Financial assistance and community health needs benefits

22nd Annual Health Sciences Tax Conference Financial assistance, other community benefits and community health needs assessments: telling your story effectively December 3, 2012

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 2

Disclaimer

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 3

Disclaimer

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client serving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit www.ey.com. This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP.

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 4

Presenters

► Ray Bunyard VP Tax Management Baylor Health Care System Dallas, TX

► Howard Levenson Ernst & Young LLP

Washington, DC + 1 202 327 8811 howard.levenson@ey.com

► Kathy Pitts Ernst & Young LLP Birmingham, AL + 1 205 254 1608 kathy.pitts@ey.com

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 5

Why are community benefits important?

► Nonprofit hospitals must meet community benefit requirements in order to qualify for federal and state tax-exempt status.

► Community benefits demonstrate how nonprofit hospitals serve the public, rather than a private interest.

► Nonprofit hospitals are under scrutiny by Congress, the Internal Revenue Service (IRS), state legislatures, the media and the general public.

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 6

Agenda — telling your story effectively

► Results and trends ► Regulatory activity ► Process — challenges and tips

Results and trends

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 8

Results and trends

► Financial assistance and certain other community benefits, at cost ► Form 990, Schedule H, Part I, line 7 percentage

► Community building activities ► Form 990, Schedule H, Part II

► Bad debt, Medicare and collection practices ► Form 990, Schedule H, Part III

► Supplemental information (narrative disclosures) ► Form 990, Schedule H, Part VI

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 9

American Hospital Association (AHA) 2009 Schedule H Project Summary percentages

► Hospital benefit to community as percentage of total expense

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 10

AHA Schedule H Project (cont.)

► Bad debt expense: ► Percent attributable to charity care — ≥ 70% ► Although the IRS provided little instruction, the average was 0.4%

of total expenses ► Average US$1.6 million per respondent

► Medicare surplus or shortfall ► Medicare reimbursement shortfalls — ≥ 75%

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 11

AHA Schedule H Project

► Use of federal poverty guidelines (FPG) to determine free and discounted care

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 12

AHA Schedule H Project (cont.)

► Charity care, means-tested programs and other benefits

Regulatory activity

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 14

Affordable Care Act § 9007 — IRS community benefit reviews

► Identified 3,377 tax-exempt hospitals ► Using IRS, Medicare/Medicaid, DC websites

► Form 990, Schedule H, public records and other returns ► IRS ruling in 1969 on the community benefit standard:

► Charity care; use surplus to improve patient care, expand facilities, advance medical training, education and research; community board members accessible/open medical staff; and full-time emergency room available to all

► Three annual phases beginning April 2011 ► No notification of review ► Not looking just at the percentages ► Potential for enhanced penalties or loss of tax exemption

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 15

Regulatory activity

► Oversight subcommittee of the Committee on Ways and Means of United States House of Representatives

► Series of meetings on the tax-exempt sector and IRS oversight of tax-exempt activities 5/16/12; 7/25/12 ► Public concerns related to hospital sector

► Unduly burdensome or overly prescriptive ► Congressional intent ► Streamline and simplify

► Are states considering H as they regulate? ► Property tax rulings ► Acquisitions may impact types of entities

► IRS hearing on 501(r) proposed regulations originally scheduled for October 29; rescheduled for December 5

Process — challenges and tips

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 17

IRS financial assistance, at cost (Schedule H)

Gross patient charges written off

x cost to charge ratio

Estimated cost of care

Plus Medicaid provider taxes, etc.

Total community benefit expense

Less direct offsetting revenue

Unreimbursed cost of charity care

The IRS permits the use of cost accounting system in lieu of Schedule H Worksheets.

Excludes bad debt expense Worksheet #1

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 18

Process — challenges and tips

► Correct calculation of cost-to-charge ratio ► Bad debt ► Avoid double counting of expenses ► Disallowed expenses (non-patient related)

► Direct offsetting revenue

► UPL Medicaid, uncompensated care pools, etc.

► Community benefits at cost — patient type challenges ► How much is reported as community benefit? Easy if no insurance ► Insurance: are waivers of co-pays charity? Medicare? ► Examples: by patient type

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 19

How does patient type impact amounts?

Example basic assumptions: ►All patient types qualify for 100% financial assistance ►Cost of care = $500 or 50% cost to charge ratio ►Self pay discount = 35%

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 20

Process — challenges and tips

► Identify types of community benefits ► Unreimbursed Medicare (Subsidized Services) ► Grants to related organizations ► Cash and in-kind contributions to other community groups ► Community education vs. marketing ► Staff education vs. broad based education

► Develop procedures and deadlines for collection, review

and correction of data prior to submission

► Create education plan for leadership, advocacy, compliance, etc.

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 21

Process — challenges and tips

► Medicare Shortfall — IRS may consider changes such as adding Medicare to community benefit if positive comments from Hospital community

► Impact of insurance exchange from PPACA. If everyone has at least Medicaid, where is the charity care?

► Joint Ventures — Includes pro rata share of community benefits

► Federal vs. State results and differences

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 22

Narrative information — Form 990, Schedule H, Part VI

► If the IRS asks, then it is important — don’t skimp/take lightly ► Needs assessment, assistance eligibility, community information,

promotion of community health, health care system, state filing of community benefit report

► Prepare early — compare across all publicly available documents for consistency ► Form 990, bond documents, cost reports, community benefit reports,

annual financial statements ► Required disclosures — Forms 24; Instructions 34 ► Supplemental disclosures

► IRS tip — community benefit as a percent of total expenses ► If no group ruling, consider disclosing total for System ► Medicare revenue and costs not included in cost reports

Financial assistance, other community benefits and community health needs assessments: telling your story effectively Page 23

Process — challenges and tips

► Audited financial statements; Medicare cost reporting; Form 990, Schedule H; and community benefit reporting

► Software limitation ► Financial assistance and certain other community benefits at

cost — percentages aren’t always automatic

► Instructions regarding negative percentages ► The IRS doesn’t expect changes to Form 990,

Schedule H until final regulations are issued

One minute wrap up Ray Bunyard Kathy Pitts Howard Levenson