Chapter Three Discussion Questions

Transcription

1 This is a sample of the instructor resources for Introduction to the Financial Management of Healthcare Organizations, Fifth Edition, by Michael Nowicki. This sample contains the instructor notes and PowerPoint slides for Chapter 3. The complete instructor resources consist of 29 pages of instructor s notes, 946 PowerPoint slides, and a test bank. If you adopt this text you will be given access to complete materials. To obtain access, your request to [email protected] and include the following information in your message: Book title Your name and institution name Title of the course for which the book was adopted and season course is taught Course level (graduate, undergraduate, or continuing education) and expected enrollment The use of the text (primary, supplemental, or recommended reading) A contact name and phone number/ address we can use to verify your employment as an instructor You will receive an containing access information after we have verified your instructor status. Thank you for your interest in this text and the accompanying instructor resources.

2 Chapter Three Discussion Questions 1. Explain the rationale for granting organizations tax-exempt status. Relieves the government of the burden of having to provide the service itself Reward organizations for providing services that enhance community values and goals 2. Identify the benefits and burdens of tax-exempt status for hospitals. Benefits: Eliminates tax liability Eliminates the organization from having to pay most business fees and licenses Organization is able to issue tax-exempt bonds Burdens: Cannot participate in political campaigns Cannot attempt to influence legislation Cannot lend any part of organization's income without adequate security and interest Cannot make any investments for more than adequate consideration Cannot sell an asset for less than adequate consideration 3. What are the steps necessary to qualify for tax-exempt status? Operate exclusively for charitable, scientific, or educational reasons Serve public rather than private interests Not engage in prohibited transactions 4. What are the bases of legislative, judicial and IRS challenges to tax-exempt status? Legislative: Taxpayer Bill of Rights II - indirectly addresses tax-exempt issues. Provides intermediary sanctions the IRS must take before revoking an organization's taxexempt status Patient Protection and Affordable Care Act - new requirements for tax-exempt hospitals o Community health needs assessment o Financial assistance policies o Limiting charges

3 Judicial: o Avoidance of extraordinary billing and collection practices Courts review tax-exempt status Utah Supreme Court - Not-for-profit hospitals had evolved to a position that made it impossible to differentiate them from for-profit hospitals; Not-for-profit hospitals should be reviewed more frequently and rigorously. Provena Catholic Hospital - Illinois Supreme Court denied tax-exempt status due to aggressive collection policies and using for-profit entities for key hospital affairs. Methodist Hospital in Houston - tax-exempt status revoked due to failure to provide adequate charity care o Task force was developed to define uncompensated care o Texas Health Policy Task Force- provide charity care (minus bad debt and contractual allowances, includes charity care and losses to Medicaid) equal to local and state tax-exempt benefits received by hospitals. IRS: IRS began auditing tax-exempt organizations, including hospitals in 1992 Coordinated examination programs audit tax-exempt organizations on the following: o Community benefits standards o Unreasonable compensation and inurements o Financial analysis o Joint ventures o Independent contractors 5. Will the Patient Protection and Affordable Care Act of 2010 be viewed as a friend or foe to tax-exempt hospitals? Foe for tax-exempt hospitals because o Justification required for needs identified but not explained with resources o Community health needs assessment is required o Hospitals required to develop, implement, and publicize financial assistance policies, and include criteria for financial assistance, methods of applying for assistance, basis for determining the amount charged to patients, permissible debt collection actions for patients on financial assistance, and the availability of emergency care regardless of the patient s ability to qualify for assistance.

4 o Hospitals are required to limit their charges to patients eligible for financial assistance to no more than the lowest amount billed to insured patients. Friend for tax-exempt hospitals because o Hospitals will have new volumes of insured patients which should reduce both the hospital bad debt and charity care

5 of Healthcare Organizations

6 Learning Objectives of Healthcare Organizations Analyze the rationale for tax-exempt status and apply the rationale to healthcare. Appreciate the value of tax-exempt status. Identify the steps necessary to qualify for tax-exempt status. Relate the importance of community benefits to tax-exempt status in healthcare. Examine judicial challenges to tax-exempt status. Examine legislative challenges to tax-exempt status. Examine IRS challenges to tax-exempt status.

