A Well Placed Question by Professor Mirkay: “Should Medical-Related Charities Increase Disclosure of Their Donors?”

We’ve written a great deal here at HRW about the need for transparency in industry/profession interactions and the elimination of conflicts of interest–the Center for Health & Pharmaceutical Law & Policy here at Seton Hall Law has, in fact, over the course of the last two years, issued two White Papers on the subject–with another on the way. In the last, “Conflicts of Interest in Clinical Trial Recruitment & Enrollment: A Call for Increased Oversight,” the Center proposed legal and policy changes to address conflicts of interest in the relationships between industry and doctors that can create unwarranted risks to trial participants and to the scientific integrity of research. In the Paper prior,  ”Drug and Device Promotion: Charting a Course for Policy Reform,” The Center recommends: (1) making payments by drug and device companies to doctors transparent, with public disclosure by industry and physicians of their financial relationships; (2) adopting federal legislation to ban gifts, meals and other benefits provided to doctors as part of the current marketing model; (3) setting new policies to give FDA the authority to require studies of safety and efficacy of drugs and devices used off-label; and (4) undertaking a fundamental change in funding for continuing medical education to end industry support.

But over at Nonprofit Law Prof Blog, Professor Nicholas A. Mirkay of Widener University School of Law, has a post–and an additional question–well worth considering:

“Should Medical-Related Charities Increase Disclosure of Their Donors?”

Professor Mirkay points to a recent Chronicle of Philanthropy article which raises the issue as the National Alliance of Mental Illness (NAMI) has begun disclosing the names of corps and foundations who (does Citizens United make that “who” correct? Never mind appropriate.) donate more than $5,000. NAMI is said to have done so on the heels of an investigation by Senator Chuck Grassley into their financial relationship with the pharmaceutical industry. Mirkay writes:

NAMI’s actions have given Grassley further impetus to force 33 other nonprofit medical associations to follow NAMI’s lead.  In a related article, the Chronicle reports that Grassley’s inquiry into these other groups represents a “broader effort by the senator and others to expose and curtail corporate influence on the medical field.”  Grassley commented that “[t]hese organizations have a lot of influence over public policy, and people rely on their leadership.  There’s a strong case for disclosure and the accountability that results.”

Professor Mirkay also writes

In December 2009, Grassley sent a letter to 33 such nonprofit associations requesting information on the amount of funds received from pharmaceutical, medical-device and insurance companies from 2006 to 2009, the identity of the donors and how their money was spent by the medical group, and additional information on the outside income earned by the groups’ top executives and board members.

The (partial) results of those queries are not particularly heartening, but are certainly worth considering. Mirkay writes:

The Chronicle acquired more than half of the solicited groups’ responses to Grassley’s letter, finding that such groups receive aggregately more than $100 million annually from medical-related companies via “donations, advertising revenues, exhibit fees, corporate memberships, and support for continuing medical education.”  For some groups, this can represent as much as 78% of their revenue, while for others it only represents a small percentage of their total receipts.

Despite the longings of Elvis Costello, it’s hard to bite the hand that feeds you–and 78% of revenue pretty much constitutes (in)visible means of support. In pushing further with our (or more accurately, the Supreme Court’s) Citizens United “who” conceit, one might think 78% sufficient in some sense to constitute dependent status under the tax code–at least for purposes of context. Having said that, in addition to not biting, it’s not hard to imagine the dependent regularly fed doing that which it may to help assure the continued regularity of that feeding. Especially if the feedings are invisible.

It should also be noted that Mirkay rightly points out that “This effort is further evidence of Grassley’s commitment to increased transparency of tax-exempt nonprofits.” He’s right. And being that Senator Grassley follows HRW on Twitter, and as I have at times been critical of some of his positions in the past regarding other issues, it’s worth noting that the Senator should be roundly applauded for his efforts.

[And if you haven't been over to the Nonprofit Law Prof Blog, you should. It's in our blog roll for good reason-- their work is informative, brief and well written.]

