Editor's note: The following is an edited excerpt of a full transcript of a Feb. 7 editorial webcast, “Taxing Times,” conducted by Modern Healthcare.
Navigating tax-exempt issues
Experts offer strategies for coping with new benefit-reporting requirements
The panelists were Thomas Glynn, lecturer in public policy at the Harvard Kennedy School and former chief operating officer, Partners HealthCare System, Boston; Jane Haderlein, senior vice president of external affairs, Huntington Memorial Hospital, Pasadena, Calif.; and Nicholas Mirkay, visiting associate professor of law at Creighton University, Omaha, Neb. In an exchange moderated by reporter Joe Carlson, the panelists discussed the latest developments regarding tax exemptions for not-for-profit hospitals.
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 a 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 (Form) 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.
Carlson: How do you see the community perception of the $91 million in community benefit you 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 definition that is 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 benefit 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 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 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.
Carlson: It seems like a pilot, a payment in lieu of tax, could be sort of a double-edged sword for a hospital CEO. 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: 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. 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 that 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.
Carlson: 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?
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.
Glynn: 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.
Carlson: 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 for-profit healthcare—what would actually happen if the tax exemption just went away?
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.
Glynn: I think that a lot of hospitals are happy if they can run a 3% margin of revenue 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 that 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.
Mirkay: I was just going to add that there have 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.
Carlson: How do executive salaries fit into this debate? And should salaries of CEOs at not-for-profits be capped?
Mirkay: 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 for 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 is reasonable. And the study also found that there was a direct correlation between the total revenue 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 for smaller hospitals, it is going to be more commensurate with the size of the hospital.
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