Philanthropic Pains

Francine Machisko

The government may soon ask for payback from non-profit hospitals. In an effort to ensure adequate charity care and better community benefit, the government is eyeing implementing a mandate that would require non-profit hospitals to provide a minimum amount of benevolence in order to get — or retain — tax-exempt status. But new laws could put financially-viable hospitals in jeopardy, and CEOs and CFOs need to be prepared.

Non-profits have been under scrutiny for years. A recent “Wall Street Journal” article showed how tax-exempt organizations were paying out what some consider inflated executive salaries while providing relatively little in terms of charity care or community benefit. Back in 2005, Sen. Chuck Grassley (R-Iowa) commissioned a Government Accountability Office report to investigate the community benefits non-profit hospitals were providing in return for the billions of dollars in tax credits received. The report found wide discrepancies from one organization to another.

After the results were in, Grassley drafted a letter. It was no love letter; he sent copies to executives at 10 of the country's largest non-profit hospitals. In it he asked the executives detailed questions regarding the type of charity care being provided.

Suzanne Lestina

“The bottom line of the report was that there should be some minimum level of either charity care or community benefit that tax-exempt organizations — including hospitals — should be required to provide,” says Atlanta-based Francine Machisko, a senior principal at Noblis who has been in the industry for two decades. Grassley wants 5 percent of non-profit hospital revenue earmarked for community benefit. But the logistics of creating such mandates are far from simple. “One of the problems that we have right now is that how ‘charity care’ and ‘community benefit’ are defined is open to interpretation by organizations,” Machisko says. For example, some hospitals include ‘bad debt’ under the charity care umbrella.

The government is still in the information-gathering stage, but things are moving. This year the IRS is requiring healthcare organizations to fill out a revised 990-D Schedule H, which Machisko says “will hopefully capture this information in a more common methodology.”

Looking to add specificity to loose definitions, the government will soon be ready for down-the-road, non-profit hospital benchmarking. “Perhaps we will have the ability to at least look at some measurement of what healthcare organizations are providing,” Machisko says. “And even if it's not 100 percent accurate, at least it is common. You can look at one organization versus another versus a third.”

Not everyone believes mandates are necessary. Of course, each hospital is unique, and non-profit hospital care does not come as one-size-fits-all, says Suzanne Lestina, technical manager of patient financial services/revenue cycle at the Healthcare Financial Management Association (Westchester, Ill.).

Lestina, who has more than 25 years of healthcare experience, says hospitals have a responsibility to know what the community needs. “That's what community benefit is all about,” she says.

For some hospitals, the challenge will be adjusting to granular detailing and itemization. To be prepared for possible future changes, Lestina says CEOs and CFOs need to take a careful look at who they fit in. “They really need to look at what community benefit means, and what they truly are offering as a community benefit, to ensure that they're following the reporting guidelines.” Lestina says that though hospitals may be offering tremendous unreimbursed services for things such as NICUs, burn units and hyperbaric chambers, she isn't so sure they are quantifying, qualifying and communicating to the public what they are doing.

Machisko agrees that hospital leaders should have an eagle eye on detailing the services they provide to prepare for what may be coming down the road. “They need to be tightening up their policies and tracking all of the community benefits and charity care that they are providing so that they get full credit for what they do,” she says. “It's one thing to say you're doing it, and it's another thing to actually be able to show it. To some degree, they have to do this now because this is part of their IRS reporting. But even so, they need to make sure that they're really capturing everything they do. Now that it's being watched and measured, they really need to hone in on that.”

For other hospitals though, no matter how well they track things, the proposed mandated minimums could spell danger.

Lestina says it's all about location. “Right now, we have at-risk hospitals, simply because of where they are located and the type of patients they serve, which determines disproportional share,” she says. “So if you have a disproportionate-share hospital — a hospital whose primary patient is Medicaid or uninsured — they're already at risk because they're not receiving reimbursement for the services that they are providing,” she says. “And then, on top of it, they have to increase the amount that they're writing off. I think you're going to see hospitals that are already struggling, struggle even more and perhaps force themselves to close. It really and truly depends on where they're located.”

Machisko agrees. “A lot of it, frankly, has to do with location as much as anything else,” she says. “If you are an inner city teaching hospital, you're not going to have any trouble whatsoever meeting those minimum standards. By contrast, if you're a hospital that is primarily serving an upper-middle class area in suburbia, then you might have some difficulty achieving those standards, even if you have the best of intensions.”

As to the idea of mandates in terms of big picture, Machisko supports them. “I think, in theory, it makes sense if you're a tax-exempt organization and you're getting the financial benefits of being a tax-exempt organization, there should probably be at least a commensurate amount of benefits that the community is getting.” However, she points out the mandates will need to be well thought out and fair. “The devil is in the details.”