Recommended Reading: Nonprofit & Tax Law

James J. Fishman’s Stealth Preemption:  The I.R.S.’s Nonprofit Corporate Governance Initiative, recently posted on SSRN, joins the growing chorus of critics of the IRS’s preemption of state nonprofit corporate law via the addition of an entire “governance section” to Forms 1023 and 990.  The underlying hypothesis is, of course, that by virtue of asking particularized questions regarding governance, the IRS will affect changes to facilitate the provision of the “right” answers on the respective forms; the IRS specifically acknowledges that no federal tax law addresses most of the issues about which it inquires.  The article is a great survey of the bases of criticism of the IRS foray into governance reform, particularly as it applies to the medium to small nonprofit.  It also catalogues examples of applicants being denied 501(c) (3) exemption as a result of concerns about, for example, conflicts of interest which, Fishman explains, the IRS appears to believe are per se bad, without an acknowledgement of why they may be necessary and appropriate for the small nonprofit, and can be managed, as is required by state law, to avoid foreseeable evils.  An important theme of Fishman’s article is the lack of empirical data showing that the IRS’s structural governance preferences actually have a positive substantive impact on the operation of nfps.

John D. Columbo’s The NCAA, Tax Exemption, and College Athletics, 2010 U.Ill. L. Rev. 109 is simply fun for those academics who enjoy complaining about the outrageous salaries of coaches, or who flinch at the reference to the “scholar athlete.”  More relevantly, however, Columbo’s article comprehensively outlines the doctrine relevant to analyzing the sparse legal guidance available regarding the assessment of the reasonableness of executive compensation, and whether it violates the prohibition on inurement or excess private benefit. This analysis is timely as well: the IRS may be on the verge of  delving into the salaries of coaches as part of its college audits. The article also makes incredibly accessible UBIT analysis, also of importance in teaching health law.  Like most of Columbo’s work, he makes hard concepts seem easy. As the IRS may be taking a closer look at coaches’ salaries.

Recommended Reading: Nonprofit & Tax Law

James R. Hines, Jill Horwitz & Austin Nichols’ The Attack on Nonprofit Status: A Charitable Assessment, just posted on SSRN, forthcoming in 108 Mich L. Rev. 1179 responds to the literature advocating for tax benefits to any entity, including the for-profit, that engages in charitable activity, regardless of organizational status.  Ultimately, the authors argue for the exclusive retention of tax exemption for the nonprofit firm, employing economic analysis and extant though limited empirical data to suggest the superior efficiency, higher quality and lower costs of nonprofits for at least some charitable activities.  The article is rich with empirical data about the demographic differences between the for-profit and non-profit employee, from which it suggests employees of the two sectors may be differently motivated –  by altruism as opposed to monetary incentives — thereby reducing costs and arguably increasing efficiency and quality.  Professor Horwitz’s work always makes an important contribution to the literature, and she doesn’t disappoint in this article either.

Lloyd Hitoshi Mayer and Brendan M. Wilson’s Regulating Charities in the 21^st Century: An Institutional Choice Analysis, available on SSRN, forthcoming in Chicago-Kent Law Review, invokes institutional choice theory to determine the best locus for the regulation of the charitable sector.  The article concludes that charity governance, comprising rulemaking and enforcement, best resides in a state agency independent of but related to the attorney general.  This outcome respects the historic role of the state in regulating charities, takes advantage of the state’s expertise in nonprofit oversight, and enables the state to be nimble in its regulatory approach.  The provision of sufficient funding remains a concern with this choice. Also of concern is inter-state consistency in regulating the multi-state nonprofit charity; inconsistency can foster regulatory arbitrage.

Recommended Reading: Nonprofit & Tax Law

Miranda Perry Fleischer’s Theorizing the Charitable Tax Subsidies:  The Role of Distributive Justice, just published at 877 Wash. U.L. Rev. 505 is a must-read for anyone asking what justifies hospitals’ tax-exemption in a post-reform world.  The least that can be said for this incredibly thoughtful article, which is apparently the first in a series on the topic, is that it provides a superb overview of tax-exemption theory for those who do not regularly read this literature.  It is perfect background reading for the non-tax teacher who introduces students to the topic in her health survey class, or the person who just wants a quick overview of the extant theoretical justifications for the charitable tax exemption.  Fleischer makes two primary points.  First, she chides tax theorists for their failure to acknowledge that tax exemptions for charities, and the attendant deductibility of charitable contributions, are redistributive. Second, she seeks a clearer justification for the determination for the charitable exemption, and convincingly enumerates disparate examples that prove the lack of coherence of current IRS policy, particularly with respect to the question as to whether charities are expected to serve the poor.  Unsurprisingly, hospitals are but one example.  She urges the adoption of a moral theory to facilitate the development of a coherent system of tax exemption, and starts the process of describing potential outcomes if we subscribed to a utilitarian, maximin, egalitarian or capabilities approach to defining charity.  Apparently, this project will be further developed in future articles, which is just in time, at least for the health care sector.

