of years in Milwaukee, and last year, it involved tax exemption of an outpatient clinic owned by Wheaton Franciscan Healthcare. This is in the Milwaukee suburb of Wauwatosa. Last year, the exemption after a long court battle—I believe it was about seven or eight years—the exemption was upheld for this outpatient clinic. However, in a dissent of that opinion, the state's chief justice, Shirley Abrahamson, included some strong language in her opinion, her dissent that is, of the majority putting hospitals on notice there that they'll continue to face a skeptical audience when they ask for tax exemption, particularly in cases like this in which a health system is diversifying beyond just acute care. She said, ‘In light of the changing ways medical services are delivered, it may be time for the Legislature to re-examine Wisconsin statutes. Until the Legislature acts on this question of public policy, the presumption is that the property at issue is subject to taxation, that tax burden should be strictly construed, and that the burden of persuasion is on the party seeking the property tax exemption.' So I think that quote sets a bit of a tone here. So with that, those are my opening remarks, and I think we're going to now turn to Nick Mirkay.
Nicholas Mirkay: Good morning. First slide. So I'm going to do just a brief introduction of the federal tax exemption standards currently in place. I think Joe already has introduced the community benefit standard, which came around by a revenue ruling in 1969. It still is the standard applied today. Of course, it is the standard that's most at issue right now. And Joe correctly stated there was a previous revenue ruling in place—56-185—that imposed much more of a charity care standard, but because of the changes in healthcare systems in the '50s and '60s, the IRS finally had to kind of seal the [inaudible] issue that hospitals were no longer just recipients of philanthropy but actually had public funding through Medicare and Medicaid and the standard changed. So what we have in place here is, as the slide shows, a community benefit standard with the only true what I would refer to as ‘free care' or ‘charity care' standard being imposed in the operating of an emergency room. The standard does say that the emergency room must be open to all persons regardless of their ability to pay. Otherwise, hospital services beyond the emergency room do not require—at least right now—any kind of standard of free care in the hospital portion. But again that's subject to debate as we speak. Charity care is something that's been a constant issue. I would say at least in the last decade, maybe two decades. It's still not explicitly required under the law, but the new Form 990 Schedule H, which has been kind of delayed in its implementation is now asking hospitals on their annual reports to quantify, for lack of a better word, their charity care. We'll discuss that a little more, I think, with other panelists. Trying to figure out how much free care they are providing in certain areas. It also allows them to report bad debt expense and argue as to how much of that should be considered charity care as well. I think we'll also talk throughout the discussion today, and I just make a slight not of it at the bottom of this slide, that states clearly can employ a tougher exemption standard, and I put in parentheses Illinois. Again, Joe's introduced that. I think Illinois clearly being the leader right now among states in looking at the definition of charitable, and imposing a much tougher standard for real estate tax exemption in Illinois than the federal government requires for income tax exemption. Next slide.
What I put in here was a Finance Committee actually the minority committee of Finance—at that time the minority committee headed by Sen. Grassley—did a round-table discussion. And in advance of that round-table discussion, had a working paper released that proposed some reforms and started looking at whether or not we should reconsider the 501(c)(3) exemption of hospitals. And recognizing that (c)(3)s—you can go ahead and go back to the last slide, I'm sorry—that the (c)(3)s perhaps we should look at that and impose a charity care standard. And they define that as ‘5% of the greater of annual patient expenditures or revenues.' They got into detail on how you should be able to value that—value at the lowest rate paid by Medicare or Medicaid for actual reimbursement, have a widely disseminated charity care policy, and if, for some reason, hospitals could not make that new (c)(3) standard, they still would be eligible to be exempt under 501(c)(4), which would allow them to still not have to pay taxes on that revenues but would eliminate the charitable contribution deduction because the charitable contribution deduction is only available to contributions made to 501(c)(3)s with a couple other small exceptions. So, of course that was just a proposed reform. It caused a lot of furor, a lot of discussion—at least in the tax-exempt world. If I could go back to the second slide. What happened as most people I'm sure know is that the healthcare act was enacted, and at least in the initial stages there was discussion about whether or not 501(c)(3)s should be amended and include an actual charity care requirement, a requirement that to be exempt hospitals must provide a certain quantifiable amount of brief medical care, and that 5% that was in the proposed