While we are seeing more for-profit entities in the U.S. health and human service system, the majority of service delivery is by non-profit entities that qualify for tax-exempt status. The Patient Protection & Affordable Care Act (PPACA) brought a new standard for qualifying for federal tax-exempt status, including establishing written financial assistance and emergency medical care policies; limiting amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy; making reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions against the individual; conducting a community health needs assessment; and adopting an implementation strategy at least once every three years.
But, state and local governments do not automatically accept the PPACA definition for qualification for tax-exempt status (see PPACA & Tax-Exempt Status – More On The Horizon and Exemption Information If Your State Didn’t Expand Medicaid) and have set standards of their own. This has led to a “variable” landscape where tax-exempt status is concerned.
At the federal level, the PPACA may not be the last word. A handful of senators are pressuring the Internal Revenue Service (IRS) to clarify whether hospitals are actually meeting their charity care requirements and if the agency is following current policy requirements if they do not meet the requirements (see GOP Senators Press IRS On Enforcement Of Community Benefit Standards).
There is also new activity at the state level. Four hospitals in California recently asked the Attorney General for a reduction in the amount of charity care they are required to provide. While three of the hospitals asked for about a 50% reduction, one hospital asked for a 79% reduction in their charity care requirements (see 4 California Hospitals Ask AG To Reduce Charity Care Requirements: 5 Things To Know). And, the State of Pennsylvania notified hospitals in late December that they must inform consumers about whether or not the consumer qualifies for the hospital charity care program. Failure to inform consumers about the program and whether or not a consumer qualifies will limit the hospital’s ability to claim reimbursement from the state’s uncompensated care fund (see Pennsylvania DHS Says Hospitals Must Notify Consumers Of Charity Care Status).
So how much “charity care” do tax-exempt provider organizations provide? Modern Healthcare reported that the largest 20 health systems in the U.S. attributed 1.4% of their collective operating revenue to charity care in 2016—about the same amount as 2015 (see Charity care spending flat among top hospitals). The amount of operating revenue attributed to charity care varies dramatically by hospital, from 5.36% all the way to 0.33%. However, how charity care is defined varies from hospital to hospital. One hospital’s bad debt (medical bills the hospital doesn’t expect to collect on) may be another’s charity care. Additionally some hospitals calculate charity care at the top level of reimbursement rather than what they actually would have been paid.
Many executives of specialty provider organizations may ask—why does this matter for my strategy? James Stewart, President and Chief Executive Officer of Grafton Integrated Health Network and Thomas A. Leach, Chief Financial Officer of Pathways, Inc. explored this question at The 2018 OPEN MINDS Performance Management Institute during their session, Non-Profit Organizations & Community Benefit: A Guide To Tax-Exempt Status, Charity Care & Community Benefit.
Mr. Stewart explained that the challenges hospitals are facing around charity care are also relevant to specialty provider organizations, particularly those where the state or local governments are challenging organization’s tax-exempt status. To prepare, Mr. Stewart suggested that non-profit organizations should attempt to quantify their community benefit. For Mr. Stewart’s organization, this is difficult because of their specialty—children with the highest level of needs who cannot be served by, or have been kicked out of, other residential facilities, and many of whom come from out of state. As a result, his organization has to quantify other factors when it comes to “benefit” to the local community like the emergency services they provide to foster children, as well as how the organization supports the local community through other means.
Mr. Leach’s organization, Pathways, took another track. Pathways benefit to the community is clear, as a large community mental health center in 10 counties in northeast Kentucky. His organization has decided to improve their reach and make their community benefit known by participating in the Community Health Needs Assessments (CHNAs) conducted by the local hospitals in their region. As part of the CHNA requirements, hospitals must also mention/involve partnerships with the community, solicit feedback from the community and stakeholders, and make the report publicly available. Mr. Leach explained that in Pathways’ operating area, there are four hospitals. For two of the hospitals, Pathways participated directly in the assessment. In another, Pathways did not actively participate but was listed in the final report; and in another, Pathways neither participated, nor was listed.
With the changing health and human service landscape and the increasing pinch of state and local governments for tax revenue, the issues around what (and how) organizations qualify for tax-exempt status will continue to be an issue. Understanding the current (and any proposed) related regulations in your state and tracking the related court cases in your jurisdictions are critical to managing any proposed challenges. And, in what I consider to be just good practice for any non-profit organization, the ability to quantify your contributions to the community should be standard operating procedure.
For more on the topic of tax-exempt status for health and human service organizations, check out:
- The 2017 Tax Bill & Its Effects On Non-Profits, Children, & Families
- Planning For Long-Term Mission Sustainability
- Michigan State Supreme Court Clarifies Test For Non-Profit Charity Property Tax Exemption
- ‘Dynamic’ Challenges Face 1.5 Million Nonprofits In The United States
- IRS Investigating Tax-Exempt Status Of Non-Profit Organization Good Days
- Non-Profit Health & Human Service Provider Organizations Report Service Fees Are 50% Of Current Funding
- Oregon Hospitals Spent $157 Million On Charity Care In 2015, Down 37% From 2014
- The Kerfuffle About ‘Non-Profit’ Profits
- American Hospital Association Challenges IRS Denial Of Tax-Exempt Status To Non-MSSP ACOs
- The IRS’ ACO Tax-Exempt Issue & The Implications For Provider Networks
And join us in Gettysburg, Pennsylvania on September 18 at The 2018 OPEN MINDS Executive Leadership Retreat for the session, “Non-Profit Board Management: Keys To Attracting & Managing A Board That Can Operate In A Competitive Market.”