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July 12, 2007

Comment Period for the Proposed New IRS Form 990 and Schedule H for Hospitals

Overview of the Proposed Form 990 and Schedules
According to the IRS, the redesign of the form was based on three guiding principles: enhancing transparency, promoting compliance with tax-exempt standards, and minimizing the burden on filing organizations. But, many hospitals may find the new form and accompanying schedules quite challenging to complete, especially those hospitals that do not currently submit Community Benefit Reports to the state.

The proposed Form 990 includes a 10-page "core" form and 15 specific additional schedules to complete as appropriate. Most hospitals will have to complete several schedules pertaining to compensation, related organizations, asset transfer/termination of exempt entities, supplemental financial information, and tax-exempt bonds. All hospitals will have to complete Schedule H, which consists of five parts, requiring tax exempt hospitals to report charity care and other community benefits, information on billing and collection, management companies and joint ventures, some narrative responses to various questions about community need and emergency department policies, and information specific to each facility owned or operated by the hospital.   

IHA has identified several major concerns with the proposed new form and Schedule H, in particular, which will be addressed in IHA’s comment letter to the IRS, in addition to other clarification and consistency issues. Several IHA membership groups will review and provide input for the comment letter, but we encourage all hospitals to share their concerns with us.

Part I: Community Benefit Report
IHA’s greatest concern is the lack of Medicare shortfalls and bad debt in the definition of charity care or community benefits.  On average, Illinois hospitals are only reimbursed 90% of the cost of care and subsidize millions in losses from the care of Medicare patients.  This consistent below-cost level of reimbursement goes beyond any possible claims of hospital inefficiency, has been absorbed for numerous years by hospitals, and is reflective of their commitment to the community. Providing care to Medicare patients relieves the federal government of the burden of providing that care directly and should be included as a community benefit, just as any Medicaid shortfall is included.

Additionally, a significant amount of bad debt would likely qualify as charity if the patient's financial circumstances were known.  Patient disclosure of finances is the key to the distinction between charity and bad debt. Hospital bad debt is different from other industries in that hospitals provide care first and then seek to collect payment. This significant amount of unpaid care should be recognized in the community benefit definition.

The Illinois Community Benefits Act, passed in 2003, provides a definition of community benefits that, in addition to areas included in the IRS proposal, includes the unreimbursed costs from Medicare, bad debt, volunteers and language assistance.  The IRS proposed definition will be in conflict with how hospitals are reporting community benefits in Illinois and will create a burden of separate accounting and reporting of community benefits.

Further, the Illinois law exempts for-profit, public, rural, and hospitals with 100 beds or less from reporting community benefits.  This proposed new Form 990 and Schedule H will cause a burden to hospitals that do not currently have a community benefit reporting process in place, especially given the very short time-frame for preparation.

The proposed Schedule H asks for a calculation of each category of community benefit as a percentage of total expenses. The purpose for this requirement is unclear and of concern, as several proposals requiring a certain percentage of community benefits are under discussion in Congress. In addition, the definitions of entities reporting must be clarified to ensure that the community benefits reported here reflect the same entities reporting total expenses in the core form, so that the percent of expenses is comparable.

Part II: Billing and Collections
IHA is greatly concerned about the purpose and definitions contained in this section.  Since bad debt is not included in the definition of charity care or community benefit, the amount of net payment expected from the uninsured will be perceived as much higher than that for other categories of patients. This reporting does not reflect the well-known fact that hospitals only collect a very small percentage of charges from the uninsured.

There should be some type of disclaimer process for hospitals completing this section due to timing and uncertainty of patients' insured status at the time of service.  There are often significant, retroactive adjustments made to contractual allowances due to audits for Medicare and Medicaid, and end of year settlements under insurance contracts, that occur one or more years after the year of service.  In addition, these numbers will not tie back into financial statements given the current definitions.  The cash collected will not correspond to the revenue that was expected as stated in this section.

The definition of insured needs to be clarified to state whether this only pertains to health insurance or whether it includes those covered by workers’ compensation and auto liability insurance as well.  Often, a lengthy time frame is incurred to fully determine whether the services are covered under other insurance products.

Finally, the titles of the lines in Part II need to be revised to reflect the industry terminology.  For example, Medicare and Medicaid do not negotiate "discounts" with hospitals, so referring to the lower reimbursement from these programs as "discounts" is improper and misleading. Early payment discounts should not be included in this line as they are not contractual discounts, but rather, a payor's choice to pay a bill quickly and in full. In addition, the amount of commercial contractual allowances should not be disclosed at all as this is proprietary information that, once publicly known, will serve only to disadvantage hospitals when negotiating with commercial payors.

Part III: Management Companies and Joint Ventures, Part IV: General Information, and Part V: Facility Information
These last three parts of Schedule H do not present the objectionable concerns as the first two parts, but the breadth of information sought by these sections will be overwhelming for hospitals that have multiple management companies and joint ventures, and for hospitals that do not conduct formalized community needs assessments. Part IV requests narrative descriptions of how the organization educates patients about their eligibility for financial assistance under government programs or under the organizations’ own charity care policy, the organization’s emergency room policies and procedures, and "other information important to describing how the organization’s hospital facilities further its exempt purpose." Part V requires a description of the activities and programs conducted at each and every one of the organization’s "facilities," which include all buildings or campuses dedicated to providing medical or hospital care.

Sending Comments to the IRS
To access all of the IRS draft forms and background materials, go to: http://www.irs.gov/charities/article/0,,id=171216,00.html. Questions and comments about the proposed Form 990 and any of the 15 schedules can be directly e-mailed to the IRS at Form990Revision@irs.gov or mailed to:

IRS
Form 990 Redesign, SE:T:EO
1111 Constitution Avenue, NW
Washington, DC 20224

Alternatively, hospitals may contact IHA staff to offer comments which can be incorporated into the IHA comment letter to the IRS. Comments are due to the IRS by September 14, 2007, so hospitals should get their comments/concerns to IHA staff by August 20, 2007 or earlier. Comments may be directed to: Sandy Kraiss, skraiss@ihastaff.org, or 630-276-5522, or Kathleen Pankau, kpankau@ihastaff.org or 630-276-5598.