discussion was discussed. But, essentially, as the bill went through many machinations, it eventually was dropped and what are left with is Section 501(r) or the Internal Revenue Code, which imposes additional requirements for hospitals that are exempt under 501(c)(3). They must conduct a community health needs assessment every three years. Again, the details of what that requires is still being played out in proposed regs, regulations. They must provide and widely publicize a written financial assistance policy that sets forth under what circumstances there will be either reduced cost or free care given. And that must be provided to patients upfront. They must limit their amount charged for emergency or other medically necessary care. That requirement seems to go more towards making sure that people in the emergency room aren't billed at a higher rate if they know that they're not going to be reimbursed for that care. And then finally, dealing with extraordinary collection actions. Again, making sure that the hospitals engage in kind of a fair approach to trying to collect bills. Again, kind of looking at this implicit charity care requirement and realizing that if we're going to allow hospitals to write off certain free cost, we don't want them to also be, for lack of a better word, hassling people who have not paid their bills. At least that's the implied policy, I think, under there. But if you notice from the three slides, we still don't have a consensus on at least the federal level at this point—whether there should be a quantifiable amount of charity care in order to retain your 501(c)(3) exemption. That's my basic opening.
Joe Carlson: OK. Great. Nick, can I ask you a follow-up question?
Nicholas Mirkay: Sure.
Joe Carlson: You talked about the IRS Section 501(r). Do you suppose this is going to result in more community benefit and charity care being given out, or is this just going to result in better accounting than is already happening?
Nicholas Mirkay: The cynical part of me would probably say it's going to result in better kind of documentation accounting of the community benefit standard. I think that if you go back—the discussions in Congress about this tax exemption issue for hospitals over the last 10 years easily, if you go back awhile, the IRS, when it was called to the Hill, really at times was not able to provide the documentation for, OK what are hospitals providing in free care? For those congresspersons who were looking at a quid pro quo, OK we're giving them an exemption, what are we getting in return? I think the IRS found themselves not able to provide documentation. The 990 annual reports at that time did not really provide a lot of specifics, and the IRS wasn't good about following up on 990s that were either incomplete or not filed. So, some of this I think is to make sure the information is there, specifically for Congress. Part of the act is also that the IRS has to make certain accountings to Congress on a regular basis. So I would say most likely in a lot of instances, it's just going to mean more paperwork for hospitals and give the IRS probably the information they need to report to Congress.
Joe Carlson: OK. Great. Next we are going to hear from Jane Haderlein, senior vice president of external affairs at Huntington Memorial Hospital.
Jane Haderlein: Good morning. My view is from the community hospital view, and we do believe that not-for-profit hospitals are the backbone of our country's health system, and we have been for hundreds of years. Our view related to Schedule H and its requirements, we're very much in support of having a single look but also making sure that we are entrusted as community hospitals to be in the best position to determine whether our benefits are meeting our community needs, and that is why we believe on a local level that our board of governors needs to be very much involved in anticipating, inquiring of our communities about their needs both from our discharge data, census data, but as well as being very proactive in talking to people in our community that are aware of barriers to care and what might help increase people's comfort levels, access to care as well as preventive care.
Part of Pasadena here, we contribute approximately $91 million in community benefits and did that last year and we continue to do that. But part of the community benefit we deliver each year provides delivering and offering care—and someone else mentioned, I think Nick—for people just who simply lack the ability to pay. While we've done that here for 120 years really with integrity and devotion, we want to make sure we look at also our Medicare and our Medi-Cal population. It's a little interesting to be doing two sets of reports—one to the state of California; I know many other states share the same challenge, where we're not able to have the same set of standards that Schedule H requires, and of course as a state they're very interested in showing that Medicare and Medi-Cal do in fact not cover the shortfalls. Our federal mandates ask us to really show that those shortfalls are covered, so one of our challenges is looking at two different sets of requirements and not letting that become an unnecessary headache and more paperwork, but really remaining steadfast in looking at where our opportunity is for better serving our community and then looking at that reporting as a way to document this and of course [20:47: inaudible] it.