Jessica  Berg’s Putting the Community  Back into the “Community Benefit” Standard, just published at 44 Ga. L. Rev. 375, represents one of the first articles of what can be expected to be a flurry of post-PPACA proposals to reform the criteria for hospitals’ tax-exempt status when  charity care begins to decrease, at least in some markets (undocumented aliens will continue to be a significant burden in several states).  Professor Berg seeks to shift the focus from the provision of individual charity care as a means to satisfy the community benefit standard, to the provision of population health care benefits, which can be measured by local, state and federal authorities to justify their respective tax exemptions.  Berg seeks to avoid adopting a method for quantifying the value of the hospital’s community benefit that encourages hospitals to expend resources for the purpose of earning the tax exemption, rather than promotion of population health.  Consequently, she proposes that tax authorities measure the value of the effect or outcome of the hospital’s population health programs, by analyzing participation, mind states, behavior, health status, sickness care utilization, sickness care expenditures, and community value, which can be accomplished by looking at statistical lives saved, lack of pain and suffering, gains in productivity, and risk reductions.  Berg also proposes the administrative mechanism, which would include community participation, for identifying appropriate programs for hospitals’ implementation.  As is generally the case with Professor Berg’s scholarship, this article proposes on-the-ground solutions to pressing problems of the day worthy of serious consideration.

Hospital Bills, Insurers and Pricing

A few weeks ago I wrote here about my unhappy experience of inadvertently mixing two different types of drain cleaners together. I learned then, and thought it useful to relate, a painful in-home science lesson: the combination of hydrochloric acid and hypochlorite (bleach) apparently forms chlorine gas, which was used as an agent of chemical warfare early in World War I. Serious lung damage and death are real possibilities. After a trip to the emergency room, a follow-up visit to my doctor and the passage of time– I’m ok.

But the other day I got the bill, or thankfully, as I am insured through my employer, the explanation of benefits. My present insurance company, CIGNA, detailed the claim in an easy to read and understandable manner. It is telling.

I was in the Emergency Room for about 4 hours (they had wanted to keep me overnight for observation but released me under the condition (and my pleading) that I return immediately if any number of things happened). I received oxygen and breathing treatments, x-rays, lab work, an electrocardiogram, and the care of a physician.  The total billed was $2,270. But perhaps more importantly, the amount “discounted,” or the amount my insurance company did not pay through its negotiated pricing contract with the hospital, was $2007. Which is to say that my insurance company  paid a total of only $263 of this bill. Thankfully, I owe nothing except a small co-pay.

The greatest single item of the billed amount is actually the charge for being in the Emergency Room itself. That charge, presumably triggered the moment I signed in, was $1,364.40. My insurance company, by agreement, paid only $158 of that charge.

But what if I weren’t insured?

Presumably, I would presently owe that hospital–which is a tax-exempt entity under 501(c)(3) with a concomitant mandate to deliver “community benefit” — a sum total of $2,270.  This for services my insurance company paid a sum total of $263.

I understand robbing Peter to pay Paul, and quite frankly $263 seems a little cheap for the care and services I received (as $2,270 seems rather expensive). But if Peter is out of work and lacks insurance does it make sense to charge him 9x more than Paul? Does anyone wonder why uninsured Peter will do his best to avoid the hospital at almost any cost– even at great risk to his health?

I’ve written about this subject before. How seemingly no one except the uninsured pay “the chargemaster rate”; how many nonprofit hospitals in a recent IRS informational survey disclosed that they count the discounts they offer insurers and Medicare as “community benefit”; how even more nonprofit hospitals who bill greater amounts to the uninsured wind up counting the full amount billed, if collection efforts fail, as “a community benefit.” (e.g., if uninsured Peter above had received the care I received he would have been billed $2,270. If he failed to pay, not considering the harm to his credit record or the potential for being sued and a resultant judgment entered against him, the hospital then counts the unpaid $2,270 as “community benefit.”)

