DB 2 Summer

Chapter 5

Community

Benefit

Assessment

Learning Objectives

• Describe the current basis for tax exemption of

not-for-profit healthcare firms.

• Describe the elements of community benefit

listed by key policy groups.

• Assess the relative community benefits provided

by proprietary and not-for-profit hospitals.

• Develop a methodology for estimating financial

benefits received by not-for-profit healthcare

firms.

• Develop a methodology for estimating financial

benefits provided by not-for-profit healthcare

firms.

 Background

 Estimating Benefits Provided: Case Study

 Estimating Benefits Received: Case Study

 National Data

 Summary & Conclusions

Outline

Why the interest in community

benefits?

Background

 Non-profit hospitals, comprising 78% of US hospitals,

are not subject to federal income tax, most sales taxes,

or property taxes. In most states, they sell tax-free

bonds, making it cheaper to fund building projects.

 “In a report issued in December 2006, the Congressional

Budget Office estimated nonprofit hospitals receive

$12.6 billion in annual tax exemptions, on top of the $32

billion in federal, state, and local subsidies the hospital

industry as a whole receives each year.”

1. Federal and State Governments

Need Cash

2. Healthcare costs are rising.

“In a report issued in December 2006, the

Congressional Budget Office estimated from

a five-state survey that nonprofit hospitals

provided 0.6% more in uncompensated care

than did for-profit hospitals.”

3. Voluntary Nonprofits Don’t Look

Different From Investor-Owned

Hospitals

4. Bad PR

Nonprofit hospitals, once for

the poor, strike it rich

John Carreyrou, Wall Street

Journal

Hospitals: Is the price

right?

Michael Rosenbaum, CBS

Broadcasting Inc.

Cost efficiency at hospital

facilities in California

Report shows hospital costs

and charges vary widely

throughout the state; healthcare

purchasers call for standardized

reporting, more transparency

Milliman/CalPERS

Hospital-acquired

superbug infections soar

in newborn babies

Sherry Baker, Health

Sciences Editor – Natural

News

Originally Reported in:

Pediatric Infectious Disease

Journal

What is happening?

Background

1. Court cases on tax-exempt status

2. State efforts

Detailed community-benefit requirement:

10 states

Less-detailed community-benefit

requirements: 15 states

Illinois Supreme Court upheld denial of

property tax exemption—March 2010

• IRS recognized five factors that would support a

nonprofit hospital’s tax exempt status: 1. The operation of an emergency room open to all

members of the community without regard to ability to

pay

2. A governance board composed of community members

3. The use of surplus revenue for facilities improvement,

patient care, medical training, education, and research

4. The provision of inpatient hospital care for all persons in

the community able to pay, including those covered by

Medicare and Medicaid

5. An open medical staff with privileges available to all

qualifying physicians

3. The 1969 IRS Community Benefit

Standard Revenue Ruling 69-545

1. Meets the community needs assessment

requirements  Conducts the assessment at least once every

3years

 Adopts an implementation strategy

 Input from community

 Makes available to public

2. Establishes a financial assistance policy for

medically necessary and emergency care  Develops, follows, and communicates a formal

charity care policy

4. Patient Protection and Affordable Care

Act (ACA) of 2010: Additional

Requirements for Charitable Exemption

3. Meets the required limitations on charges Limits charges to emergency and other

medically necessary care to lowest amount for

individual with insurance (prohibits use of gross

charges)

4. Meets the billing and collection requirement Does not engage in extraordinary collection

efforts until financial assistance policy eligibility

is exhausted

4. Patient Protection and Affordable Care

Act (ACA) of 2010: Additional

Requirements for Charitable Exemption,

cont.

5. Schedule H of IRS Form 990

• Released in December 2007

• Mandatory filing is tax year 2009 due in

2010

• Complete data may not be available

until 2011 at the earliest

What are the biggest lightning rods?

Background

What community benefits are

provided?

Background

1. Charity Care

2. Bad debt Included by AHA

Not included by CHA/VHA/HFMA

No position by IRS – reported in Part III of

Schedule H

3. Unreimbursed costs of means-

tested programs such as Medicaid

Included by IRS/AHA /CHA/VHA/HFMA

Included by IRS/AHA/CHA/VHA/HFMA

4. Unreimbursed costs of Medicare

Included by AHA/HFMA

Not included by CHA/VHA

No position by IRS – reported in Part III of

Schedule H

5. Other activities

Cash and in-kind contributions

Health professions education

Community health improvement services

Community benefit operations

Medical research

Subsidized health services

6. Where Are the Current Dollars?

FIGURE 5-1 State Analysis of Charity Care Costs

Reproduced from GAO Analysis of 2006 California, Indiana, Massachusetts, and Texas data.

What benefits are received?

Background

1. Income tax

• Federal

• State

2. Property tax

3. Sales tax

4. Tax-exempt financing

5. Other

Estimating Benefits Provided: Case

Study

Background

Community Benefit Includes*

*These categories are in accordance with CHA/VHA guidelines. Medicare shortfall is excluded from the Community Benefit Report under these guidelines.

