presentation explores many contexts of community benefit
DESCRIPTION
PYA Principal David McMillan gets to the bottom of the definition of community benefit in “Community Benefit: One Term, Many Contexts,” a presentation given at the 2013 AICPA Healthcare Industry Conference.TRANSCRIPT
1#AICPA_HEALTH
Community Benefit:One Term, Many ContextsPresented by:David McMillan, CPA
1American Institute of CPAs #AICPA_HEALTH
David W. McMillan, CPAPYA Principal
David McMillan provides financial and strategic services to the Firm's healthcare clients. David's areas of concentration are: feasibility studies for various healthcare entities; mergers, acquisitions, and affiliations among providers; strategic planning and forecasting, clinical integration services; and valuations and operational analysis.
1
1American Institute of CPAs #AICPA_HEALTH
Overview
In this session, we will examine the importance and meanings of community benefit.
We will review the nuances within the Federal reporting requirements.
We will also present best practices for developing a workplan to aid hospital staff, counsel, the C-Suite, and the Board in preparing a uniform message.
2
1American Institute of CPAs #AICPA_HEALTH
Agenda
Importance and Meaning of Community Benefit
Federal Reporting Nuances for Community Benefit
Economic Value of Community Benefit
Community Benefit Uniform Message
3
1American Institute of CPAs #AICPA_HEALTH
Importance and Meaning of Community Benefit
4
1American Institute of CPAs #AICPA_HEALTH
Community Benefit Standard
Adopted in 1969 by the IRS
Basis for recognizing hospitals as income tax-exempt under Section 501(c)(3) of the Internal Revenue Code
Most common test applied by IRS to determine if a hospital is operated to promote health in a manner that serves a charitable purpose and merits tax-exempt status
5
1American Institute of CPAs #AICPA_HEALTH
Public Perception
Narrow interpretation= charity care
Broad interpretation= virtually everything anon-profit hospital does
Most common perception - mixture of the two interpretations
6
1American Institute of CPAs #AICPA_HEALTH
Demographics of Hospital Sector
The American Hospital Association reports that there are more than 5,700 hospitals throughout the country.
Of these, more than 2,900 are non-governmental not-for-profit hospitals.
Around 1,025 are for-profit community hospitals.
The remainder are state and local government hospitals.
Per AHA Hospital Statistics, 2013 edition. Data from the 2011 annual survey.
7
1American Institute of CPAs #AICPA_HEALTH
Community Benefit Test – Federal Level
Charities provide for a charitable class of people. (such as food, clothing, and shelter to the poor or distressed)
A non-profit hospital, however, is required to show it benefits the community it serves through the promotion of health.
• A non-profit hospital may provide services to persons outside of a charitable class.
8
1American Institute of CPAs #AICPA_HEALTH
Practice Perspective
Catholic Health Association released a set of guidelines for hospitals to use in identifying community benefits:• To qualify as “community benefit,” the program must respond to
an identified community need and meet at least one of the following criteria:- Improve access to healthcare services within the community- Improve health of the community- Advance medical or health education within the community- Relieve or reduce the burden of government or other
community efforts
9
1American Institute of CPAs #AICPA_HEALTH
What is Community Benefit?
10
1American Institute of CPAs #AICPA_HEALTH
What does community benefit mean?
The answer lies within the question, “How does one meaningfully differentiate a tax-paying, for-profit hospital from a non-profit hospital that enjoys exemption from federal and state tax, exemption from property tax, and eligibility for favorable bond financing?”
11
1American Institute of CPAs #AICPA_HEALTH
What is required for federal tax exemption?
1
2
3
Neither the Internal Revenue Code nor the underlying regulations explicitly provides for the exemption of non-profit hospitals from federal income taxation.
We have long recognized that hospitals may quality for exemption under section 501(c)(3).
Five Factors within the Community Benefit Standard
12
1American Institute of CPAs #AICPA_HEALTH
The Community Benefit Standard - 5 Factors
1A community board
2An open medical staff
3A full-time emergency room open to all regardless of ability to pay
4The admission of all types of patients including those able to pay for care either for themselves or through third-party payers
5How excess funds are used, such as for expansion and replacement of existing facilities and equipment, medical training, education, and research
13
1American Institute of CPAs #AICPA_HEALTH
Facts and circumstances determination, with no one factor controlling
Exemption also based on providing charity care
Other Factors
14
1American Institute of CPAs #AICPA_HEALTH
501(c)(3) Considerations
Community benefit standard is not the only requirement hospitals must satisfy
Requirements for exemption under section 501(c)(3), including:
• Prohibitions against inurement and the payment of excess compensation, and impermissible private benefit
15
1American Institute of CPAs #AICPA_HEALTH
Distinguishing Tax-Exempt from For-ProfitAn open medical staff, participation in Medicare and Medicaid, and treating all emergency patients without regard to ability to pay are characteristics now shared by tax-exempt and for-profit hospitals.
