Understanding the Health Care Reform Act

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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. 3

Ø  Background

Ø  Estimating Benefits Provided – Case Study

Ø  Estimating Benefits Received – Case Study

Ø  National Data

Ø  Summary & Conclusions

Outline

Why the Interest in Community

Benefits?

Background

Ø Non-profit hospitals – 59% 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.

Ø  “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

1.6% 1.9%

2.7%

3.4%

2.4%

3.3% 3.4% 2.5%

4.1%

0.1%

4.7% 5.0%

3.7% 4.2% 4.3% 3.7% 5.2%

2.6%

2001 2002 2003 2004 2005 2006 2007 2008 2009

CPI CPI Medical

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 By John Carreyrou, Wall Street Journal

Hospitals: Is the price right? By Michael Rosenbaum, CBS Broadcasting Inc.

Cost Efficiency at Hospital Facilities in California Report Shows Hospital Costs and Charges Vary Widely Throughout The State - Health care purchasers call for standardized reporting, more transparency Milliman/CalPERS

Hospital-Acquired Superbug Infections Soar in Newborn Babies By 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 Ø Detailed community-benefit requirement

CA, ID, TX, IL, IN, NY, PA, WV, MD, NH Ø Less detailed community-benefit requirements

WY, CO, MS, AL, ND

Ø 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:

a)  the operation of an emergency room open to all members of the community without regard to ability to pay

b)  a governance board composed of community members

3) The 1969 IRS Community Benefit Standard Revenue Ruling 69-545

c.  the use of surplus revenue for facilities improvement, patient care, medical training, education, and research

d.  the provision of inpatient hospital care for all persons in the community able to pay, including those covered by Medicare and Medicaid

e.  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

a) Conducts the assessment every two years

b) Adopted an implementation strategy

c) Input from community

d) Made available to public

2. Meets the financial assisted policy requirements

a) Develop, follow, and communicate a formal charity care policy

4) H.R. 3590 Additional Requirements for Charitable Exemption

3.  Meets the requirements on charges

c.  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

d.  Does not engage in extraordinary collection efforts until financial assistance policy eligibility is exhausted

4) H.R. 3590 Additional Requirements for Charitable Exemption

Ø Information on Medicaid / indigent care programs / uncompensated care

Ø Revisions to this are under review

5) Worksheet S-10 of Medicare Cost Report

6) Schedule H of IRS Form 990

Ø Released in December 2007

Ø Mandatory filing is tax year 2009 due in 2010

Ø Complete data may not be available until 2011 at the earliest

What Are the Biggest Lightning

Rods?

Background

1)  Large Executive Salaries

Ø The combined net income of the 50 largest nonprofit hospitals jumped nearly eight-fold to $4.27 billion between 2001 and 2006, according to a Wall Street Journal analysis of data from the American Hospital Directory

Ø The Cleveland Clinic swung from a loss to net income of $229 million during that period. No fewer than 25 nonprofit hospitals or hospital systems now earn more than $250 million a year. One nonprofit hospital system – Ascension Health – has a treasure chest of 7.4 billion, more than do many large, publicly traded companies.

2)  Large Profits

2) Large Profits

Ø Nonprofits – which account for a majority of US hospitals – are faring even better than are their for-profit counterparts: 77% of the 2,033 US nonprofit hospitals are in the black while just 61% of for-profit hospitals are profitable.

3)  Large Cash Balances

4) Low Levels of Charity Care

Ø Untaxed investment gains have greatly increased some hospitals’ cash piles. Ascension Health – a Catholic nonprofit system that runs 65 hospitals mostly in the Midwest and Northeast – reported net income of $1.2 billion in its fiscal year ended June 30, 2007, and cash and investments of $7.5 billion. That’s more cash than Walt Disney Co. has.

Ø At John H. Stroger Jr. Hospital – formerly knows as Cook County Hospital – 56% of patients do not have any insurance when they are admitted, says John Cookinham, the hospital’s chief financial officer. At Northwestern Memorial, the percentage of uninsured patients is less than 5%.

What Community Benefits Are Provided?

Background

1) Charity Care

2) Bad debt Ø Included by AHA

Ø Not included by CHA / VHA / HFMA

Ø No position by IRS – reported in Part III of Schedule H

3) Unreimbursed costs of means tested programs such as Medicaid

Ø Included by IRS / AHA / CHA / VHA / HFMA

4) Unreimbursed costs of Medicare Ø  Included by AHA / HFMA

Ø Not included by CHA / VHA

Ø No position by IRS – reported in Part III of Schedule H

5) Other activities Ø Cash and in-kind contributions

Ø Health professions education

Ø Community health-improvement services

Ø Community benefit operations

Ø Medical research

Ø Subsidized health services

6) Where Are the Current Dollars?

Figure 5–1 State Analysis of Charity Care Costs

GAO Analysis of 2006 California, Indiana, Massachusetts and Texas

What Benefits Are Received?

