"Nationwide, hospitals spend an average of 11.3% of their total expenses on benefits to their communities. Direct benefits to patients in financial need, which include free care, financial assistance and spending to fill gaps in Medicaid underpayments, averaged 5.7% of total hospital expenses," according to an April AHA study analyzing the first year of Form 990 and 990 Schedule H reports filed by not-for-profit hospitals.
While the AHA findings are good news, these results are just some of the data that can be unearthed by analyzing Form 990 and 990 Schedule H. What might be worrisome to financial leaders, however, is that the IRS is also digging into the estimated 1,700 Form 990 Schedule H currently filed.
Section 9007 of the Patient Protection and Affordable Care Act sets forth requirements for non-profit hospitals that must be followed to retain tax-exempt status. Filing IRS tax form 990 is mandatory. And so is 990 Schedule H, which gathers information about a hospital through a community health needs assessment, to determine if the organization is truly operating for the community's benefit.
In addition to non-profit hospitals needing to do these CHNAs every three years, organizations also need to publicly publish a financial assistance plan for those in the community who may need it. This plan must include the eligibility criteria for financial assistance, and explain how the hospital calculates patient charges and how patients can apply for assistance.
The paperwork for Form 990 and 990 Schedule H is onerous. So much so, that the American Hospital Association recently released a statement responding to the proposed changes to for 990 Schedule H contending that it leads to redundancies. However, as of now, the filing requirements haven't changed and whether the regulation is redundant or not, failing to adhere to the tax provisions can result in a $50,000 penalty.
Most non-profit hospitals and health systems have filed at least one Form 990 and 990 Schedule H, however, now that the Supreme Court has affirmed the constitutionality of the PPACA, more providers will be pursuing accountable care organizations and which changes how providers get paid. Milton Cerny, attorney at McGuireWoods, LLP in Washington, DC, and a former member of the National Office of the IRS in Washington, DC notes this regulation will have an impact on CEO compensation, joint ventures, unrelated business income tax, and ACOs.
Cerney, who responded to HealthLeaders Media via email, says, "ACOs can qualify under 501(c)(3) if they are certified and meet the standards of CMC; approximately 89 have been so certified. I have not seen any rulings by the IRS as of yet."
Also, finance leaders may want to alert their governing boards to pay particular attention to 501(c)(r) as it deals with improving transparency in transactions. The IRS will be looking to see that boards are doing a thorough due diligence when reviewing transactions, especially as they relate to the community health needs assessment, financial assistance policies, billing and collections, and limitations on charges for medical care.
"We are awaiting the 501(c)(r) regulations. The IRS is issuing guidance and I expect to see a rapid increase of IRS announcements following the Supreme Court Decision," notes Cerny.
In addition to Cerny, four representatives from the accounting and consulting firm Moss Adams, LLP offered their thoughts via email.
The following are the combined answers of Chris Rivard, partner, Rich Croghan, partner, Tracy Paglia, senior manager, and Renie Burbank, senior manager, to five questions on Form 990 and 990 Schedule H:
1. Have non-profit hospitals and health systems taken the necessary steps to meet the parameters of this tax regulation?
Form 990 has been an annual filing requirement for some time; however, it has undergone significant changes over the past few years. All these changes have created new challenges for organizations. One of the biggest changes applies to additional information required from hospitals. Hospitals now need to disclose much more information on their charity care and governance. Our clients are becoming overwhelmed with the changes; they are spending a lot of time gathering the information rather than tending to their organization's mission.
2. How does this tax regulation influence physician employment arrangements?
The Form 990 requires disclosure of compensation paid to physician employees only if they have key roles in the organization. There also may be disclosure of other arrangements with physician groups if they are one of the organization's largest contractors for services.
Due to the public disclosure of Form 990, physician employment arrangements may be approached differently. We are seeing organizations focus on governance, including executive compensation and physician arrangements, and use this as an opportunity to make real improvements. Most organizations now have a documented process on executive or physician compensation. The new disclosures on compensation allow organizations to illustrate the process that they go through in setting executive compensation.
3. What are the main areas that CFOs should watch closely in their current and future employment agreements so they don't run into issues with the IRS?
CFOs should have a clear policy on setting compensation and make sure that the policy is effective and consistently followed. They should consider how that policy may be viewed by outsiders. Further, the CFO can work with the Board so that the compensation of the executives is fairly set and meets the Safe Harbor guidelines provided by the IRS, and approved by the Board or Committee, which should have a set methodology of determining compensation and contemporaneously document the process.
4. With the development of more ACOs, what is the outlook on further review and exemptions/waivers issued related to the current Stark, anti-kickback statutes and IRS requirements?
The IRS continues to be interested in joint ventures between tax-exempt hospitals and for-profit organizations, physician groups included. Form 990 asks about joint ventures and written policies or procedures relating to these joint ventures, and asks if there are revenue sharing arrangements with people or companies with ties to the filing organization. These issues received considerable scrutiny by the IRS back in the 1990s, and we anticipate that the IRS will be closely monitoring new developments and arrangements.
5. What are you hearing from the IRS about expected audit and enforcement activity in this area?
The IRS's 2011 Annual Report and 2012 Workplan released in April indicate that the Service will be reviewing community benefit activities of each hospital as mandated by the PPACA. These reviews are done by the Review of Operations group and do not involve contacting hospitals, but it's possible there will be some hospitals that are referred to other IRS departments for a closer look. Every hospital's return is expected to be reviewed over the 3-year period that began in March 2011.
As of August 15, the first extended due date for Forms 990, 990-EZ, and 990-PF for those with a year end of December 31, 2011 arrives. For those who haven't filed yet for 2011, it's time to do so.
For financial leaders, Form 990 and 990 Schedule H are tax regulations that must be closely watched, as they do impact tax status. Unfortunately the guidelines for this tax regulation are not yet set in stone and the IRS is refining subsections which can influence how an organization operates. CFOs should check periodically for updates on changes to Form 990 and 990 Schedule H by watching the IRS website.
Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