7 of Healthcare Organizations For-profit organizations pay taxes.

8 of Healthcare Organizations For-profit organizations pay taxes. Federal and state income tax on their income State and local sales tax on their purchased goods/services Local real estate and personal property tax on their land, buildings, and major equipment

9 of Healthcare Organizations Non-profit organizations pay no taxes.

10 Rationale for Tax-Exempt Status

11 Rationale for Tax-Exempt Status Relieves the government of the burden of providing services

12 Rationale for Tax-Exempt Status Relieves the government of the burden of providing services Rewards the organization for performing services that enhance beneficial community values and goals

13 Value of Tax-Exempt Status for 122- Bed Hospital Federal Income Tax $2,188,810 State Income Tax 497,660 Real Estate Tax 230,950 Personal Property Tax 125,160 City Property Tax 35,760 Total Tax Liability 3,078,340 Business Licenses/Fees 223,500 Incremental Debt Cost 1,341,000 Total Value of Tax-Exempt Status $4,642,840

14 Qualifying for Tax-Exempt Status (501-C-3)

15 Qualifying for Tax-Exempt Status (501-C-3) Operate exclusively for charitable, scientific, or educational reasons Revenue Ruling : financial ability standard- -provide care to those who can t afford to pay for care Revenue Ruling : community benefits standard--promoted health deemed beneficial to the community (I.e. emergency rooms) Revenue Ruling : emergency room exemptions if services were duplicated

16 Qualifying for Tax-Exempt Status (501-C-3) Serve public, rather than private, interests, in that the organization s income does not benefit individuals

17 Qualifying for Tax-Exempt Status (501-C-3) Cannot engage in prohibited transactions including, but not limited to, the following: Participate in political campaigns Attempt to influence legislation Lend any part of the organization s income with receiving adequate security and interest Pay compensation in excess of reasonable salary levels Making investments for more than adequate consideration Sell an asset for less than adequate consideration Subvert in any manner substantial portions of income or assets Make any part of services available on a preferential basis

18 Case Study You are a tax attorney & consultant to Doctor s Hospital, a for-profit, physician-owned hospital. You are scheduled to give a presentation to the board regarding the advantages related to converting the hospital to not-for-profit tax status. What are you arguments? What are the board s likely arguments to remain forprofit?

19 Is there a significant difference between the amount of community benefits offered by non-profit and forprofit hospitals?

20 Is there a significant difference? Relman--medical-industrial complex

21 Is there a significant difference? Relman--medical-industrial complex Bromberg--for-profit hospital spokesperson

22 Is there a significant difference? Witek, Milligan, and Ryan 1993 study-- including taxes as a community benefit, for-profit hospitals provide significantly more community benefits

23 Is there a significant difference? 1991 Georgia Hospitals % of adjusted gross revenue Ownership Indigent care Taxes Total Benefit County 6.0 (4.0) 2.0 Non-profit For-profit

24 Is there a significant difference? In 2004, Richard Scruggs began seeking class-action status in 49 lawsuits accusing 370 not-for-profit hospitals of overcharging the uninsured and using aggressive collection methods against poor patients.

25 Is there a significant difference? The lawsuit against the Providence Health System which operates several hospitals in Washington state and Oregon is representative. Citing the Providence mission to provide universal access to health care, social justice and compassion for all members of our society with special concern for the poor and vulnerable, Scruggs argued:

26 Is there a significant difference? In fact, contrary to these representations, Providence discriminates against the very patients who are supposed to benefit most from its charity care by engaging in a pattern and practice of charging inordinately inflated rates to its uninsured patients, including Plaintiffs and the Class they seek to represent, that are far higher than the rates it charges its insured patients for the same services. Providence publicly represents itself as a 'not-for-profit medical care provider, and it receives millions of dollars each year in tax exemptions under Section 501(c)(3) of the federal tax code, 26 U.S.C. 501(c)(3), as a charitable, 'non-profit' organization that is required by law to engage in exclusively charitable purposes. Providence Oregon is similarly exempt from Oregon property taxes based on its charitable, 'non-profit' status.