Background

1)  Income tax a) Federal b) 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

Standard Charity Care Program Ø Sliding scale discounts within charity policy

based upon income level as determined by the Federal poverty guidelines:

< 100% 100% HCAP 100-200% 100% Charity 201-267% 75% Charity 268-334% 65% Charity 335-400% 45% Charity

Charity Care Policy

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 $ 1.9

- Revenues (0.1)

Net Cost of Subsidized Health Services $ 1.8

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 0.0

Total $ 56.8

Estimating Benefits Received – Case Study

Background

Benefits Received Categories

Ø Real Property Tax

Ø Sales & Use Tax

Ø Commercial Activity Tax

Ø Postage

Ø FUTA

Ø Tax Exempt Bond Interest Savings

Ø Local Income Tax

Ø State Income / Franchise Tax

Ø 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 & Use Tax

Calculation (in millions):

Supply Expense* $ 125.0

x Tax Rate of 7.0% 7.0%

Sales Tax Foregone 8.75

* Excludes drugs which are exempt in the State of Ohio

Postage

Calculation (in millions):

Postage Rate (For-Profit) – 1st Class 0.44

Postage Rate (Not-For-Profit) – 1st Class 0.22

Difference in Postage Rate 0.22

Number of Items Mailed 3.5

x Difference in Postage Rate 0.22

Postage Foregone $ 0.77

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

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 Income Taxes $ 47.644

x Tax Rate of 2.0% 2.0%

City Income Tax Foregone $ .953

State of Ohio Income Tax

Calculations (in millions): Federal Taxable Income Before State Tax $ 46.691 x Tax Rate of 8.5% 8.5% State of Ohio Income Tax Forgone $ 3.969

Federal Income Tax Calculation (in millions):

Taxable Income $ 42.722

x Tax Rate of 35% 35.0%

Federal Income Tax Foregone $ 14.952

Value of Benefits Received FY2010 (in millions)

Total

Real Property Tax $ 12.250

Sales & Use Tax $ 8.750

Postage $ .770

Federal Unemployment Tax (FUTA) $ .336

Local Income Tax $ .953

State Income / Franchise Tax $ 3.969

Federal Income Tax $ 14.952

Tax Exempt Bonds $ 5.250

Total Benefit Received $ 47.230

Community Benefit Provided $ 56.800

Excess Community Benefit $ 9.570

National Data

Ø  All PPS acute-care hospitals 2008

Ø  Hospitals removed if did not have Medicaid revenues or Medicaid charges reported in WKS S-10

Ø  Data set reduced from 3,478 to 2,423

3,478 Hospitals 2,423 Hospitals Number of

Hospitals % Net Patient Revenue %

Number of Hospitals %

Net Patient Revenue %

Investor Owned 25 13 23 13 Government 17 16 17 15 VNP Church 14 16 15 16

VNP Other 43 56 45 56 Total 100 100 100 100

1) The Sample of Hospitals Used

2) Comparison sample to all US

3) Medicaid Composition

Medicaid Charges to Gross Charges

Medicaid Days to Total Days

Investor Owned 12.9 13.7

Government 17.9 16.7

VNP Church 11.8 16.3

VNP Other 13.4 13.9

Medicare Payment to Net Patient Revenue

Investor Owned 25.3

Government 22.0

VNP Church 26.5

VNP Other 24.2

4) Medicare composition

5) Profit margins– median

Patient Margin (NPR less Cost)

Investor Owner 5.3

Government -4.8

VNP Church -0.5 VNP Other -1.3

6) Charge/cost Structure – Medians

Hospital Charge Index

Hospital Cost Index

Investor Owned 132 99

Government 90 106

VNP Church 107 100

VNP Other 95 101

National Data – Audited Financial Statements

Ø  Sample of five large IO systems ($32 billion of revenue; 2008)

§  $5.0 billion IO 1

§  $9.0 billion IO 2

§  $10.8 billion IO 3

§  $4.5 billion IO 4

§  $3.0 billion IO 5

Ø  Sample of five large VNP systems ($45 billion of revenue)

§  $13.6 billion VNP 1 (2008)

§  $8.2 billion VNP 2 (2008)

§  $6.9 billion VNP 3 (2007)

§  $6.7 billion VNP 4 (2008)

§  $9.2 billion VNP 5 (2009)

Summary Data National – Large Systems

3)  Comparative Statistics

IO Systems

VNP Systems

Average Revenue (billions) $6.4 $9.0

Average Bad Debt to Net Revenue % 10.1 7.0

Average Charity to Net Revenue (Based

upon Charges) 3.9 NA

Average Medicare % 27.7 35.7

Average Medicaid % 9.4 13.4

Average CEO Pay (thousands) $2,410 $2,420

Average CFO Pay (thousands) 1,140 1,220

Summary

Community benefit analysis will become more important in the years ahead

Comparisons of benefits provided in non-profits with investor-owned hospitals will be closely reviewed

Not-for-profit hospitals must begin to document the benefits they provide