Traditional Charity Care

Unpaid Cost of Medicaid

Medical Education

Subsidized Health Services

Community Health Services

Cash/In-Kind Donations to the Community

Research

Traditional Charity Care

Calculation (in millions):

Charity Charge Write-offs

$120.0

x Cost to Charge* Ratio 38.0%

Cost of Charity Care $45.6

– Charity Care HCAP** Receipts 9.0

Net Cost of Traditional Charity Care $36.6

* Actual cost to charge calculated by hospital. This represents a weighted average cost to

charge.

** HCAP is the State of Ohio’s Medicaid Disproportionate Share Program and is an additional

payment to hospitals in Ohio that provide a disproportionate share of uncompensated services to

the indigent and uninsured.

Definition: Free or discounted health services provided to persons

who cannot afford to pay, as defined by the hospital and entity charity

care policies and procedures (summarized on the previous slide)

Unpaid Cost of Medicaid

Calculation (in millions):

Costs of Medicaid $ 38.0

– Medicaid Payments

31.0

Net Cost of Medicaid $

7.0

Medical Education

Calculation (in millions):

Medical Education Costs

$20.0

– GME Payments $10.0

Net Cost of Medical Education $10.0

Subsidized Health Services

Calculation (in millions):

Cost of Subsidized Health Services $1.8

– Revenues $0.1

Net Cost of Subsidized Health Services $1.7

Community Health Services

Calculation (in millions):

Community Health Services

$1.0

Net Cost of Community Health Services $1.0

Cash/In-Kind Donations to the Community

Calculation (in millions):

Cash and In-Kind Donations $0.3

Net Cash / In-Kind and Other $0.3

Research

Calculation (in millions):

Net Unsubsidized Research Cost $0.1

Community Benefit (in Millions)

FY2010

Charity care (net cost) $36.6

Net cost of Medicaid programs $7.0

Net cost of medical education $10.0

Subsidized health services $1.8

Community health services $1.0

Cash/in-kind and other $0.3

Research $0.1

Total $56.8

Estimating Benefits Received: Case Study

Background

Benefits Received Categories

Real property tax

Sales and use tax

Commercial

activity tax

Postage

FUTA

 Tax-exempt bond

interest savings

 Local income tax

 State

income/franchise

tax

 Federal income tax

Real Property Tax

Calculation (in millions):

Fair Market Value of Land, Buildings

& Building Improvements $500.0

x Assessment Percentage of 35% 35.0%

Assessed Value $175.0

x Tax Rate of 7.0% 7.0%

Real Property Taxes Due $12.25

Sales and Use Tax

Calculation (in millions):

Supply Expense* $125.0

x Tax Rate of 7.0% 7.0%

Sales Tax Foregone $8.75

* Excludes drugs that are exempt in the State of Ohio

Postage

Calculation:

Postage Rate (For-Profit) – 1st Class $0.47

Postage Rate (Not-For-Profit) – 1st Class $0.23

Difference in Postage Rate $0.24

Number of Items Mailed 3.5million

x Difference in Postage Rate $0.24

Postage Foregone $840,000

Federal Unemployment Tax

Calculation (in thousands):

Wage Base $7.0

x Number of FTEs 6.0

Total Wages $42,000

x Tax Rate of 0.8% 0.8%

Federal Unemployment Taxes Foregone $336.0

Definition: Federal unemployment taxes are 0.8% on the first $7,000 of

wages for each employee

Tax Exempt Bonds – Other Benefits Received

Definition: Benefit received from payment of lower

rates on tax-exempt borrowing

Calculation (in millions):

Taxable Bond Rate 6.75%

Hospital Tax Exempt Rate 5.00%

Differential 1.75%

Hospital Bonds Outstanding $300.0

Tax-Exempt Benefit Received $5.25

City Income Tax

Calculation (in millions):

Federal Taxable Income Before State & Local IncomTaxe$45.390

x Tax Rate of 2.0% 2.0%

City Income Tax Foregone $0.908

State Income Tax

Calculations (in millions):

Federal Taxable Income Before State Tax $44.482

x Tax Rate of 8.5% 8.5%

State of Ohio Income Tax Forgone $3.781

Federal Income Tax

Calculation (in millions):

Taxable Income $40.701

x Tax Rate of 35% 35.0%

Federal Income Tax Foregone $14.245

Value of Benefits Received FY2010 (in millions)

Total

Real Property Tax $12.250

Sales & Use Tax $8.750

Postage $0.770

Federal Unemployment Tax (FUTA) $0.336

Local Income Tax $0.908

State Income / Franchise Tax $3.781

Federal Income Tax $14.245

Tax Exempt Bonds $5.250

Total Benefit Received $46.290

Community Benefit Provided $56.800

Excess Community Benefit $10.510

Summary

Community benefit analysis will become

more important in the years ahead

Comparisons of benefits provided in

nonprofits with investor-owned hospitals

will be closely reviewed

Not-for-profit hospitals must begin to

document the benefits they provide