Uniform Definitions and Measurements Needed - Number of Hospital Audits Uncertain

On July 19th, shortly after the Minority Staff of the Senate Finance Committee released its discussion paper on its concerns with nonprofit hospitals, the IRS quickly released its scheduled Interim Report on tax-exempt hospitals and community benefit. The Interim Report is part of the IRS's Hospital Compliance Project initiated in 2006 to study section 501(c)(3) hospitals and community benefit, as well as to determine how such hospitals establish and report executive compensation. The Interim Report is based on the IRS's preliminary analysis of data from (1) the responses of approximately 487 tax-exempt hospitals across the country to a May 2006 compliance questionnaire from the IRS and (2) the last Form 990 filed by each of those hospitals. The Interim Report is a summary of the responses received (which have not been verified) and information relating primarily to community benefit (72 of 81 inquires on the questionnaire are aimed at identifying and measuring community benefit). The IRS expressly stated that the Interim Report is not an analysis of perceived problems nor part of any recommended solutions or reporting requirements.

Reponses to the questionnaire reveal that there are a variety of definitions and methodologies used by hospitals to describe and measure community benefit and uncompensated care, as discussed further below. The 11 hospitals which did not respond at all to the questionnaire have been referred to the IRS's Review of Operations unit for additional "follow up." Certain hospitals that did respond to the questionnaire with responses outside the norm may also be targeted by the IRS for follow-up.

A final report from the IRS is due in September 2008, which will include the results of the pending executive compensation examinations as well as those of the forthcoming hospital audits with analysis and presumably the Hospital Compliance Team's recommendations for IRS administrative actions and/or legislation.

Given the recent release of a revised Form 990 (with a new Schedule H requiring a significant amount of information from hospitals) and public statements of IRS and other government officials, it is likely that there will be additional activity and action in this area prior to the final report.

Community Benefit as Reflected in the Interim Report. The Interim Report summarizes hospital responses to each of the questions and gives the number of hospitals responding to each specific question. Community benefit is the primary focus of the Interim Report and uncompensated care is by far the largest component of quantified community benefit - totaling 56 percent of the total community benefit reported. Although 97 percent of the hospitals said they had a written uncompensated care policy and 99 percent reported providing uncompensated care, no uniform definition of what constitutes uncompensated care emerged from the responses.

Even with the divergence of accounting for community benefit and including uncompensated care, emergency room availability, medical research, professional medical education and training and other items the hospitals believed relevant, the IRS noted that about 22 percent of the hospitals reported 1.9 percent or less of their total revenue as spent on community benefit, and another 27 percent of the hospitals reported between 2.0 percent and 4.9 percent of their total revenue being spent on community benefit. By whatever definition and method of quantification, about half of the hospitals reported community benefit "expenditures" of less than 5 percent of total revenue. The median of all hospitals for community benefit expenditures was 5 percent, and the average was 9 percent, of total revenue.

Methodologies Reported Vary. The IRS purposely did not include a definition of uncompensated care in the compliance questionnaire instructions in hope of learning industry practice. Not surprisingly, the responses demonstrate that hospitals (1) use a range of income and asset criteria to establish eligibility for uncompensated care, (2) vary in how they measure and incorporate bad debt expense and shortfalls between actual costs and Medicare or Medicaid reimbursements into their measures, and (3) differ in whether they use charges or costs in their measures. The result of such differences can be seen in the selected areas below:

Bad Debt and Uncompensated Care. 56 percent of the hospitals reported they did not include bad debt expense as uncompensated care. The remaining 44 percent included at least some bad debt expense as uncompensated care. Some of those hospitals converted the debt from charges to cost before reporting it. A significant number of hospitals reported only bad debt from emergency room care as uncompensated care, while one hospital included accounts returned from collection agencies.
Contractual Adjustments as Uncompensated Care. 19 percent of the hospitals reported the difference between hospital charges and the amount private insurance paid or allowed as uncompensated care.
Governmental Adjustments as Uncompensated Care. 20 percent of the hospitals treated the difference between hospital charges and the Medicare/Medicaid reimbursements as uncompensated care.
Private Pay as Uncompensated Care. 51 percent of the hospitals treated the difference between hospital charges and what uninsured or underinsured patients actually paid as uncompensated care. Others only considered the difference between the cost of a service (not its charge) and the amount paid as uncompensated care.

These inconsistencies were of particular concern to the IRS. The director of the IRS's Exempt Organizations division in the press release accompanying the Interim Report stated: "The lack of consistency of uniformity in classifying and reporting uncompensated care and various types of community benefit often makes it difficult to assess whether a hospital is in compliance with current law." The IRS Hospital Project Team had previously recommended a separate Form 990 schedule for hospitals as a way to address the perceived (and with the Interim Report, confirmed) lack of uniformity in definitions and reporting. That recommendation was included as Schedule H in the draft Form 990 released on June 14, 2007. The draft Schedule H requires reporting (at cost) of charity care and other community benefit and requires information regarding charity care policies, revenue profile, bad debt expense, collection practices and certain other activities.

Next Steps. The Interim Report identifies the following next steps for the IRS:

  1. Analyze reported data and adjust treatment of bad debt and shortfalls as uncompensated care to try to develop more meaningful comparisons across the reporting hospitals

  2. Obtain additional research and analyze differences in community benefit expenditure amounts and types and take into account varying demographics such as rural and urban hospitals.

  3. Test the reported community benefit amounts and types by conducting data analysis, compliance checks or examinations of individual hospitals, and by other means.

The data contained in the Interim Report supports much of the draft Form 990 Schedule H conceptual requirements. From the discussion in the Interim Report, the IRS appears open to other activities as constituting community benefit and notes that it is premature to conclude that the reported community benefit accurately portrays the community benefit actually provided by the hospitals. As a result, hospitals should continue to actively communicate to the IRS and the public what they believe to be the appropriate components of and measurements for community benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.