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.


Disclaimer

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Presenters

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

► Howard Levenson Ernst & Young LLP

Washington, DC + 1 202 327 8811 [email protected]

► Kathy Pitts Ernst & Young LLP Birmingham, AL + 1 205 254 1608 [email protected]


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.


Agenda — telling your story effectively

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

Results and trends


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


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

► Hospital benefit to community as percentage of total expense


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%


AHA Schedule H Project

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


AHA Schedule H Project (cont.)

► Charity care, means-tested programs and other benefits

Regulatory activity


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


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


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



► 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


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%



► 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.



► 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


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



► 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

Documents

Financial assistance and community health needs benefits