Jeni Williams

Schedule H of the new Form 990 requires detailed reporting of the community benefit hospitals provide, beginning with tax year 2009. Is your organization ready


At a Glance

Steps hospitals should take now to prepare for Schedule H include:

  • Form a multidisciplinary group to address how to meet the reporting requirements
  • Review programs currently counted as community benefit, to ensure they meet IRS standards
  • Collect community benefit data in "real time"
  • Sharpen charity care policies
  • Consider the use of IT to facilitate charity care decisions and community benefit data collection
  • Use tax year 2008 as a dry run

The redesigned Form 990 has the potential to help tax-exempt hospitals better tell their community benefit story-but completing the new form could amount to a major undertaking for hospitals, particularly those that have never prepared community benefit reports.

Released by the IRS on Dec. 20, 2007, the revised Form 990, Return of Organization Exempt from Income Tax, features a new schedule, Schedule H, that establishes a uniform standard for the reporting of charity care and other community benefits by tax-exempt hospitals. Schedule H also allows an organization to describe its exempt accomplishments and mission up front and requires organizations to explain their community benefit activities.

Schedule H will begin to be used for tax year 2008 (returns filed in 2009), with a transition period for certain requirements. Starting with tax year 2009, it will require that hospitals collect and analyze data regarding their community benefit activities and the charity care they provide, and determine the value of both according to standards adopted by the IRS.

Although healthcare providers agree on the need for uniform rules that guide the valuation and reporting of community benefit and charity care, making the switch to Schedule H could challenge hospital resources, both in the length of time needed to complete the schedule and the expense involved. Some large organizations are likely to have dedicated employees whose job it will be just to work on the information for this new reporting.

There are a number of steps hospitals can take now in preparation for filing Schedule H. Here, industry experts provide tips on ways hospitals can proactively meet this challenge.

Taking a Closer Look

In June 2007, in response to the call for increased transparency regarding the community benefit that tax-exempt hospitals provide, the IRS released a draft form of a revised Form 990, which included the new Schedule H, for public comment.

Based on public comment, the IRS incorporated many recommendations in its final version of Schedule H, such as adding areas for hospitals to report bad debt expense, Medicare shortfalls, and community building activities (e.g., economic development activities and improvements in housing), but not including these costs in the "community benefit table." The IRS also removed a schedule that would have required the disclosure of revenue and expense data by payer category, to which hospitals were universally opposed. The final version of Schedule H also references HFMA's Statement 15, which provides guidance on the correct way to measure and report components of uncompensated care.

View Exhibit

exhibit-1-Schedule H  What Hospitals Should Do to Prepare

Industry Reaction

The final version of Schedule H elicited mixed reactions from healthcare organizations. The industry as a whole welcomed the greater transparency, and agreed it was time for standardized reporting that would help tax-exempt providers better tell their community benefit story and demonstrate that they are fulfilling their tax-exempt purpose.

"Schedule H has a couple of great values," says Patsy Matheny, a community benefit consultant who was a contributing author for A Guide for Planning and Reporting Community Benefit, released by the Catholic Health Association (CHA) and VHA, Inc., in 2006, and who staffs the CHA's community benefit hotline, "What Counts." "One, it promotes a more uniform definition of community benefit and helps a lot of groups move closer to counting community benefit in the same way. Another important thing that Schedule H does is to ask 'process questions'-questions such as 'How did you assess the needs in your community?', 'Are you reporting back to the community through an annual benefit report?', and 'Does your organization have a written charity care policy?' These process questions will move hospitals toward looking at community benefit as a systematic program within their organizations versus just a bunch of numbers that they pull together at the end of the fiscal year."

But the final version of the form also drew concern regarding what the IRS has determined should count as community benefit, depending on the perspective of the organization. Most of the comments the IRS received fell into three categories: community building activities, Medicare shortfalls, and bad debt expense.

In the draft of the revised Schedule H, costs related to community building activities were excluded. After much comment by hospitals and experts, the final version requires reporting of community building in Part II of Schedule H, but these costs are not included in the community benefit table. "While the IRS believes that certain of these community building activities might constitute community benefit or other exempt purpose activities, more data and study (are) required," the IRS said in a statement ("Form 990 Redesign for Tax Year 2008, Schedule H, Hospitals-Highlights," IRS, Dec. 20, 2007).

Both Medicare shortfalls and bad debt expense also were excluded from the draft of Schedule H. Now, both make an appearance on the form, although neither will be counted as community benefit. For example, the final form collects information on Medicare gains and losses, giving hospitals the opportunity to describe what portion of Medicare should be counted as community benefit and why. Similarly, the form requires hospitals to report bad debt expense at cost, provide an estimate of the portion of bad debt expense that is attributable to patients who would have qualified for financial assistance under the organization's charity care policy, and explain why the organization believes a portion of its bad debt expense should constitute community benefit.

The issue of whether Medicare shortfalls and bad debt should be considered community benefit is one that divides the industry. "The Catholic Health Association, VHA, HFMA, and numerous other groups have very clearly said that bad debt is not a community benefit," Matheny says. "Some organizations believe Medicare shortfalls are not community benefit; others say it depends on the hospital and the community it serves. The American Hospital Association, on the other hand, has advocated that both of these categories should be quantified as community benefit.