Thankfully, the reverse Robin Hood charging practice is about to change for at least some people. As Associate Dean  Kathleen  Boozang pointed out in her post last week, provisions in the new Health Reform law, PPACA, address the issue in part. Among other provisions aimed at tax exempt 501(c)(3) hospitals is the following:

Financial Assistance Policy.  Hospitals must develop a financial assistance policy which enumerates a) eligibility criteria, b) an explanation of how hospital charges are calculated, c) the process for applying for financial assistance, and d) whether such assistance includes free or discounted care.  If the hospital does not have a separate collections policy, the financial assistance policy must explain what happens if a hospital bill is not paid, including collections actions and reports to credit agencies.  The financial assistance policy must be widely publicized throughout the entity’s service area.

Limitations on Patient Charges. Hospital charges for emergency or other medically necessary care provided to patients eligible for financial assistance may not exceed the lowest amounts charged to insured patients, and may not be based upon gross charges.

But of course, the Limitations on Patient Charges apply only to patients eligible for financial assistance, which may or may not apply to Peter who, if not eligible for financial assistance, may still be subjected to a $2,270 bill for services I paid $263 for. And seemingly, if Peter, ineligible for financial assistance, doesn’t pay that bill, hospitals are still able to claim as a “community benefit” the full amount of that non-payment of a bill 9x as high as an amount they were willing to accept for the same services from someone else.

In May of last year I wrote the following; it is worth considering again:

Nonprofit Hospital Tax Exemptions Worth $638 Million, Exceed “Community Benefit” by $373 Million for 10 Nonprofit Hospitals in Massachusetts

In recent posts we’ve pointed out some of the questionable characterizations of “community benefit” by nonprofit hospitals under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities, such as nonprofit hospitals, which it harbors. In particular, we’ve focused on how matters such as “bad debt,” Medicare “shortfalls,” and even Private Insurer “shortfalls” have often been construed by nonprofit hospitals to constitute the conveyance of a community benefit. A “shortfall” may be deemed to have occurred when although the hospital receives the amount it had agreed to with a Private Insurer, or which was designated by the government through Medicare, that amount is less than the hospital’s “list price” for such services.

Despite this rather lax standard, Kaiser.org reports that an in-depth review by the Boston Globe determined that “the value of abundant tax exemptions extended to Massachusetts General Hospital, and other private non-profit hospitals, ‘far exceeds the amount the state’s leading hospitals spend on free care for the poor and other community benefits.’”

Kaiser reports that in Massachusetts

The ten biggest hospitals in the state benefited from $638 million in tax breaks in 2007, but reported only $265 million in “community benefits” provided that year, the Globe found.

Even if one accepts the questionable characterizations of community benefits, that still leaves an excess of $373 million in tax exemptions–for merely 10 hospitals–in only one state.

New Requirements for Tax-Exempt Hospitals in Health Reform Law

I. New Requirements for Tax-Exempt Hospitals Embedded in PPACA

Sen. Grassley’s fingerprints are evident in the Patient Protection and Affordable Care Act (H.R. 3950).  The Act includes in Section 9007 requirements to appear in new IRC §501(r), which applies to § 501(c)(3) charitable hospitals.  Every hospital facility, including each hospital in a multi-hospital system must meet these requirements, which fall within the following categories:

Community Health Needs Assessment and Implementation Strategy.  Hospitals must work with community representatives and experts in public health to develop community needs assessment made available to the public, as well as an implementation strategy.  This section takes effect in tax years that begin after March 23, 2012.  The hospital must include a description of how it is meeting the requirements of this section in its 990 filing. The Secretary of the Treasury is mandated to review a hospital’s community-benefit activities at least once every three years. IRC Section 4959 is amended to provide for a $50,000 fine for failure to meet the community health needs assessment provision of §501(r)(3).

Financial Assistance Policy.  Hospitals must develop a financial assistance policy which enumerates a) eligibility criteria, b) an explanation of how hospital charges are calculated, c) the process for applying for financial assistance, and d) whether such assistance includes free or discounted care.  If the hospital does not have a separate collections policy, the financial assistance policy must explain what happens if a hospital bill is not paid, including collections actions and reports to credit agencies.  The financial assistance policy must be widely publicized throughout the entity’s service area.

Limitations on Patient Charges. Hospital charges for emergency or other medically necessary care provided to patients eligible for financial assistance may not exceed the lowest amounts charged to insured patients, and may not be based upon gross charges.

Limitations on Collections Policies. Collection actions may not be undertaken until the hospital has undertaken reasonable efforts to determine if the patient is eligible for financial assistance.