27 Is there a significant difference? In fact, again contrary to its representations, Providence is extremely profitable. For example, in 2002, which is the most recent year for which data is available, Providence Oregon obtained over $1.2 billion in revenue, it held over $250 million in cash and investment securities, and the cost of its physical plant (land, buildings and equipment) was over $1.1 billion. The same year, Providence Oregon's President and CEO, Henry G. Walker, received over $1.4 million in compensation and benefits, its four Vice Presidents received an average of over $565,000 in compensation and benefits, and the average compensation and benefits of its five highest paid employees other than officers and directors was $460,000.

28 Is there a significant difference? In 2006, Providence Health System along with Legacy Health System and Sutter Health settled the uninsured billing cases while denying wrongdoing.

29 Is there a significant difference? 2006 Community Benefits Standards AHA argues that the cost of bad debt as well as charity care along with losses to both Medicare and Medicaid should be counted. CHA argues that the cost of bad debt and the loss to the Medicare program should not be counted. HFMA P&P Board Statement #15 is consistent with the CHA standard.

30 Is there a significant difference? December of 2006,CBO Report on the provision of community benefits by not-forprofit hospitals. Both for-profit and not-for-profit hospitals in five states, California, Florida, Georgia, Indiana, and Texas, were examined (n=1,057). Acknowledging the lack of industry consensus on what constitutes community benefits and how such benefits should be measured, the CBO report defined community benefits as the provision of uncompensated care, the provision of services to Medicaid patients, and the provision of certain specialized services that have been traditionally identified as unprofitable.

31 Is there a significant difference? CBO found, on average, that not-for-profit provided higher levels of uncompensated care and were more likely to provide unprofitable specialized services. For-profit hospitals provided care to more Medicaid patients as a percent of their total patient population and for-profit hospitals were found to operate in areas with lower average incomes, higher poverty rates, and higher rates of uninsured. The CBO also reported the results of the Joint Committee on Taxation which valued the total taxexemptions for the nation's not-for-profit hospitals for 2002 at $12.6 billion with exemptions from federal taxes accounting for about half of the total.

32 Judicial Challenges to Tax-Exempt Status

33 Judicial Challenges to Tax-Exempt Status Board of Equalization of Utah County v. Intermountain Health Care, 709 P.2d 265 Utah, 1985 Tax exemptions confer an indirect subsidy and are usually justified as the quid pro quo [consideration] for charitable entities undertaking functions and services that the state would otherwise be required to perform. A concurrent rationale used by some courts, is the assertion that the exemptions are granted not only because charitable entities relieve government of a burden, but also because their activities enhance beneficial community values and goals. Under this theory, the benefits received by the community are believed to offset the revenue lost by reason of the exemption (emphasis added).

34 Judicial Challenges to Tax-Exempt Status State of Texas v. Methodist Hospital

35 Judicial Challenges to Tax-Exempt Status State of Texas v. Methodist Hospital Attorney General Maddox filed suit against Methodist for providing inadequate charity care.

36 Judicial Challenges to Tax-Exempt Status State of Texas v. Methodist Hospital Methodist attempted to defend itself citing large amounts of contractual allowances as community benefits.

37 Judicial Challenges to Tax-Exempt Status State of Texas v. Methodist Hospital Attorney General Maddox appointed task force which sided with Methodist

38 Judicial Challenges to Tax-Exempt Status State of Texas v. Methodist Hospital District judge dismissed the case against Methodist in 1993, explaining that Methodist had broken no state laws.

39 Judicial Challenges to Tax-Exempt Status State of Texas v. Methodist Hospital Local tax appraisal district sent letters to Methodist Hospital and other non-profit hospitals in Harris County asking for data to support tax-exempt status.

40 Judicial Challenges to Tax-Exempt Status State of Texas v. Methodist Hospital Governor appointed the Texas Health Policy Task Force which made a 1993 recommendation to the legislature that nonprofit hospitals provide community benefits equal to the value of their local and state taxexempt benefits (see Texas SB 427).