"I think it was conciliatory of the IRS to allow hospitals to show the full extent of their fiscal responsibility to the community by reporting information on their community building activities, Medicare shortfalls, and bad debt expense," she says. "It allows the opportunity for all three of these categories to be reported, although not as community benefit."

"Arguments to include and exclude Medicare and bad debt were made with great conviction," says Keith Hearle, president, Verité Healthcare Consulting, LLC, Alexandria, Va., and an expert on community benefit. Hearle designed the accounting framework for the Catholic Health Association's Social Accountability Budget, which provided the first comprehensive guidance for hospitals to report community benefit. "Key questions were whether these losses were unique to tax-exempt hospitals or also present in taxable facilities; whether, unlike Medicaid, Medicare losses could be more related to efficiency concerns; whether Medicare-funded community benefits could be picked up as 'subsidized health services;' and whether bad debt for low-income patients could be addressed by refining charity care policies and practices. It would be hard for one branch of the federal government-the Centers for Medicare and Medicaid Services and MedPAC-to say that Medicare payment is fair while another says Medicare services represent charitable activity."

There is also concern regarding the administrative burden of completing Schedule H, which the IRS says "could be substantial for many hospitals, particularly in the first year of reporting" ("Form 990 Redesign for Tax Year 2008, Schedule H, Hospitals-Highlights," IRS, Dec. 20, 2007).

"Those who have been reporting their community benefit for years are saying, 'We are ready.' Those who have never reported their community benefit before, or who are doing it in ways that differ from the framework that was adopted by the IRS, are concerned about the resources that will need to go into this," Hearle says. "They're going to be looking at the instructions for completing the form-which should be released by the IRS this spring-very carefully. There are some questions that need to be answered before any organization can fill this out and say, 'We are fully in compliance with what the IRS has mandated.'"

Action Steps for Hospitals

The amount of time, data, and resources required to complete Schedule H accurately is a daunting prospect for many hospitals. "The burden to hospitals will be greater if they don't start preparing right away," Matheny says.

There are a number of ways that hospitals can proactively prepare for filing the new Schedule H.

Form a multidisciplinary group to strategically address how to meet the reporting demands of Schedule H. This "community benefit steering committee" should develop a process for collecting community benefit data from throughout the organization while simultaneously educating the board of trustees and staff on what is considered community benefit, why community benefit is integral to the mission of the organization, and the new IRS reporting requirements.

"The more that staff are educated, the better the data will be, because staff will understand what they're being asked to report and why it's useful," Matheny says. "They'll also understand that it's worth their time to collect the data in order to report under each of the categories in Schedule H."

Review the programs your organization currently counts as community benefit, to ensure they meet IRS standards. "Depending on where the hospital is coming from-whether the hospital has been collecting and reporting community benefit information, for how long, and what guidelines the hospital has used to define community benefit-hospitals will have to increase their attention to detail to ensure that their community benefit numbers are all very defensible and would survive audit," Hearle says. "Hospitals that have never done this should conduct an inventory of their programs to determine what should be counted as community benefit. There is some effort involved in valuing charity care and community benefit, and identifying all of the programs that fall under community benefit is going to take some time."

Collect community benefit data regularly throughout the year. "You want to start building the fact base for this form in real time-monthly or quarterly, at a minimum," Hearle says. "I would worry about an organization that is starting from scratch and has the filing date staring them in the face in 30 days. You're going to want to start keeping track of your community benefit numbers throughout the year to prepare to report those numbers on the new Form 990."

Matheny suggests hospitals collect community benefit data according to the same timetable that other strategic indicators are reported to their board of trustees, whether monthly or quarterly.

Consider the use of IT to facilitate data collection. "There are excellent tools for collecting community benefit data that allow for real-time data collection," Matheny says.

Sharpen your charity care policies. "Look at who qualifies for charity care very carefully," Hearle says. "Sharpen the whole revenue cycle around self-pay accounts. Examine when decisions are made regarding charity care, and consider investing in technology solutions that can help in determining which patients have the ability to pay. Doing this will help to minimize the number of patients who would have qualified for financial assistance under the organization's charity care policy, but whose accounts were written off to bad debt because of a problem with the organization's charity care policy or with the documentation these patients provided."

Use tax year 2008 as a dry run. "Take a stab at filling out Schedule H in 2009 for tax year 2008, and start tracking those numbers now," Hearle says. Doing so will help identify weaknesses in your community benefit reporting cycle and enable your organization to make any needed improvements before the new IRS requirements go into effect.


Jeni Williams is a senior editor in HFMA's Westchester, Ill., office.


Preparing for Schedule H

Schedule H will be phased in beginning in tax year 2008 (returns filed in 2009). Only Part V of the form will be required to be completed by hospitals in tax year 2008; all other sections of Schedule H will be optional. The entire Schedule H must be completed for tax years beginning in 2009 (returns filed in 2010 and afterward). Additionally, there will be a graduated transition period for smaller organizations to adjust to the new form.

Publication Date: Saturday, March 01, 2008

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