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.
2. David W. McMillan, CPA
PYA 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.
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3. 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 CSuite, and the Board in preparing a uniform
message.
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4. Agenda
Importance and Meaning of Community Benefit
Federal Reporting Nuances for Community Benefit
Economic Value of Community Benefit
Community Benefit Uniform Message
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6. 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
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7. Public Perception
Narrow interpretation
= charity care
Broad interpretation
= virtually everything a
non-profit hospital does
Most common
perception - mixture of
the two interpretations
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8. 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 notfor-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.
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9. 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.
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10. 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
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11. What is Community Benefit?
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12. 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?”
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13. What is required for federal tax exemption?
1
Neither the Internal Revenue Code nor the underlying
regulations explicitly provides for the exemption of
non-profit hospitals from federal income taxation.
2
We have long recognized that hospitals may quality
for exemption under section 501(c)(3).
3
Five Factors within the Community Benefit Standard
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14. The Community Benefit Standard - 5 Factors
1
2
A community board
An open medical
staff
4
The admission of all
types of patients
including those able to
pay for care either for
themselves or through
third-party payers
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3
A full-time
emergency room
open to all
regardless of ability
to pay
5
How excess funds are
used, such as for
expansion and
replacement of existing
facilities and equipment,
medical training, education,
and research
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15. Other Factors
Facts and circumstances
determination, with no one
factor controlling
Exemption also based on
providing charity care
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16. 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
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17. Distinguishing Tax-Exempt from For-Profit
An 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.
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18. 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.
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19. 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.”
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20. 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
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22. Required Reporting
IRS Form 990, Schedule
H, Hospitals
Medicare Cost Report –
CMS Form 2552, Worksheet S-10
GAAP/Community Benefit
Reporting
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23. 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
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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.
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24. 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.
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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.
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25. Reporting Period Differences
IRS Form 990,
Schedule H
Filed annually
Based on FYE
Electronic Filing
Due Dates: up to 11
months after FYE
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CMS Form 2552,
Worksheet S-10
Filed annually
Period can be
shorter
Electronic Filing
Due dates: 5
months after FYE
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26. 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
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27. IRS Form 990, Schedule H
Financial
Assistance at
Cost[1]
Line 7a
Schedule H Part I Line 7a-d
Gross patient charges at the full established rates[4]
Ratio of patient care cost to charges
Estimated 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 programs
Revenues received from a state organization to directly offset revenue for
financial assistance
Other direct offsetting revenue
Total direct offsetting revenue
Column D
Medicaid[2]
Other Meanstested
Government
Programs[3]
T otal
Line 7b
Line 7c
Line 7d
X
=
+
=
+
+
=
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.
*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.
*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.
[5] Do not include bad debt expense in this total.
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28. CMS Form 2552, Worksheet S-10
Required by all acute care
hospitals, including Critical
Access Hospitals
CMS uses data from the worksheet to:
Worksheet
S-10
- 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 thirdparty coverage
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29. 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)
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30. 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
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31. CMS Form 2552, Worksheet S-10
Hospital Uncompensated and Indigent Care Data
Uncompensated and indigent care cost computation
Line Item
Description
20
Partial payments by patients approved for charity care
23
Total
Cost of initial obligation of patient approved for charity
care (line 1 * line 20)
22
Insured
Patients
Total initial obligation of patients approved for charity care
(at full charges excluding non-reimbursable cost centers)
for the entire facility
21
Uninsured
Patients
Cost of charity care (line 21 minus line 22)
• 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
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32. 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
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33. GAAP/Community Benefit Reporting
GAAP
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)
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34. GAAP/Community Benefit Reporting
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
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35. Reporting Example
Hospital
Actual:
Worksheet S-10
Uncompensated
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
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38. 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)
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40. Value Determination
Ultimate goal is to
determine
• Is the community better off
because of the…
Hospital?
Affiliation?
Merger?
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41. Hospital Acquisition Laws
Many 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.”