Finally, the PPACA requires hospitals for the first time to include their audited financial statements with the 990 filings.

II. IRS 990 Version 2.0

The new Informational Return 990 for tax exempt organizations continues to raise philosophical questions about the “federalization of nonprofit law,” particularly with its many questions about governance. As presumably intended by the IRS, its questions about the existence of particular policies such as whistle-blower, document retention, etc., inspired many tax-exempt organizations to create these policies.  Many tax-exempt boards are actually seeing their entity’s 990 for the first time, again inspired by a question on the 990 itself.

The 990 for fiscal year 2009 reflects several changes, such as:

• Whether the entity follows the rebuttable-presumption-of-reasonableness procedure described in Reg. 53.4958-6(c);
• Whether the entity has made any significant changes to its program services or organizational documents.

Most important to hospitals is that the completion of Schedule H is mandatory for fiscal year 2009 (completion was optional last year).  Questions include:

• Whether the organization uses Federal Poverty Guidelines (FPG) to determine eligibility for providing free or discounted care to low-income individuals;
• Whether the organization budgets for free or discounted care, and whether actual expenditures exceeded the budgeted amount;
• The amount of unreimbursed costs from government programs;
• Whether the organization has a written debt collection policy, and how patients are advised of financial-assistance programs for which they might be eligible;
• Whether the organization creates an annual community-benefit report which it provides to the public.

Nonprofit Health Related CEO Compensation

Health Insurance Company CEOs in the U.S. earned tens of millions in 2008, but what about nonprofits? If you guessed that nonprofit CEOs are paid less than their private sector counterparts, you are right. But the numbers are no less shocking to the average American. Below are the highest paid nonprofit workers at the largest nonprofit healthcare organizations, hospitals and medical centers in the U.S, courtesy of the Chronicle of Philanthropy.

Last year, some of the top paid nonprofit workers took pay cuts while others saw increases in compensation. Despite a global recession, many health-related nonprofits reported higher income in 2008, according to the report by The Chronicle of Philanthropy, which surveyed compensation information from the top 400 charities and foundations in the U.S.

According to the Chronicle, it asked each organization to answer a questionnaire and provide its most recent 990 tax form. This year, not every organization provided the information. In fact, most of the top paid executives from 2007 did not provide the information in 2008.

Based on 2007 data, the highest paid nonprofit worker was Herbert Padres, chief office of New York-Presbyterian Hospital. Padres earned  $6,170,885 in 2007. That’s $118,671 per week. In some parts of the country, that is enough to purchase a home. Every week. It is certainly enough to purchase one of the finest cars on the market.

As we’ve noted before on this blog:
Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In [this] study’s executive summary, the IRS puts it so:

“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”

“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”

The varied and evolving fact pattern of nonprofit executive compensation looks something like this:

The nonprofit healthcare CEO with the highest salary in 2008 (given the incomplete response) was James J. Mongan, CEO of Partners HealthCare Systems. Mongan earned $3,376,554 in 2008.

Nonprofit executive compensation, health-related nonprofit:
New York-Presbyterian Hospital Herbert Pardes (CEO): $6,170,885
Memorial Sloan-Kettering Cancer Center Harold Varmus (CEO): $3,677,402
Partners HealthCare System James J. Mongan (CEO): $3,376,554
New York Presbyterian Hospital Steven J. Corwin (COO): $3,127,051
Mount Sinai School of Medicine Samin Sharma (Professor of Medicine and Cardiology): $2,894,580

Note: Aside from James J. Mongan, all numbers are for the 2007. Compensation amounts include deferred compensation and fringe benefits.

See Health Insurance CEO Compensation Here.

Kaiser Health News, New Jersey Gets a New Hospital?, & Kicking Medicaid Grandma to the Curb

In the wake of declining newspaper presence, the Kaiser Family Foundation, a nonprofit private operating foundation known for its health care concerns, has started Kaiser Health News. In the present issue, there are two articles of special note for New Jerseyans. The one regards the plans of Hackensack University Medical Center, a 775-bed teaching and research hospital that is one of New Jersey’s most prestigious, [which] requested state permission to open a new hospital in Pascack Valley’s empty [hospital] buildings. Although Hackensack is a nonprofit, it announced that Westwood would be getting a for-profit facility financed by a private equity firm from Texas.

Not everyone approves.