41 Judicial Challenges to Tax-Exempt Status St. Luke s Regional Medical Center, Boise, Idaho County authorities sent a $3.4 million property tax bill in 1997 based on the following: Hospital was not sufficiently supported by donations Recipients of services at the hospital were expected to pay Hospital did not provide community benefit because the costs of charity care and bad debts were shifted to other patients Hospital was too profitable-8.9% net income

42 Judicial Challenges to Tax-Exempt Status Harrisburg Hospital, Harrisburg, Pennsylvania In 1998, an appeals court upheld the revocation of the hospital s tax exempt status, because it had not been operated free of the profit motive: Hospital passed surpluses to corporate parent Hospital s CEO made $400,000 Hospital s bonus plan included financial goals Hospital required physicians sign non-compete clauses

43 Judicial Challenges to Tax-Exempt Status Dartmouth-Hitchcock Medical Center in Lebanon, New Hampshire In 1998, city revoked tax-exempt status and sent hospital $6.5 million tax bill based on the following: Hospital had collection policy that encouraged full pay Hospital provided 2.9% of revenue in charity care, an amount also provided by for-profit hospitals The hospital used surpluses to fund its for-profit subsidiary

44 Judicial Challenges to Tax-Exempt Status St. David s/hca v. IRS IRS assessed $1.2 million in 1996 St. David s paid, but filed suit Both sides agreed the that were owed would not be paid pending outcome of the suit June 7, 2002, St. David s won in federal district court September, 2002, federal government appeals decision to fifth circuit November 7, 2003, fifth circuit overruled district court decision and sent the case back for trial

45 Judicial Challenges to Tax-Exempt Status St. David s/hca v. IRS In reversing the trial court, the fifth circuit said: If more than an insubstantial amount of the partnership s activities further non-charitable interests, then St. David s can no longer be deemed to operate exclusively for charitable purposes. Therefore, even if St. David s performs important charitable functions, St. David s cannot qualify for tax-exempt status...if its activities substantially further the private, profit-seeking interests of HCA.

46 Judicial Challenges to Tax-Exempt Status St. David s/hca v. IRS On March 4, 2004, the trial court determined that St. David s had not ceded control and therefore returned a verdict in favor of St. David s. In May, 2004, U.S. Justice Department announced that they had decided not to appeal the March 4 jury decision. Had St. David s lost the appeal, it would have owed more than $40 million in back taxes and penalties.

47 Case Study You are the President and CEO of St. Michael s Hospital for Children, you arrive at work to find television cameras and news reporters in your office. A national news story had aired the previous evening calling into question the taxexempt status of non-profit hospitals. You feel compelled to address the issue from the local perspective. What is your press release?

48 IRS Challenges to Tax-Exempt Status Responding to public pressure to reduce federal budget deficits, the IRS began auditing tax-exempt organizations in 1987.

49 IRS Challenges to Tax-Exempt Status By 1992, the IRS had audited 233 taxexempt health care organizations and found frequent irregularities in physician recruiting arrangements (Herman Hospital) and unrelated business income.

50 IRS Challenges to Tax-Exempt Status 1991 Coordinated Examination Program (CEP) Community benefit standard including instances of patient dumping

51 IRS Challenges to Tax-Exempt Status 1991 Coordinated Examination Program (CEP) Unreasonable compensation and private inurement

52 IRS Challenges to Tax-Exempt Status 1991 Coordinated Examination Program (CEP) Financial analysis of affiliated entities and unrelated business income

53 IRS Challenges to Tax-Exempt Status 1991 Coordinated Examination Program (CEP) Joint ventures

54 IRS Challenges to Tax-Exempt Status 1991 Coordinated Examination Program (CEP) Independent contractors

55 IRS Challenges to Tax-Exempt Status By June, 2000, the IRS had identified 875 audit candidates. The first 63 audits closed with an average assessment of $2.5 million and an average audit length of 3 years.

56 IRS Challenges to Tax-Exempt Status IRS made the following changes to be effective in 2003 Information on fund-raising activities; Information on corporate responsibility practices Information on grants to foreign organizations see

57 IRS Challenges to Tax-Exempt Status In 2006, in conjunction with the Exempt Organization Compensation Initiative, the IRS sent compensation questionnaires (Form 13790) to approximately 600 taxexempt hospitals. The initiative was triggered by incomplete or insufficient answers to Form 990 for 2005 which resulted in 200 examinations.