Joe Carlson: Jane, can I ask a follow-up question?
Jane Haderlein: Sure.
Joe Carlson: How do you see the community perception of the $91 million in community benefit you just mentioned? I mean, are people in the community expecting $91 million in free care going out of your ER or going to populations that don't have insurance? Or do you think people understand sort of a wider community benefit definitions that are used in policy circles?
Jane Haderlein: That's an excellent question. I think, locally, we have made a very strong effort to define what community benefits means. We are a teaching hospital with two residencies—one in internal medicine and one in surgical medicine. We regularly speak to the community and to our patients about how important that is—not only for people who happen to not have insurance but also for the fact that we are setting up our own succession planning of very good physicians in our own community. So we reach out and we talk about that regularly as part of our culture. We talk to our employees, and we do talk to our stakeholders, our community leadership, about that. We also, two years ago as a result of our community needs assessment and really many years of work prior to that we worked in collaboration with a medical foundation group, not to be confused with a philanthropic foundation but a physician foundation as well as the city of Pasadena to set up an urgent-care clinic to try to, again, deliver the right care at the right cost at the right time. With that we also private partnered with the federally qualified healthcare centers so that we could ensure that people without insurance or with less insurance than would be optimal to have a primary-care home. So those are a couple of examples of ways we try to inform the community and try to share in a very proactive way that what the hospital is doing based on the response we have from people who live in our region that what we are doing is actually reinvesting back so that people have access to exceptionally good care, that it's priced appropriately and it does not leave community members out regardless of whether they're insured, uninsured or have a PPO plan vs. an HMO plan. So we are very proactive about showing that that investment is a good investment for our community. And we very much want to keep our tax exemption so that we can continue to do those things.
Joe Carlson: OK. Great. Next up we will hear from Tom Glynn at the Harvard Kennedy School. Tom?
Thomas Glynn: Hi. Thank you. So I guess I would make three points: The first one is just to say that I think we all recognize this is a kind of balancing act, you know there are roughly 5,000 hospitals on the one hand. On the other hand we have the federal government through the IRS taking a look at these issues. Then we have 50 different states and 50 different attorneys general and some courts and then at the local level we have a lot more interest in the last few years in pilot payments, payment in lieu of taxes. So just to kind of use one example, put it in context, and then talk for another minute about the pilot, so for Partners, where I've worked for many years as Joe said, if you total up all of the community commitments that they are making, it probably ends up being something like $1.2 billion. That would include subsidies for Medicare losses, subsidies for Medicaid losses, subsidies for research, subsidies for education. In Massachusetts we have guidelines from the attorney general that say that between 3% and 6% of our revenues have to be spent on community commitments. So, as opposed to the $1.2 billion, they would only give Partners credit for something less than the $200 million. So that's about 4.5% for the system, and for the teaching hospital it's closer to 6%. So I think on the one hand you might say, ‘Well, that sounds like people are making a pretty serious effort.' Notwithstanding that fact, there is still an interest in the city of Boston in seeing what nonprofit institutions should be doing to help the city. And we have a pretty aggressive pilot in lieu of taxes program, which has recently been enhanced and strengthened. The argument is that 40% of the land in Boston is tax exempt, that tax exempt nonprofit institutions use the same police, the same fire, the same snowplowing and in some instances the same trash collection. So, a new formula was created, which is voluntary but which anticipates all the nonprofits doing more to help the city balance their budget and make sure the city stays strong. So I think that when you look across the country, you see an escalation interest in the pilot approach. It's still only probably in 18 or 20 states, maybe 100, 120 cities, so it still hasn't become a national trend, but definitely is starting on the East Coast and kind of moving west. So those are my three thoughts for the opening.
Joe Carlson: It seems like a pilot, a payment in lieu of tax, could be sort of a double-edged sword for a hospital CEO. I mean you've got on one hand you're opening up discussions about taxation, which might have some risk, but then you're also on the other hand sort of extinguishing some interest in increasing. Do you have any thoughts on: How does a hospital CEO decide whether to sort of open that as an option to put the pilot on the table as a way to avoid a tax that might otherwise be coming?
