Eye on Washington
Chad Mulvany
The dramatic change in the Senate’s balance of power resulting from Scott Brown’s recent upset victory in Massachusetts may have left future prospects for healthcare reform in doubt. But it doesn’t mean that the bill’s provisions will disappear completely.
In particular, the Senate bill’s treatment of provider’s tax-exempt status was one provision that enjoyed bipartisan support. Regardless of reform’s ultimate fate, providers should anticipate increased federal scrutiny in this area. Given the fiscal difficulties currently being experienced at all levels of government, it’s not hard to see challenges to tax-exempt status on the horizon for many providers. Thus, moving forward, hospital executives need to ensure the benefits their organizations provide match their communities’ needs.
Reasons to Expect Greater Scrutiny
Tax-exempt status for not-for-profit hospitals is an evergreen issue for elected officials at both the local and federal level. At the local level, this is easily understandable. By assets, the bulk of which consist of taxable property, hospitals are the largest component of the tax-exempt sector, making them a tempting source of taxable revenue during economic downturns.
Champaign County’s challenge to Provena Covenant Medical Center, which is under appeal with the Illinois Supreme Court, is a prime example. At stake for the parties involved are $5 million in property taxes. However, the case’s implications will have further reach, especially as many state and local governments project long-range fiscal shortfalls. The ruling could set a precedent used by other localities to tax previously exempt hospitals and influence national policy.
At the federal level, Sen. Chuck Grassley (R-Iowa) has vigorously pursed the issue as an influential member of the Senate Finance Committee. While he did not support reform legislation during any phase of the debate, the final Senate bill’s new requirements for tax-exempt hospitals were a product of an early overture for his vote.
As specified in the legislation, hospitals wishing to qualify as tax-exempt would have had to:
- Conduct a community assessment at least every two years and act to address identified needs
- Draft and publicize a financial assistance policy that includes eligibility criteria
- Use “extraordinary” collections efforts only after the hospital has made reasonable efforts to determine the patient’s eligibility for financial assistance
- Limit amounts charged for emergency care to individuals eligible for financial assistance to no more than the lowest amount charged to insured individuals
These provisions aren’t draconian. The first requirement is similar in spirit to guidance the Catholic Health Association has offered its member hospitals.a The second is a point that HFMA has made continuously through its Principles and Practices Board and the PATIENT FRIENDLY BILLING® Project. However, given that the IRS has not revised its criteria since 1969, any new rules enacted would signal a more active role for the government. And a higher level of scrutiny would also coincide with anticipated declines in the uninsured over the next decade as a result of either sweeping reform or incremental changes to existing laws. The combination of the two makes it safe to assume that more facilities will face challenges to tax-exempt status similar to what Provena Covenant experienced.
Loss of tax-exempt status would lead to serious short- and long-term consequences for not-for-profit providers. In the short term, they would be subject to sales, property, and—if profitable—income tax, which would substantially reduce operating cash flows needed to fund quality improvement initiatives. Longer term, loss of tax exempt status would make it more difficult for providers to replace aging equipment and upgrade existing facilities. Most tax-exempt bonds are callable upon loss of not-for-profit status, which would force hospitals to pay higher rates for replacement funds in the corporate market. Compounding the problem, donations would decline as potential benefactors would likely shift contributions to organizations still capable of providing them with a tax shelter.
Sheltering Your Organization
To maintain tax-exempt status, providers need to proactively manage all aspects of their community benefit program, using the same process they use for new revenue-generating initiatives.
Set strategy. Like any other aspect of hospital operations, a community benefit program should have a long-term strategy that’s grounded in the organization’s mission. Using input from members of the community, the organization should routinely conduct a thorough needs assessment, which will serve as a basis for the organization’s community benefit strategy. The needs assessment helps align community benefit activities with the organization’s mission, identifies areas where the hospital should play a larger role in the community, and ensures the portfolio of programs makes the best use of limited hospital resources.
During strategy setting, an opportunity also exists to tie community benefit programs to operational imperatives. For example, if the organization sets a goal to reduce preventable readmissions, its community benefit program could be used to mitigate some of the socioeconomic factors that contribute to the problem.
Establish goals. Goals are required for both the overarching community benefit program and the individual initiatives. Goals for individual programs should be tied to the overarching program, allowing the organization to evaluate outcomes for both planning and resource allocation. The goals should be S.M.A.R.T. (Specific, Measurable, Attainable, Realistic, Timely), striking a balance between the organization’s capabilities (both financial and human capital) and the community’s needs in each area.
Communicate. Success will also depend on how effectively two key categories of messages are communicated. The first includes communications designed to help potential beneficiaries access community benefit programs. In the challenge to Provena Covenant’s tax-exempt status, the organization is alleged to have not clearly communicated the availability of charity care. To avoid this problem, providers should examine each program and develop campaigns using the appropriate mix of employees, media, governmental agencies, and other not-for-profit organizations to make target audiences aware of available services.
The second category of messages relates to how providers communicate the value of their community benefits programs. As scrutiny of not-for-profit status increases, so does the importance of providing a comprehensive and accurate accounting of community benefits programs. Completing the IRS 990-H, while required for 2009, is not sufficient. Providers also need to prepare and disseminate a comprehensive benefit report to help community leaders understand that charity care is only one portion of the value a tax-exempt hospital brings to the community.
Prepare for a Rainy Day
As we wait for the Illinois Supreme Court ruling and enactment of potential legislation regarding provider tax-exemption, not-for-profit hospitals enjoy a window of opportunity. They should use this time to examine their community benefit programs and make any changes necessary to avoid the consequences of lost tax-exempt status.
Chad Mulvany is a technical manager in HFMA’s Washington, D.C., office, and a member of HFMA’s Virginia Chapter.
a. The Catholic Health Association of the United States, The IRS Form 990, Schedule H: Community Benefit and Catholic Health Care Governance Leaders, 2009, p. 15.