The other regards measures that New Jersey legislators are considering in response to a recent investigation of assisted living facilities. KFN reports

Associated Press/Philadelphia Inquirer reports that “lawmakers this week will consider measures to enhance protections for assisted living residents in New Jersey to ensure they aren’t discharged simply because they pay with Medicaid.” The legislation comes in response to an investigation that found a Wisconsin-based assisted living firm called Assisted Living Concepts, which has eight facilities in New Jersey and more than 200 nationwide, “wrongly showed New Jersey residents the door once they exhausted their savings and were about to go on Medicaid, despite promises to allow them to stay.”

Both stories are worth reading.

Nonprofit Hospital Tax Exemptions Worth $638 Million, Exceed “Community Benefit” by $373 Million for 10 Nonprofit Hospitals in Massachusetts

In recent posts we’ve pointed out some of the questionable characterizations of “community benefit” by nonprofit hospitals under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities, such as nonprofit hospitals, which it harbors. In particular, we’ve focused on how matters such as “bad debt,” Medicare “shortfalls,” and even Private Insurer “shortfalls” have often been construed by nonprofit hospitals to constitute the conveyance of a community benefit. A “shortfall” may be deemed to have occurred when although the hospital receives the amount it had agreed to with a Private Insurer, or which was designated by the government through Medicare, that amount is less than the hospital’s “list price” for such a services.

Despite this rather lax standard, Kaiser.org reports that an in-depth review by the Boston Globe determined that “the value of abundant tax exemptions extended to Massachusetts General Hospital, and other private non-profit hospitals, ‘far exceeds the amount the state’s leading hospitals spend on free care for the poor and other community benefits.’”

Kaiser reports that in Massachusetts

The ten biggest hospitals in the state benefited from $638 million in tax breaks in 2007, but reported only $265 million in “community benefits” provided that year, the Globe found.

Even if one accepts the questionable characterizations of community benefits, that still leaves an excess of $373 million in tax exemptions–for merely 10 hospitals–in only one state.

Grassley and Baucus Seek to Further Define the Difference Between Charity Care and Bad Debt for Nonprofit Hospitals. As a Matter of Collections Timing?

According to Inside ARM, an accounts receivable management online magazine, the Senate Finance Committee is presently contemplating imposing strictures upon nonprofit hospitals regarding when those hospitals may outsource the collection of unpaid bills and, presumably, the definition of “bad debt” as it relates to “community benefit.” Inside ARM states that “The proposal is meant to provide more free care and make not-for-profit hospitals more accountable for their tax-exempt status.”

Details of the initiative are said to be scant at this point, but according to Inside ARM, “Committee Chairman Max Baucus of Montana and Chuck Grassley of Iowa, the committee’s top ranking Republican, propose requiring not-for-profit hospitals to follow certain procedures before initiating collection actions against patients.” Sen. Grassley has sought to require nonprofit hospitals to justify their tax exemptions since 2005, the year in which he sent what pretty much amounts to interrogatories to the nation’s leading nonprofit hospitals regarding billing practices and questionable characterizations of “community benefit.”

Although without detail, the new timing distinction for collections seems to be based upon the amount owed being designated as “bad debt,” or that which is essentially deemed “uncollectable.” The prospective prohibition would seem to  require the amount owed to be deemed “uncollectable” or “bad debt” before it can be placed with a collection agency. A prospect the nation’s collectors, who generally work on commission, do not relish. But one hopes this provision is but one small piece of further defining “community benefit” in terms of actual charitable care.

Many nonprofit hospitals have characterized their uncollected receivables as a fulfillment of the ill-defined requirement that they offer a “community benefit” in exchange for the tax exemption they receive under 501(c)(3). Senator Grassley has said that “Neither the IRS nor Congress has done a very good job when it comes to establishing the criteria for enjoying this tax status since the IRS scrapped charity care for its community benefit standard in 1969″ (New York Times, 2/13/09).”

He has a point. But unless the prospective timing provision for outsourcing only “bad debt” is coupled with a prohibition upon characterizing mere “uncollected receivables” and  payor “shortfalls” as “community benefit,” it is hard to see what effect this bad debt collections distinction will have–besides the expansion of in house hospital collection  departments. One hopes that the pointed questions Senator Grassley asked of the nation’s leading nonprofit hospitals in ’05 will play a substantial role in the Senate effort to reform and redefine the obligations of tax exempt nonprofit hospitals now. I believe Mr. Grassley would well agree that a mere shift in the locus of collection activities will not constitute reform worth the name.