Although they remain factors in assessing entitlement for tax exempt status, they no longer meaningfully distinguish one type of hospital from another.
16
1American Institute of CPAs #AICPA_HEALTH
State Tax Debate
Provena case in Illinois proved that Federal tax exemption is no longer always dispositive of how a state or local government will regard a hospital.
More than a dozen states have codified their hospital community benefit requirement in law or within regulations. Another nine have established community benefit requirements through broader hospital licensure laws, interpretive attorney general guidelines, and property tax exemption standards.
17
1American Institute of CPAs #AICPA_HEALTH
Legislative Intervention
In July 2007, Finance Committee member Senator Grassley put forth a proposal to quantify the community benefit that tax-exempt hospitals ought to provide.
• “No hospital can maintain section 501(c)(3) status without dedicating a minimum of 5% of its annual patient operating expenses or revenues to charity care, whichever is greater.”
18
1American Institute of CPAs #AICPA_HEALTH
IRS Form 990, Schedule H
Intended to make “apples to apples” comparisons of hospitals
Provides clearer standards on:• The types of activities reportable or not reportable as community
benefit• The requirement that community benefit be reported at cost
rather than charges, or otherwise• The requirement that community benefit be reported by employer
identification number, rather than by hospital or by system
19
1American Institute of CPAs #AICPA_HEALTH
Federal Reporting Nuances for Community Benefit
20
1American Institute of CPAs #AICPA_HEALTH
Required Reporting
IRS Form 990, Schedule H, Hospitals
Medicare Cost Report – CMS Form 2552, Worksheet S-10
GAAP/Community Benefit Reporting
21
1American Institute of CPAs #AICPA_HEALTH
Definitions
IRS Form 990, Schedule H CMS Form 2552, Worksheet S-10
Uncompensated Care
Charity care and bad debt, which includes bad debt and Medicare bad debt. Uncompensated care does not include courtesy allowances or discounts.
Charity Care
• “…free or discounted health services provided to persons who meet the organization’s criteria for financial assistance and are thereby deemed unable to pay for all or a portion of the services”
• General Rule – if create a bill, no longer charity care, but might be bad debt if ultimately written off
• “Charity care” for Schedule H does NOT include: Bad debt or uncollectible charges recoded
but not paid Medicare revenue shortfalls (exception –
Subsidized Service Medicare Shortfalls are Community Benefit)
Contractual adjustments
Health services for which a hospital demonstrates that the patient is unable to pay. For Medicare purposes, charity care is not reimbursable and unpaid amounts associated with charity care are not considered as an allowable Medicare bad debt.
22
1American Institute of CPAs #AICPA_HEALTH
Definitions
IRS Form 990, Schedule H CMS Form 2552, Worksheet S-10
Bad Debt
Health services for which a hospital determines the non-Medicare patient has the financial capacity to pay, but the non-Medicare patient is unwilling to settle the claim.
Medicare Bad Debt
Amount of allowable Medicare coinsurance and deductibles considered to be uncollectible but are not reimbursed by Medicare.
Uninsured Patients
Individuals with no source of third party healthcare coverage (insurance).
Medically Indigent Patients
Individuals who are unable to pay some or all of their medical bills because medical bills exceed a certain percentage of family income or assets. Usually defined by a hospital under its financial assistance policies.
Individuals who use or commit all available current and expected resources to pay for medical bills, and not limited to a defined percent of the Federal Poverty Guidelines, but follows specific hospital policy.
23
1American Institute of CPAs #AICPA_HEALTH
Reporting Period Differences
Filed annuallyBased on FYEElectronic FilingDue Dates: up to 11 months after FYE
Filed annuallyPeriod can be shorterElectronic FilingDue dates: 5 months after FYE
IRS Form 990,
Schedule H CMS
Form 2552,
Worksheet S-10
24
1American Institute of CPAs #AICPA_HEALTH
IRS Form 990, Schedule H
Community Benefit - “The Chart” on Page 1 which we know is a focal point for various internal
and external constituents – board, media, IRS, AG, etc.