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43. Develop a Workplan
Identify Key
Stakeholders
Identify
Reports
• External
Reports
Develop a
Reconciliation
#
• Internal
Reports
#
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#
#
E.g.,
Decision
Support,
Finance,
Marketing
Identify
Timeline
• Audited
Financial
Statements
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44. Reconciliation Example
Schedule
S-10
Form 990
Sch H
Difference
Cost-to-Charge Ratio
Total Expenses
Less: Bad Debt
Non-Allowable costs
Non patient care activities
Medicaid Provider Taxes
Community benefit expenses
Total Adjusted Cost
Total Patient Charges
Less: Non patient related charges
Total Adjusted Charges
CCR
A
B
C
E
F
G
H
J
K
L
M = (H/L)
112,585,996
(19,247,068)
(2,432,568)
(849,936)
(1,054,053)
112,339,761
(19,247,068)
89,002,371
387,479,075
(6,069,922)
381,409,153
0.233351
(2,001,826)
(1,054,053)
(119,456)
89,917,358
387,479,077
387,479,077
0.232057
N
O
M
(M x N)
38,392,982
6,352,465
23.3351%
8,959,057
Q
M
R = (M x Q)
18,659,071
23.3351%
4,354,121
246,235
1
(914,987)
(2)
(6,069,924)
2
39,442,000
6,336,426
23.2057%
9,152,805
(1,049,018)
16,039
3
25,342,815
23.2057%
5,880,986
(6,683,744)
Medicaid
Gross Medicaid Revenue (Medicaid Charges)
Net Medicaid Revenue
Cost-to-Charge Ratio (CCR)
Medicaid at Cost
P=
4
(193,748)
Charity Care
Charity Care Charges
Cost-to-Charge Ratio (CCR)
Charity Care at Cost
1
2
5
(1,526,865)
Expenses for Schedule H are from Audited Financial Statements
Patient Charges for the Schedule H include gross inpatient and outpatient revenues.
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.
5
Charity Care Charges per S-10 do not include amounts for indigent.
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45. Educate the C-Suite and the Board
Share listing
of reports
Share and
discuss
reconciliation
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Share
Timeline
Prepare for
answering
questions
from
stakeholders,
reporters, gov
ernment
officials, etc.
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46. 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.
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The Community Benefit Standard was set out in 1969 in a revenue ruling (Rev. Rul. 69-545).
The community benefit standard is the center of what concerns people about non-profit hospitals, including the cost and delivery of care and the treatment of patients when it comes to billing and collection. To some, community benefit should be narrowly interpreted to equate with charity care; to others; it should be broadly construed to encompass virtually everything a non-profit hospital does. And there are still others that believe it fits somewhere in the midst of these competing interpretations.
Hospitals are a bit different from other charities. We ordinarily expect a charity to provide for a charitable class of people – a prime example is providing food, clothing and shelter to the poor or distressed. This is not necessarily the standard for a nonprofit hospital. Instead, the non-profit hospital is required to show it benefits the community it serves through the promotion of health in its community. Thus, in determining community benefit, the hospital may include services provided to persons commonly thought of as being outside the traditional definition of a charitable class – the poor or distressed.
So what does “community benefit” mean? We have to understand it in context. Non-profit hospitals operate alongside for-profit counterparts in many parts of the country. To the man on the street, a tax-exempt hospital may look remarkably similar to one that pays tax. And that same man on the street might reasonably ask why the standard discussed previously – that the hospital benefits the community it serves through the promotion of health – would not also be met by a for-profit hospital. So the tax policy and tax administration question that needs to be addressed is: 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? That is where the community benefit standard comes in – to help one make the distinction.
It may be somewhat surprising to learn that neither the Internal Revenue Code nor the underlying regulations explicitly provides for the exemption for non-profit hospitals from federal income taxation. Nonetheless, we have long recognized that hospitals may qualify for exemption under Section 501(c)(3). To qualify as an organization described in Section 501(c)(3), a hospital must demonstrate that it provides benefits to a class of persons broad enough to benefit the community, and it must show that it is operated to serve a public rather than a private interest. In a nutshell, that is the standard – a hospital must show that it benefits the public by promoting the health of that community. The community benefit standard looks at five factors.
The five factors are not the only factors. It is a facts and circumstances determination, with no one factor controlling. The 1969 ruling also modified (but left in place) an earlier revenue ruling that based exemption on providing charity care.
The health care industry has changed since 1969. Medicare and Medicaid now reimburse hospitals for medical care for the elderly and the indigent. Hospitals that participate in Medicare and have an emergency room are generally required – for reasons unrelated to the community benefit standard (EMTALA) – to treat any patient in an emergency condition, regardless of ability to pay.