Perhaps some background is in order. As we posted here a little while back in “The IRS, Nonprofit Hospitals, and the Meaning of “Community Benefit,” the IRS recently published the results of a two year study of nonprofit hospitals functioning under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities it harbors. For those of you who have not yet read our post on the topic, I’ve excerpted it here below (if you have already read the piece, you can scroll down to the paragraph before Grassley’s numbered questions for the concusion to this post). The excerpted post describes how uncompensated care, bad debt and “shortfalls” in payments from Medicare and even Private Insurers can, and often are, characterized as somehow providing a “community benefit” which justifies a tax exemption for nonprofit hospitals:

Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In the study’s executive summary, the IRS puts it so:

“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”

“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”

These limitations may be seen in the characterizations of “community benefit” available to the hospitals in the study. Bad debt and Medicare payment shortfalls may be construed as  “community benefit.” As the debt, the credit injury, and the collection calls all inure to the community member who received treatment but could not pay, one might question if the “community benefit” involved in a failure of collection practices might be distinguishable from the “community benefit” involved in intentional charitable care. In addition, there simply is no set criteria to determine the appropriate amounts to be charged as “community benefit.” The IRS study poses the following under the heading of

“Limitations: …although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the respondents’ discretion.

Which is to say that those being monitored (nonprofit hospitals) to gauge the amount of money spent– to justify their tax exempt  status– were free to characterize their contributions in the manner they thought best.

Medicare shortfalls: So… if a non-profit hospital has a fee schedule rate of $100 for a procedure, and Medicare has a reimburse rate of $80 for that procedure, if a “charge” rate of measurement is used then there has been a $20 “community benefit” if the federally designated tax exempt nonprofit hospital accepts as payment the federally designated and predetermined Medicare reimbursement amount. Significantly, 19% of the hospitals also claimed “shortfalls” in payment from private insurers as uncompensated care/community benefit (See Chart: “Figure 82,” p. 105, full report).

Cost vs. Charge: So… if a procedure has a cost to the hospital of $80 and a fee schedule [or "chargemaster"] rate of $100, and the recipient of the procedure does not pay and the hospital categorizes the non-payment as “bad debt,” it has the ability to count as “community benefit” not only the cost of its unintended largesse, but also the amount it had expected as profit.

Perhaps even more telling than this latitude in characterization are the amounts actually submitted to the IRS as community benefit. Here are a few of the findings:

• The average and median percentages of total revenues reported as spent on community benefit expenditures were 9% and 6%, respectively.
• Uncompensated care accounted for 56% of aggregate community benefit expenditures reported by the hospitals in the study. Read more

The IRS, Nonprofit Hospitals, and the Meaning of “Community Benefit”

Kaiser.org has written an interesting article about the recent two year IRS Study of nonprofit hospitals under 501(c)(3). The IRS queried 5oo nonprofit hospitals, with the study’s findings based primarily upon examination of 489 of those. Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In the study’s executive summary, the IRS puts it so:

“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”

“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”

The Kaiser article notes that according to the NY Times, “Lawmakers over the last few years have ‘raised concerns over whether nonprofit hospitals provide enough free care and other community benefits to justify their tax exemptions,’ but no test exists for ‘measuring how much community benefit is enough or even what constitutes community benefit.’”

These limitations may be seen in the characterizations of “community benefit” available to the hospitals in the study. Bad debt and Medicare payment shortfalls may be construed as  “community benefit.” As the debt, the credit injury, and the collection calls all inure to the community member who received treatment but could not pay, one might question if the “community benefit” involved in a failure of collection practices might be distinguishable from the “community benefit” involved in intentional charitable care. In addition, there simply is no set criteria to determine the appropriate amounts to be charged as “community benefit.” The IRS study poses the following under the heading of

“Limitations: …although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the respondents’ discretion.

Which is to say that those being monitored (nonprofit hospitals) to gauge the amount of money spent– to justify their tax exempt  status– were free to characterize their contributions in the manner they thought best.