IRS tasked to conduct review and report on
percentage of community benefit provided by hospital
Lines 7a-7c focus on Charity Care, Medicaid,
and other means tested programs
25
1American Institute of CPAs #AICPA_HEALTH
IRS Form 990, Schedule H
Schedule H Part I Line 7a-d
Financial Assistance at
Cost[1]Medicaid[2]
Other Means-tested
Government Programs[3]
Total
Line 7a Line 7b Line 7c Line 7dGross patient charges at the full established rates[4]
Ratio of patient care cost to charges XEstimated cost =Medicaid provider taxes, fees, and assessments if payments received were intended primarily to offset the cost of the financial assistance
+
Total community benefit expense Column C =
Net patient service revenue from Medicaid or other means-tested government programsRevenues received from a state organization to directly offset revenue for financial assistance
+
Other direct offsetting revenue +
Total direct offsetting revenue Column D =
Net community benefit expense (community benefit expense – offsetting revenue) Column E
Total expenses from the organization’s Form 990[5] ÷Percent of total expenses Column F =
[1] Financial assistance is sometimes referred to as Charity Care.[2] This includes Medicaid revenues and expenses from all states, not just the organization’s home state.
[5] Do not include bad debt expense in this total.
[4] Gross patient charges refer to only those written off under the organization’s FAP for Line 7a. For lines 7b and 7c, enter the gross patient charges for each applicable program.
[3] “Other means-tested government programs” refers to government sponsored health programs (other than Medicare and Medicaid) with eligibility determined by the participants’ income or assets.
26
1American Institute of CPAs #AICPA_HEALTH
CMS Form 2552, Worksheet S-10
Required by all acute care hospitals, including Critical Access Hospitals
CMS uses data from the worksheet to: Calculate the amount of a hospital’s
EHR incentive payment Determine the amount that a
hospital will be paid from the Medicare uncompensated care pool
DSH Change Payments to a hospital cannot
exceed the uncompensated costs of furnishing hospital services by the hospital to patients who are Medicaid-eligible or have no third-party coverage
Worksheet S-10
27
1American Institute of CPAs #AICPA_HEALTH
CMS Form 2552, Worksheet S-10
EHR payments depend on the amount of charity care a hospital provides.
• Inpatient Medicare Part A + Part C Days
• Total charity care charges (Line 20 of S-10)
28
1American Institute of CPAs #AICPA_HEALTH
CMS Form 2552, Worksheet S-10
DSH payments reduced 75% beginning in 2014• Portion of the reduction is returned as
an additional payment for continued uncompensated care costs
• Payment from the pool is determined by:- Hospital’s percentage change in the
% of uninsured from 2013- Hospital % of aggregate
uncompensated care costs
29
1American Institute of CPAs #AICPA_HEALTH
CMS Form 2552, Worksheet S-10
• Uninsured Patients: list patients’ total charges
• Insured Patients: patients covered by a public program or private insurer with which the provider has a contractual relationship
Hospital Uncompensated and Indigent Care DataUncompensated and indigent care cost computation
Line Item DescriptionUninsured Patients
Insured Patients Total
20 Total initial obligation of patients approved for charity care (at full charges excluding non-reimbursable cost centers) for the entire facility
21 Cost of initial obligation of patient approved for charity care (line 1 * line 20)
22 Partial payments by patients approved for charity care
23 Cost of charity care (line 21 minus line 22)
30
1American Institute of CPAs #AICPA_HEALTH
GAAP/Community Benefit Reporting
GAAP
No revenue for charity care recognized on Financial Statements – only footnote disclosure
Charity care defined as “healthcare services that are provided but are never expected to result in cash flows” Charity care is provided to a patient with
demonstrated inability to pay
New amendment to ASC 954 requires cost be used as measurement Includes both direct and indirect costs Must disclose method used to determine cost
31
1American Institute of CPAs #AICPA_HEALTH
GAAP/Community Benefit Reporting
Medicaid and other means-tested programs shown as gross charges less contractual and other adjustments
Amounts reported on the accrual basis Contractual and other adjustments can be based
on estimates Bad debts shown as a reduction in net patient
revenue (for years ending after December 15, 2012)
GAAP
32
1American Institute of CPAs #AICPA_HEALTH
GAAP/Community Benefit Reporting
No specific standards for reporting Usually prepared by hospital marketing
department Many based on charges vs. cost Not all hospitals issue report to community
Community Benefit
Reporting
33
1American Institute of CPAs #AICPA_HEALTH
Reporting Example
Hospital
Actual: Worksheet S-10Uncompensated Care
Actual: Form 990 Schedule H Charity Care
Proposed Requirement: Charity Care Expense at 5% of Total Patient Revenue
Hospital A $40,851,133 $18,343,174 $53,385,064
Hospital B $21,858,117 $12,959,865 $59,300,452
Hospital C $244,583,485 $137,924,438 $226,156,541
34
1American Institute of CPAs #AICPA_HEALTH
Economic Value of Community Benefit
35
1American Institute of CPAs #AICPA_HEALTH
Community Benefit ValuationQualitative
Quantitative
Economic Value
36
1American Institute of CPAs #AICPA_HEALTH
Qualitative Factors
Proximity to Community Population• Can residents get to the facility with relative
ease?