Thomas Glynn: Well, I think that historically these payment-in-lieu-of taxes agreements were only made when an institution was planning to expand. And so therefore the city had some leverage because they had to approve expansion, zoning, etc., etc. I think what we've moved to is the notion that, you know, kind of fair share, and we all have an interest in having a successful city, and you know I think there are some legal issues that I would defer to Nick on, that some nonprofits have been concerned by making this kind of payment, but it is voluntary. So, in a sense, as a layperson, I'm not sure it raises a legal question about the tax-exempt status, but you are correct in saying it's something that has come up. In general I think most institutions have tried to cooperate with the city recognizing this five-year phase-in has a fair formula, and, you know, everybody's trying to cooperate, but it gets down to kind of civic participation and to what extent that kind of a framework has been established.
Joe Carlson: OK, great. I think one thing we want to do right now is ask if anyone—if any of the panelists—had any questions for any of the other panelists?
Jane Haderlein: I do. This is Jane Haderlein. I have a question for Tom. He said that pilot evolved. I'd like to ask whether or not that payment would be in lieu of sort of the sense of collaboration if you do have people like fire, like police, like zoning officials at the table. That's what we have in Pasadena, so we don't make a payment, but we do bring people into the conversation. And an example of that would be our fire and rescue has just suggested that the hospital should provide training to some of the EMTs in the field related to early identification of stroke symptoms, and we are doing that at our cost, but, again, responding very locally to that civic organization within our own community. And I would argue that rather than a payment to deflect taxation, it serves us to have the conversation and then to create together a reasonable solution. I'm wondering about your thoughts on that, Tom.
Thomas Glynn: You know, I think that is a very desirable model and a good way to do it. But I think that some of those conversations do take place, have taken place, and the way in which that thinking was accommodated was people were told that if, after you figure out what the tax should be, the city would give us credit for various programmatic commitments or in-kind commitments that we were making, consistent with the city's agenda, so that this would be offset to the tax, which would come out of the same kind of conversation you're suggesting with police, fire, etc. But it's a little bit more of a formula, and it sounds like your model is a little bit more of a discussion and kind of a community consensus where this one has a little bit more of a formulaic framework.
Jane Haderlein: Thank you.
Joe Carlson: The first question is, it's a bit of a provocative one, and I think we'll start with Jane, so lucky you, Jane. What would happen if tax exemption for hospitals vanished tomorrow? What's the impact on a hospital? Do hospitals start going belly up? Or can they rapidly respond? Is there a for-profit healthcare—what would actually happen if the tax exemption just went away?
Jane Haderlein: It's an interesting question. I'll just mention that several systems in California, UniHealth being one, did in fact convert to a for-profit, and now they are a significant funder for community hospitals. So I guess a short answer to your question is: We would be in a lot of trouble. We would need to reduce programs. We would need to start looking at what kinds of patients are triaged where. We would need to start looking like more of our for-profit friends, and that would create a lot of hardships on the kinds of programs, in our case behavioral health, being a full trauma center, having a pediatric intensive-care unit—those kinds of things that are extra-measure but we believe reflect our community need and reflect the reach that we want to have in terms of our mission. So it would ratchet down significantly, and you would see more of a—to use an old model in health—more of the tenant kind of a model, cherry-picking related to surgical choices and, again, limiting ER and trauma units, so we'd be a very different hospital and I believe many nonprofits would also be very different.
Joe Carlson: Anyone else care to take a stab, Tom or Nick?
Thomas Glynn: Yeah, this is Tom. You know, I think that a lot of hospitals are happy if they can run a 3% margin of revenues over expenses. I think in the for-profit world, that would be considered extremely modest, and so you get the question that you're trying to run a 6% margin, where is that delta going to come from? And I think Jane did an excellent job kind of laying out a lot of those things which hospitals take on willingly as community services. Pediatric care loses money. Psychiatric care loses money. You might have to re-examine health centers because people don't have a way to subsidize those things, and at the same time they're trying to increase their margin to satisfy stockholders.