58 IRS Challenges to Tax-Exempt Status Revised Form 990 for non-profits Hospital operations Schedule H sets a uniform standard for tallying and reporting charity care Cost breakdown for eight charity care and community-benefit expenses Cost breakdown for bad debt and Medicare expenses including an estimate of the amount to be considered for community benefit considerations

59 IRS Challenges to Tax-Exempt Status Revised Form 990 for non-profits Executive compensation Disclose each perk provided to officers, directors, and key employees Indicate which of six acceptable methods was used to set CEO s compensation Provide breakdown of compensation for highly paid employees

60 IRS Challenges to Tax-Exempt Status Revised Form 990 for non-profits Governance Indicate if governing body reviewed Form 990 before submission. Explain process of review Indicate how the organization regularly and consistently monitors and enforces its conflict-ofinterest policy Describe if and how the organization makes public its governing and conflict-of-interest policies and financial statements

61 IRS Challenges to Tax-Exempt Status In 2009, the IRS released its final report on exempt organizations hospital study which was the result of an IRS study on nonprofit hospitals beginning in Based on a survey of 500 nonprofit hospital in 4 communities, benefit findings included:

62 IRS Challenges to Tax-Exempt Status Considerable diversity in the demographics, community benefit activities, & financial resources The average & median percentages of total revenues report spend on community benefit activities were 9% & 6% respectively with the lowest in rural hospitals Uncompensated care was the largest reported community benefit- 56% of community benefit expenditures, 23% medical education & training, 15% research, & 6% community programs Excess of revenues over expenses for the sample was 5% Average total compensation amounts paid to top management official were $490,000 & $377,00.

63 Federal Legislative Challenges to Tax-Exempt Status

64 Federal Legislative Challenges to Tax-Exempt Status Attempts by Rangel (D-NY), Donnelly (D-MA), and President Clinton had limited success.

65 Federal Legislative Challenges to Tax-Exempt Status Taxpayer Bill of Rights II, which was signed into law in 1996 Requires tax-exempt organizations to disclose excess benefit transactions on Form 990 each year Expands public access to Form 990 Executives pay a 10 percent tax on the amount of the excess if corrected and reported, 200 percent tax on unreported excesses that executives personally benefited

66 Federal Legislative Challenges to Tax-Exempt Status The Patient Protect and Affordable Care Act of 2010 Requirements for tax-exempt hospitals: 1. Complete a community health needs assessment 2. Develop, implement and publicize financial assistance policies 3. Limit charges to individuals eligible for assistance to the amount billed to insured patients 4. Avoid certain billing and collection activities

67 State Legislative Challenges to Tax-Exempt Status

68 State Legislative Challenges to Tax-Exempt Status Texas Senate Bill 427 signed into law in 1993

69 State Legislative Challenges to Tax-Exempt Status Texas Senate Bill 427 signed into law in 1993 Establishes a legal duty for non-profit hospitals to provide community benefits (unreimbursed costs of providing charity care patients and unreimbursed costs of providing care to Medicaid patients) in amounts equal to 4 percent of the hospital s net revenues 100 percent of the hospital s state and local taxexemptions

70 State Legislative Challenges to Tax-Exempt Status As of 2009, 10 states have both mandated & voluntary reporting of community benefits 14 states have mandated reporting 19 states and the District of Columbia have voluntary reporting 7 states have no reporting of community benefits

71 Case Study Related to the earlier case, do you have additional arguments to covert a forprofit hospital to a not-for-profit hospital in lieu of the Patient Protection and Affordable Care Act? Does the board have a different position based on the Act?

72 Key Points Tax-exempt status has several advantages for healthcare organization Tax-exempt organizations must meet several criteria including the provision of community benefits Legislatures, courts, and the IRS have challenged tax-exempt organizations including hospitals The Patient Protection and Affordable Care Act of 2010 provides national criteria for nonprofit hospitals

73 Discussion Questions 1. Explain the rationale for granting organizations tax-exempt status. 2. Identify the benefits and the burdens of taxexempt status for hospitals 3. What are the steps necessary to qualify for taxexempt status? 4. What are the bases of legislative, judicial, and IRS challenges to tax-exempt status? 5. Will the Patient Protection and Affordable Care Act of 2010 be viewed as friend or foe to taxexempt hospitals?