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AHA: New IRS Method Doesn't Show True Costs of Charity Care

Cheryl Clark, for HealthLeaders Media, March 8, 2010

Schedule H, the Internal Revenue Service's new method of quantifying nonprofit hospitals' charity care and community benefit, fails to meet its goal and should be changed, the American Hospital Association said.

Instead of giving American taxpayers a view of the value of hospital contributions that individual hospitals and hospital systems provide, Schedule H on Form 990s, will tell only a portion of the story, said Melinda Reid Hatton, AHA senior vice president and general counsel.

Hatton made her comments to Douglas Shulman, IRS Commissioner, in a March 5 letter.

In the letter, she pointed to a survey from the Urban Institute, conducted at the AHA's request, which found major flaws in the way Schedule H gathers information from individual hospitals within hospital systems, which represent 60% of all U.S. nonprofit hospitals. The Institute visited 12 large hospital systems and then conducted an Internet survey of 210 systems with three or more nonprofit hospitals, and obtained a 36% response rate.

"In our survey, 34% of systems or their hospitals reported that their Schedule H would not include some expenditures that convey a public benefit, and were not undertaken for economic gain," according to the Institute report by Bradford H. Gray and Ashley Palmer entitled "Does It All Add Up?" The article is published in the March issue of the magazine, Trustee.

"What we found raises questions about the usefulness of Schedule H, particularly with regard to systems," the Institute report said. It will be "disappointing to those hoping for a reliable tool to accurately capture and compare community benefits."

Hatton pointed to the Institute's finding of a major problem in the way Schedule H requires reporting "solely by Employer Identification Number (EIN). We believed that most hospital systems have more than one EIN. Because of the EIN-based filing requirement, hospital systems would be filing multiple forms with no means to connect the different filings, and with no means to explain or compensate for the skewed results of the multiple filings."

Benefit programs will be reported by each nonprofit hospital, which misses charity efforts or community projects produced by the larger hospital system.

According to the Institute's report, "Systems also assist their hospitals in important ways that are only indirectly related to community benefit, but may be very important to the communities in which the hospitals are located. These include providing economies of scale, which can reduce hospitals' operating costs and in some cases help enable the survival of financially precarious hospitals.

"They may also facilitate access to capital that supports the full range of hospitals' activities, including community benefit."

Schedule H also does not provide a vehicle to reflect bad debt expense and the shortfall between what Medicare pays a nonprofit hospital to provide care, and the cost the hospital incurs to provide that care, the report said.

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