Jane Haderlein: One other, for many hospitals it would be a double hit because not only do we rely on an exemption for the dollars that don't go out the door, but we raise on average at this hospital about $18 million a year, which is not nice to have; it is must-have today in order to operate many of the programs and services we do have, so, again, it would be a double hit for many, many community hospitals.
Nicholas Mirkay: And I was just going to add that there've been several academic articles, one published in UCLA, that looked at differences before for-profit and nonprofit health providers, and there is definite evidence of the fact that nonprofit healthcare providers do offer access to services that are less profitable and hang on to those services much longer than a for-profit hospital would. And they mentioned things like psychiatric emergency care, AIDS treatment, trauma services. There are definite studies that show that nonprofit hospitals provide services on a continuum that for-profits do not because of its profitability issues.
Joe Carlson: Does that sort of fly in the face of the Joint Committee on Taxation report from '02 that not-for-profits were only giving about 1% more of their total expenses to community benefits than for-profit hospitals were?
Nicholas Mirkay: Well, I think that—what I think the studies that this particular article and a couple of articles that were written on this area looked at is they didn't look at just the numbers; they looked at the actual services. And I think that that probably is why you're getting a little bit of a different result because they aren't just looking at dollars. They're looking at: But what services are being provided that are different? What access to services is being provided that's different from a nonprofit hospital vs. for-profit? So, I don't know if it belies it, but I think it probably looks at it a bit more in-depth than just the numbers.
Joe Carlson: We have a question from the audience, and I think I would direct this one also to Nick to start out, although, again, we encourage anyone who has thoughts to offer them. The question is: Can anyone comment on the franchise fee imposed on Ohio's nonprofit hospitals? And should we expect other states to do the same? And, Nick, if you could maybe start out and talk about what the franchise fee is.
Nicholas Mirkay: Franchise fees are typically imposed on for-profits, sometimes based on the amount of stock that's been issued, the value of the stock. Everyone's a little bit different. Some franchise fees operate more like gross-receipts tax, so it kind of differs between the states. I'm not an absolute expert on all the states on that issue, but I don't know what the amount of the tax is. It probably would be helpful from the person who's asking the question to give me an idea of what it is, but whether that's a trend—I mean that's a good question. Most of what I've seen on the state perspective on the tax side is the real property tax where there's a really good chunk of dollars involved, like Illinois, where they're saying, ‘OK, we're giving up significant tax revenue on the property side.' To go to more of a quid pro quo analysis, what are we getting in return for that benefit, that tax exemption? Are we getting enough community benefit in the context of free care or underserved populations, etc. So I'm not as familiar with the franchise tax issues. I'd be curious about how much that tax actually is.
Joe Carlson: Anyone else have any thoughts on that? The charity-care standard from the IRS has not really—I mean it's not substantively been amended since 1969. And I wonder, maybe Tom, do you have any thoughts on why that is? Why, you know, in all this time with all this evolution of healthcare that's taken place since 1969, you know substantively the same charity care—I'm sorry community benefit standard still applies?
Thomas Glynn: I don't know specifically why that would be the case. I guess one could speculate that this is an area that is currently getting more scrutiny as a result of the Finance Committee and things happening around the country, and so obviously there's an effort to try to take another look at it, but as we've discussed, 5,000 hospitals, 50 different states, having worked for government, it is hard to come up with regulations which apply fairly across the board. And I think the notion has been that by increasing the transparency at the federal level of the IRS, 990 changes, and to a certain extent with some of the AGs, like in Massachusetts, that they're enabling the media, legislative bodies, consumer advocacy groups, to look at these numbers and decide whether they think there are issues, and obviously from the setup, Joe, that you did about what's happening in Illinois, that transparency's seems like it's having an impact. So, I think the notion has been more of let's get all the facts on the table. When you get into—when you're trying to set guidelines—issues between urban hospitals and suburban hospitals and rural hospitals, you get into issues about what the margins are. You get into issues about what counts if we lose $300 million in Medicare because Medicare's paying 95 cents on the dollar, should that count? Well, some people say it should and some people say it shouldn't. So I think it is not a simple task to unravel this given the complexity of the system and the way it's going up over time. But I do think there's more of an interest in trying to come up with more of a framework that people can agree on, but I don't think it's going to happen right away overnight.