Services Available to the Community• Can resident use the services provided?• Are there enough resources for residents?• Ability for organization to attract, retain, and
grow talent. (No Docs, No Health Services)
37
1American Institute of CPAs #AICPA_HEALTH
Qualitative Factors
Charity Care
Economic Impact
38
1American Institute of CPAs #AICPA_HEALTH
Value Determination
Ultimate goal is to determine• Is the community better off
because of the…- Hospital?- Affiliation?- Merger?
39
1American Institute of CPAs #AICPA_HEALTH
Hospital Acquisition LawsMany states, such as Georgia and Louisiana, have hospital conversion laws whereby the Attorney General must review all transactions related to the acquisition or sale of assets of a non-profit hospital within the state to determine that sufficient community benefit will stem from the transaction.• In Georgia, the Attorney General must conduct a public hearing “to
ensure that the public’s interest is protected when the assets of a nonprofit hospital are acquired by an acquiring entity by requiring full disclosure of the purpose and terms of the transaction and providing an opportunity for local public input.”
• The statute continues the public interest emphasis by providing further that the “disposition of a nonprofit hospital to an acquiring entity shall not be in the public interest unless there has been adequate disclosure that appropriate steps have been taken to ensure that the transaction is authorized, to safeguard the value of charitable assets, and to ensure that any proceeds of the transaction are used for appropriate charitable healthcare purposes.”
40
1American Institute of CPAs #AICPA_HEALTH
Community Benefit Uniform Message
1American Institute of CPAs #AICPA_HEALTH
Develop a Workplan
#
Identify Key Stakeholders
#
Identify Timeline
#
Identify Reports
#
Develop a Reconciliation
• Internal Reports
• External Reports
• Audited Financial Statements
E.g., Decision Support, Finance, Marketing
41
1American Institute of CPAs #AICPA_HEALTH
Reconciliation Example Schedule
S-10 Form 990
Sch H Difference Cost-to-Charge Ratio Total Expenses A 112,585,996 112,339,761 246,235 1
Less: Bad Debt B (19,247,068) (19,247,068) Non-Allowable costs C (2,432,568) Non patient care activities E (849,936) (2,001,826) Medicaid Provider Taxes F (1,054,053) (1,054,053) Community benefit expenses G (119,456) Total Adjusted Cost H 89,002,371 89,917,358 (914,987) Total Patient Charges J 387,479,075 387,479,077 (2) Less: Non patient related charges K (6,069,922) - Total Adjusted Charges L 381,409,153 387,479,077 (6,069,924) 2
CCR M = (H/L) 0.233351 0.232057
MedicaidGross Medicaid Revenue (Medicaid Charges) N 38,392,982 39,442,000 (1,049,018) 3
Net Medicaid Revenue O 6,352,465 6,336,426 16,039 4
Cost-to-Charge Ratio (CCR) M 23.3351% 23.2057%Medicaid at Cost P = (M x N) 8,959,057 9,152,805 (193,748)
Charity CareCharity Care Charges Q 18,659,071 25,342,815 (6,683,744) 5
Cost-to-Charge Ratio (CCR) M 23.3351% 23.2057%Charity Care at Cost R = (M x Q) 4,354,121 5,880,986 (1,526,865)
1 Expenses for Schedule H are from Audited Financial Statements 2 Patient Charges for the Schedule H include gross inpatient and outpatient revenues.
5 Charity Care Charges per S-10 do not include amounts for indigent.
3 External data (Summary Claims reports) is used to report Medicaid Revenue on S-10, whereas internal sources (financial statements) are used to report for on Schedule H. Differences relate to claims lag or payor classification.4 The HS&R Report was used to report Net Medicaid Revenue for the S-10, whereas internal financial statements/general ledger reports were used for Schedule H.
42
1American Institute of CPAs #AICPA_HEALTH
Educate the C-Suite and the Board
Share listing of reports
Prepare for answering questions
from stakeholders,
reporters, government officials, etc.
Share Timeline
Share and discuss
reconciliation
43
1American Institute of CPAs #AICPA_HEALTH
Summary
So what does the “community benefit” mean? We have to understand it in context.
To value the economic benefit of community benefit, we have to include qualitative and quantitative factors.
In reporting community benefit we have to be aware of the nuances between the various reporting mechanisms and reconcile those differences in a uniform message to the organization.
44
1#AICPA_HEALTH
David McMillan, CPAPrincipal, Pershing Yoakley & Associates, P.C.
(865) [email protected]
45