Medicare shortfalls: So… if a non-profit hospital has a fee schedule rate of $100 for a procedure, and Medicare has a reimburse rate of $80 for that procedure, if a “charge” rate of measurement is used then there has been a $20 “community benefit” if the federally designated tax exempt nonprofit hospital accepts as payment the federally designated and predetermined Medicare reimbursement amount. Significantly, 19% of the hospitals also claimed “shortfalls” in payment from private insurers as uncompensated care/community benefit (See Chart: “Figure 82,” p. 105, full report).

Cost vs. Charge: So… if a procedure has a cost to the hospital of $80 and a fee schedule rate of $100, and the recipient of the procedure does not pay and the hospital categorizes the non-payment as “bad debt,” it has the ability to count as “community benefit” not only the cost of its unintended largesse, but also the amount it had expected as profit.

Perhaps even more telling than this latitude in characterization are the amounts actually submitted to the IRS as community benefit. Here are a few of the findings:

• The average and median percentages of total revenues reported as spent on community benefit expenditures were 9% and 6%, respectively.
• Uncompensated care accounted for 56% of aggregate community benefit expenditures reported by the hospitals in the study.
• Uncompensated care was the largest reported community benefit expenditure for each of the study’s demographics, other than for a group of 15 hospitals reporting large medical research expenditures (93% of all research expenditures reported by the study’s respondents).
• Further, the group of 15 hospitals reporting large medical research expenditures materially impacted the overall numbers in this area. For example, when the research group is removed, the percentage of total community benefit expenditures reported as spent on uncompensated care increases from56% to 71%, and that spent on medical research decreases from 15% to 1%.
• Uncompensated care and community benefit expenditures were concentrated in certain hospitals and unevenly distributed. For example,9% of the hospitals reported 60% of the aggregate community benefit expenditures of the overall group; 14% of the hospitals reported 63% of the aggregate uncompensated care expenditures.

So… if we were to take the 15 research hospitals out of the mix, 73% of the “community benefit” for the remaining 474 hospitals was in the form of uncompensated care–Medicare (and private insurance) shortfalls and bad debt inclusive.

In addition, of the substantial uncompensated care component, hospitals contributions were disparate: 14% of the hospitals reported 63% of the total–which is to say that roughly 68 hospitals out of the 489 accounted for 63%, while the other roughly 421 hospitals chipped in a somewhat less magnanimous 37% of the total. This despite the considerable latitude in characterization.

The Kaiser article notes that according to the NY Times

“In a statement, Sen. Chuck Grassley (R-Iowa), who since 2005 has sought to require not-for-profit hospitals to justify their tax exemptions, said that the study did not include adequate definitions or comparable information on community benefits for-profit hospitals provide. He said, “Neither the IRS nor Congress has done a very good job when it comes to establishing the criteria for enjoying this tax status since the IRS scrapped charity care for its community benefit standard in 1969″ (New York Times, 2/13)”

California Foundations Advocate for Health Care Reform

The Los Angeles Times reports that “Nonprofits have dropped their usual detachment to crusade for healthcare reform in California, opening Sacramento offices staffed by former aides to lawmakers.” Apparently not satisfied with the results garnered through “years of financing studies and demonstration projects,” “California philanthropic foundations and think tanks are shedding their traditionally detached stances to crusade for healthcare reform in the state Capitol and in Congress.”

To lead this crusade, a number of foundations have hired high profile figures to advocate their ideas to policy makers, and, in some instances, foundations have promoted those ideas to the wider public as well. In defense of the practices, the LA Times reports that “Foundation leaders emphasize they have no interest in direct lobbying and that they promote ideas that are based in evidence, not ideology.”

Paul Brest, “president of the William and Flora Hewlett Foundation in Menlo Park and author of a book on philanthropic strategies” is quoted as saying: “What I’ve seen is foundations moving from thinking all we needed to do is support good research in the field and the rest will happen to realizing that unless we are going to support organizations to take the research and try to turn it into policy, then the research is going to sit in the bottom of a pile somewhere.”

Beware the IRS
The article also points out, however, that “Advocacy is risky for foundations, since most are categorized by the IRS as 501(c) nonprofits, which restricts them from direct lobbying or participation in partisan politics.” The experts of “The New America Foundation, a Washington, D.C.-based think tank underwritten by foundations,” are said to have “so much contact with lawmakers that the foundation requires them to keep track of their hours to ensure they do not exceed lobbying limits set on nonprofits.”

Despite the risks, the LA Times reports that “With billions of dollars at their disposal, the foundations are seeking to become bigger players.” Read full story here.