Joe Carlson: What do you think, Jane or Nick?
Jane Haderlein: I would just argue that I think ultimate accountability is really the most responsive way to go, and I do understand the challenges the federal government have and the IRS have in creating requirements that are across the board. It concerns me because I believe that if we do that, the one-size-fits-all approach will really undermine the ability for us to be locally responsive and to do the most good for the most people.
Nicholas Mirkay: And I agree with everything both of my co-respondents have said, Thomas and Jane. I think that the IRS went through a fairly significant hospital study. Reports were given out a couple of years ago, 500 questionnaires sent out to nonprofit hospitals, and in the final report it said that any quantitative component of a community benefit standard would be extremely difficult because of what both Jane and Tom have pointed out. You have rural hospitals and more urban hospitals, very different populations, some urban—some rural hospitals may have very little charity care in the traditional sense because of the population. Others may be just the opposite, so to apply a one-standard-fits-all is an extremely difficult task. And, again, there are those who have advocated that we should stop focusing on quantitative type of measures like 5% charity care, and look at access as being the core to tax exemption. What access to services are nonprofit hospitals providing that both differs and expands the healthcare services in that area vis-a-vis their for-profit counterparts?
Joe Carlson: The next question is from a listener, and it builds on the quote that we heard earlier from the chief justice in Wisconsin. The question is: Hospitals are looking for new sources of revenue from nontraditional business lines. How could that strategy negatively affect their tax-exempt status? I think I would address this initially to Jane.
Jane Haderlein: I would suggest that those revenues—seeking revenue for the sake of revenue just lessens are total pie in terms of our ability to accurately reflect community need. So I'll make up an example that may or may not be helpful, but if you look at all the bariatric lap band kinds of things that are so popular now in terms of clinical settings because the reimbursement is there, if we were to turn our ship and focus on procedures that are merely cherry-picking to get the most reimbursement, I think it would wear very thin, very fast if we started canceling or deferring other kinds of elective procedures, which may in the minds of the community needed for things like orthopedic care, quick access to oncological surgery or cardiac care. So, that's an extreme example, but I think in our circumstances, the community would look at that very quickly, see the transparency that we are looking at a for-profit model and would not be living according to the standards that we have expounded for over 100 years.
Joe Carlson: You hear about hospitals getting rid of their OB services lines when they're in an extreme financial situation, is that an example of what you're talking about?
Jane Haderlein: Yes it would be. That would be an excellent example. Again, an extreme example would be hospitals keeping their neonatal intensive-care unit, which is very well reimbursed, and jettisoning the obstetrics unit. Of course, that's an extreme example, but it's not unheard of, and in this new world, if we were forced to look that way, I think that would be a very disappointing choice for nonprofit hospitals to be making.
Joe Carlson: Tom, do you have any insights on hospitals looking for new sources of revenue and how that could affect their exempt status?
Thomas Glynn: I agree that they are being asked to look across the board. I also, my sense is, and I would defer to Nick on this, but I think the IRS has been particularly focused on some of these transactions and arrangements where you start to have kind of non-mission-related revenues, and that is an area that has gotten some scrutiny as is should. So there are opportunities out there. Some fit the mission and the tax-exempt status and some do not. And I think the IRS is trying to make sure that people are focused on the mission-related ones, and not ones which are unrelated.
Joe Carlson: That has to be difficult though for a CEO who is looking at the bottom line.
Thomas Glynn: Yeah. I mean it's difficult, but as Jane has pointed out, a lot of these choices are very, very difficult and I think this is just one where the IRS has made clear through various reports and investigations that they want us to be very, very careful about getting involved in things which really are not mission-related. So people have to find other ways to try to come up with revenue ideas that are not going to create a problem.
Joe Carlson: Question from the audience: And this might be a good one for Nick to address initially. There's been discussion about creating a quasi-not-for-profit organization structure for organizations that look like for-profits but have charitable missions. If that gains traction on the Hill, what would that mean for nonprofit hospitals? Are you familiar with this, Nick?
