Community Benefit Assessment

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Chapter 5

• Community Benefit Assessment

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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.

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Outline

• Background
• Estimating Benefits Provided Case Study
• Estimating Benefits Received Case Study
• National Data
• Summary Conclusions

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Background
Why the Interest in Community Benefits?
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• Federal and State
• Governments Need Cash

• 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.
• 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.

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1. Healthcare Costs Are Rising

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1. Voluntary Nonprofits Dont Look Different From
   Investor-Owned Hospitals

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.
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1. 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
CaliforniaReport 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
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Background
What Is Happening?
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1. Court cases on tax-exempt status

• Illinois Supreme Court upheld denial of property
  tax exemptionMarch 2010

1. State efforts

• Detailed community-benefit requirement
• CA, ID, TX, IL, IN, NY, PA, WV,
  MD, NH
• Less detailed community-benefit requirements
• WY, CO, MS, AL, ND

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1. The 1969 IRS Community Benefit Standard Revenue
   Ruling 69-545

• IRS recognized five factors that would support a
  nonprofit hospitals tax exempt status
• the operation of an emergency room open to all
  members of the community without regard to
  ability to pay
• a governance board composed of community members

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1. The 1969 IRS Community Benefit Standard Revenue
   Ruling 69-545

• the use of surplus revenue for facilities
  improvement, patient care, medical training,
  education, and research
• the provision of inpatient hospital care for all
  persons in the community able to pay, including
  those covered by Medicare and Medicaid
• an open medical staff with privileges available
  to all qualifying physicians.

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1. H.R. 3590 Additional Requirements for Charitable
   Exemption

• Meets the community needs assessment requirements
  
• Conducts the assessment every two years
• Adopted an implementation strategy
• Input from community
• Made available to public
• Meets the financial assisted policy requirements
• Develop, follow, and communicate a formal charity
  care policy

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1. H.R. 3590 Additional Requirements for Charitable
   Exemption

• Meets the requirements on charges
• Limits charges to emergency and other medically
  necessary care to lowest amount for individual
  with insurance (prohibits use of gross charges)
• Meets the billing and collection requirement
• Does not engage in extraordinary collection
  efforts until financial assistance policy
  eligibility is exhausted

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5) Worksheet S-10 of Medicare Cost Report

• Information on Medicaid / indigent care programs
  / uncompensated care
• Revisions to this are under review

6) Schedule H of IRS Form 990

• Released in December 2007
• Mandatory filing is tax year 2009 due in 2010
• Complete data may not be available until 2011 at
  the earliest

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Background
What Are the Biggest Lightning Rods?
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1. Large Executive Salaries

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1. Large Profits

• 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
• 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.

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2) Large Profits

• 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.

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1. Large Cash Balances

• 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. Thats more cash than Walt Disney
  Co. has.

1. Low Levels of Charity Care

• 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 hospitals chief financial
  officer. At Northwestern Memorial, the
  percentage of uninsured patients is less than 5.

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Background
What Community Benefits Are Provided?
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1. Charity Care

• Included by IRS / AHA / CHA / VHA / HFMA

1. Bad debt

• Included by AHA
• Not included by CHA / VHA / HFMA
• No position by IRS reported in Part III of
  Schedule H

1. Unreimbursed costs of means tested programs such
   as Medicaid

• Included by IRS / AHA / CHA / VHA / HFMA

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1. Unreimbursed costs of Medicare

• Included by AHA / HFMA
• Not included by CHA / VHA
• No position by IRS reported in Part III of
  Schedule H

1. Other activities

• Cash and in-kind contributions
• Health professions education
• Community health-improvement services
• Community benefit operations
• Medical research
• Subsidized health services

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1. Where Are the Current Dollars?

Figure 51 State Analysis of Charity Care Costs
GAO Analysis of 2006 California, Indiana,
Massachusetts and Texas
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Background
What Benefits Are Received?

• Income tax
• a) Federal
• b) State
• Property tax
• Sales tax
• Tax-exempt financing
• Other

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Background
Estimating Benefits Provided Case Study
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Community Benefit Includes
Traditional Charity Care Unpaid Cost of
Medicaid Medical Education Subsidized Health
Services Community Health Services Cash / In-Kind
Donations to the Community Research
These categories are in accordance with
CHA/VHA guidelines. Medicare shortfall is
excluded from the Community Benefit Report under
these guidelines.
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Charity Care Policy

• Standard Charity Care Program
• Sliding scale discounts within charity policy
  based upon income level as determined by the
  Federal poverty guidelines
• lt 100 100 HCAP
• 100-200 100 Charity
• 201-267 75 Charity
• 268-334 65 Charity
• 335-400 45 Charity

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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

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).
Actual cost to charge calculated by hospital.
This represents a weighted average cost to
charge. HCAP is the State of Ohios 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.
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Unpaid Cost of Medicaid

• Calculation (in millions)
• Costs of Medicaid 38.0
• - Medicaid Payments 31.0
• Net Cost of Medicaid
  7.0

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Medical Education

• Calculation (in millions)
• Medical Education Costs 20.0
• - GME Payments 10.0
• Net Cost of Medical Education
  10.0

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Subsidized Health Services

• Calculation (in millions)
• Cost of Subsidized Health Services
  1.9
• - Revenues (0.1)
• Net Cost of Subsidized Health Services
  1.8

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Community Health Services

• Calculation (in millions)
• Community Health Services 1.0
• Net Cost of Community Health Services 1.0

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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

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Research

• Calculation (in millions)
• Net Unsubsidized Research Cost 0.1

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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
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Background
Estimating Benefits Received Case Study
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Benefits Received Categories

• Real Property Tax
• Sales Use Tax
• Commercial Activity Tax
• Postage
• FUTA

• Tax Exempt Bond Interest Savings
• Local Income Tax
• State Income / Franchise Tax
• Federal Income Tax

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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

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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

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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

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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

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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
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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

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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

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Federal Income Tax

• Calculation (in millions)
• Taxable Income 42.722
• x Tax Rate of 35 35.0
• Federal Income Tax Foregone 14.952

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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

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National Data
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1. The Sample of Hospitals Used

• All PPS acute-care hospitals 2008
• Hospitals removed if did not have Medicaid
  revenues or Medicaid charges reported in WKS S-10
• Data set reduced from 3,478 to 2,423

2) Comparison sample to all US
3,478 Hospitals 3,478 Hospitals 2,423 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
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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
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4) Medicare composition
Medicare Payment to Net Patient Revenue
Investor Owned 25.3
Government 22.0
VNP Church 26.5
VNP Other 24.2
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5) Profit margins median
  Patient Margin (NPR less Cost)
Investor Owner 5.3
Government -4.8
VNP Church -0.5
VNP Other -1.3
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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
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National Data Audited Financial Statements
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Summary Data National Large Systems

• 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
• 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)

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1. 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
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Summary
Community benefit analysis will become more
important in the years ahead
Not-for-profit hospitals must begin to document
the benefits they provide
Comparisons of benefits provided in non-profits
with investor-owned hospitals will be closely
reviewed