Provena Covenant Medical Center is a 254 bed non-profit hospital in Urbana, IL. In 2002, the Champaign County Board of Review challenged Provena Covenant's tax-exempt status based on debt-collection tactics and amount of charity care offered. Ultimately, the Illinois Department of Revenue denied Provena Covenant's status, which led to the matter to be considered by the circuit court of Sangamon County, IL, which sided with Provena Covenant. The matter was then considered by the Appellate Court, and later, the Illinois Supreme Court which both rendered decisions against Provena Covenant's tax-exempt status. In a March 18, 2010 judgment by the Illinois Supreme Court, the Court agreed that the Department of Revenue had acted properly in denying charitable and religious property tax exemptions requested by Provena Hospitals. In the judgment, the Court noted that “a mere 302 of its (Provena Covenant's) 110,000 admissions received reductions in their bills based on charitable considerations.” The court added, “uninsured patients were charged PCMC’s “established” rates, which were more than double the actual costs of care. When patients were granted discounts at the 25 and 50 percent levels, the hospital was therefore still able to generate a surplus.” In response, the head of Provena Covenant Medical Center said, “We are deeply disappointed that the Illinois Supreme Court has denied the property tax exemption of Provena Covenant Medical Center,” said Jon Sokolski, Chair of the Board. “Provena…cares for all in our community who need our health services regardless of their ability to pay. In 2008, we provided more than $38 million in free care and other community benefits.”It increasingly appears that federal tax exemption is no longer always dispositive of how a state or local government will regard a hospital.
The House Ways and Means Committee also expressed interest in this issue. In July 2005, then-Chairman Thomas convened a hearing on tax-exempt hospitals and healthcare organizations, and the IRS’s administration of the area. He followed this in December, 2006 with proposed legislation requiring non-profit hospitals to provide a minimum level of charity care to individuals with incomes below the federal poverty limit, and limiting payments to the “average insured rate” for individuals with incomes less than two times the federal poverty limit. Sanctions would have included an excise tax on hospitals and the disallowance of charitable deductions to contributors.
The Form 990, Return of Organization Exempt from Income Tax, was completely redesigned for 2008. One of the goals of the redesign was to use the new 990 to contribute to the review of the community benefit standard. The IRS believed: better data would allow the public, the Congress, the IRS, the States, and other stakeholders to make better-informed decisions about this area. As part of the 990 redesign, the IRS added a new hospital schedule – the Schedule H – that requires non-profit hospitals to report community benefit and other information about themselves.The Schedule H addresses the “what,” the “how,” and the “by whom” aspects of community benefit, but it does not answer all questions pertinent to the debate. There remain some key areas where consensus does not yet exist (such as bad debt).
The quantifiable community benefit identified by hospitals is reported according to specific instructions outlined by the following: Internal Revenue Service, Centers for Medicare & Medicaid Services and Generally Accepted Accounting Principles.
Community Benefit, in the form of charity care, is reported to the Federal Government (and to the public) on each of the forms above. Though the terms the are the same, the definitions and therefore the resulting amounts, differ. Form 990 is a public document. It is available for viewing on GuideStar.org and must be provided by the organization upon request. The Medicare cost report is also a public document and may be requested from a Medicare contractor under the Freedom of Information Act.
Differences in charity care amounts reported on the forms above are attributable to:Variances in the manner in which charity care is defined; andTiming inconsistencies resulting from the varying filing requirements for each of the forms.
This is a summary of the “chart” at the bottom of Schedule H, page 1.
The Cost report is the “stick” and EHR payments and DSH payments (on the next slide) are the “carrot.”
When is an organization required to obtain audited financial statements? There are various external reasons that an audit may be required. Many states have a revenue threshold that would trigger the audit requirement. For example, a New Jersey nonprofit organization that must file a Charitable Registration Form CRI-300R is required to attach a certified audit if its revenue exceeds $500,000 (increased from $250,000 in February 2011). An audit may also be required by an individual or government grantor, which should be addressed in the grant agreement. An organization that receives over $500,000 in federal grants is required to have an annual audit in accordance with OMB A-133. If an organization has bank or other financing arrangements, the lender may require that an annual audit be performed.