Nicholas Mirkay: Yeah. I think several states have enacted—there's different words, there's L3Cs, there's—some are called, I forget the other name for them—but some are corporate forms, some are limited liability forms. The thought being is that they still are for-profit, but they kind of commit to giving a certain potion of their profits—via charitable contribution or otherwise—back to the community. So, some green technology companies and things of that nature. I don't know how much of an impact that will have, because at the end of the day, in order to be tax exempt, you've got to be set up in a way where you don't have shareholders or any kind of individuals that get profit distributions out of that particular structure. You're going to have to make sure that all the profits are then directed back in, as Tom has already said, to satisfy and further your charitable mission. So I don't know that alternative entities are going to change the structure of that tax-exemption system right now. I think it poses some challenges for the IRS if those entities are used as kind of the entity of choice and then they apply for exemption. I think they're going to be looking for ways, ultimately, to get the same results as they get from a nonprofit corporation or from a charitable trust, whatever form is being used.
Joe Carlson: OK. Tom or Jane, are these things that you are familiar with, quasi not-for-profits like L3Cs?
Thomas Glynn: I've read about them, but I have no experience with them.
Jane Haderlein: Yes. I am somewhat familiar with them, and I have a sense that their 501(c)(3)s will be not last long. That is my perspective.
Joe Carlson: Audience question, and I think this would be a good one to start out with Jane: Assuming that significantly more people are insured as a result of the Affordable Care Act and that free care at not-for-profit hospitals declines, how will hospitals frame, justify and quantify their community benefits? And, additionally, my hospital has increased their support of federally qualified health centers as a result.
Jane Haderlein: Well, it's a good question and one we get quite a bit. Our view is that we will continue to need to provide free wellness care. The state of medicine today is such that acute-care hospitals take patients in, we see them, we do all of the things to make them better and then a quick discharge. We believe that if payment reform is going to actually work and service on a community level, we have got to be a proactive partner in making sure that those patients particularly with chronic illness are seen, are taken care of ahead of any acute hospitalization and are followed afterwards. We're piloting this right now with congestive heart failure to very good results. And we believe that the dollars that will need to be spent in order to ensure that health and well-being of that population will continue to be a benefit. We also don't believe that the costs that will be absorbed—or payment absorbed—that will be paid will absorb the full cost in general. And those extra measure things we talked about earlier like behavioral health, pediatrics, resident training, trauma services—there will still be a gap in those areas that we would like to claim.
Joe Carlson: Nick, do you have any thought on that on how hospitals can continue to justify their tax-exempt status if uninsurance goes down by a significant amount because of the reform law?
Nicholas Mirkay: Yeah, I don't know that I have much to add beyond what Jane has said. I think that right now the community benefit standard, you know the fact that hospitals admit patients that have, for lack of a better word, public assistance or public insurance/Medicare, Medicaid, does support their community benefit standard and for their exemption, so I would have to think that the same analysis would continue for now that by serving patients that are covered by this new act and these nonprofit cooperatives, that that will be seen as kind of establishing and furthering your charitable mission.
Thomas Glynn: Maybe I can comment from the Massachusetts experience, because our law passed in 2006, and we have now 98% of the people have insurance. However, 2% remain. And there is a certain kind of churning factor, so we still see some safety net care that we provide even though it's much less than it would have been five years ago. And that, to a certain extent, has been reflected in the guidelines we are looking at from the AG's office, but in addition we are expected to provide support for neighborhood health centers, and I think that will go up in the future of the country. And also to be providing community health programs, which I also, I think, will probably go up as more people become insured, so I think there will be a benefit to the federal healthcare reform. And maybe that will be reflected to a certain extent in the guidelines, but I do think it will create some more investments in health centers and in the community health agenda.
Joe Carlson: I think this next question I will start out again with you, Tom. Should executives have part of their salaries based on community benefits?
Thomas Glynn: You know, speaking as an individual, I would say it would be fine with me. I think, again, it depends a little bit as we've said on different hospitals, different boards have different philosophies, but I think that in a lot of places boards do expect their hospitals to do more than the minimum and would be unhappy if they thought that the hospital was doing the minimum, so I think it's probably reflected in an informal way now. But it could be a criteria going forward, especially if one of the regulatory bodies decided to adopt that.
Joe Carlson: I feel like I've heard about how healthcare or hospital compensation committees including community benefit keys in sort of their overall executive compensation philosophy. But I wonder how common that is?
Jane Haderlein: I would just like to share that that is intrinsic in the way our executive team is rewarded, community connections evidenced by the kinds of things that I talked about earlier are every bit as accountable for our executive teams as is financial sustainability and the quality care provided, so it's connected throughout and our team understands that, and we choose behaviors to make sure we are making good on that commitment.
Joe Carlson: Question from the audience: How do—I guess this is related—how do executive salaries fit into this debate? And should salaries of CEOs at not-for-profits be capped? I guess that asks, keeping in mind, the public perception of this debate. I guess we should start with Nick. What do you think, Nick?
Nicholas Mirkay: Well, I guess I would say that there are at least rules in place dealing with executive compensation. And the reason hospital studies show that nearly all the hospitals that they surveyed did report using what we call the rebuttable presumption procedures that are available under another term, the intermediate sanctions that are in place to make sure that there's not too much benefit going to individuals, that's all charity, not just hospitals. And so the studies show that a majority of the hospitals—almost all of them that were surveyed did use this rebuttable presumption procedure, which is they're supposed to get comparables based on similarly sized, similarly operating hospitals or other charities. The boards got a look through those, they got to discuss it, they need to prove it, they need to document all of that, and at least the IRS looked at that as the fact that that is in place, then we're at least ensuring that the compensation executives are receiving are reasonable. And the study also found that there was a direct correlation between the total revenues and compensation that was paid to top executives. So I think there is a perception that all hospital executives are making a lot of money, but the study seems to show that smaller hospitals, again, it is going to be more commensurate with the size of the hospital.
Joe Carlson: Anyone else want to take a stab at that one?
Thomas Glynn: I guess I would just add that I think that this is an area, again, where the IRS and the 990 have put increased scrutiny, and the schedules are more elaborate than they were five years ago. And you do need to follow these rules of having an independent committee, no conflicts, a formal review and data on comparable institutions to make the decisions. And, I think by making them public, we have the oversight from the attorney general. We have oversight from the media. We have oversight from legislative bodies. So it is, again, I think hard to come up with a cap or a formula because hospitals are so different, and I think it's a sensitivity, but I think the IRS has tried to pay a lot of attention to this in the last few years. We need to kind of see how these reforms kind of play out before we start looking at more drastic remedies.
Joe Carlson: We have an audience question, and I think probably, Nick, if you wanted to try this one: does the panel believe that medical education would still be viewed as a community benefit if the tax status was changed? And maybe you could build in just a little bit of description of the background there in medical education as a benefit.
Nicholas Mirkay: When they're saying tax exemption status being changed, they're saying that we would change the rules to become a 501(c)(3)?
Joe Carlson: I think they're getting at how much is medical education—how much of that should actually be considered a community benefit?
Nicholas Mirkay: OK. I mean I think—I think historically looking at professional training, medical research is a part of that, has always been viewed by the IRS as something that is—that both establishes and furthers the hospitals charitable tax-exempt status. So I think that the training of medical professionals has always been seen as an ultimate community benefit. It's never really explicitly stated as much, but I think certainly the IRS views the provision of good medical services as kind of also being commensurate with community benefits. So, I do think it's kind of maybe a silent but fundamental leg of the chair with respect to giving hospitals tax-exempt status. I don't see that changing in the future. I just don't think that's one of the issues that's really on the radar.
Joe Carlson: OK. Great. Well, this is going to be our last question that we just concluded. We are out of time. So I would like to thank everyone again for listening in to Taxing Times. We've heard from Nicholas Mirkay and Thomas Glynn and Jane Haderlein, and I'm Joe Carlson, reporter with Modern Healthcare magazine. Thank you.
Panelist: Thank you.
David May: This concludes today's discussion on the future of tax exemptions for nonprofit healthcare organizations. For those who want to view the webcast again, all attendees will receive a follow-up email with a link to the recording of the webcast available at ModernHealthcare.com/webcast. All slides presented during this webcast are also available at that address. Thank you.
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