1. December 9, 2007 Gregory M. Luce Jones Day
ROUNDTABLE ON LAW & REGULATION: SERVING THE UNINSURED NATIONAL CONGRESS ON THE UN AND UNDERINSURED
December 9, 2007
Gregory M. Luce
Jones Day

2. Allegations Against Not-For-Profit Hospitals
In June 2004, Richard “Dickie” Scruggs and a consortium of lawyers filed more than 70 putative class action suits in federal courts.
The suits Alleged that hospitals violated the terms of their tax-exempt status by charging uninsured patients higher rates than others and by employing abusive collection practices.
Ultimately, more than 600 not-for-profit hospitals in at least 43 states were sued.

3. The Law of Tax-Exempt Status – According to the Plaintiffs
26 U.S.C. § 501(c)(3) represents a contract, or in the alternative, a trust relationship’
§ 501(c)(3) requires
Provision of a specified minimum amount of charity care
Regulated prices for services to the uninsured
Collections practices tailored to avoid demeaning the uninsured

4. The Law of Tax-Exempt Status – The Reality
501(c)(3) organizations must
be organized and operated for certain purposes, including “charitable” purposes
ensure that no part of net earnings inure to any private shareholder or individual
refrain from activities designed to influence legislation or political campaigns

5. The Law of Tax-Exempt Status – The Reality
“Charitable Purpose”
Measured by a “community benefit standard”
Not-for-profit hospitals must promote the health of the community of the whole
There are no specific legal requirements with respect to individual patients.

6. The Law of Tax-Exempt Status – The Reality
The “community benefit standard” is evaluated by weighing whether a hospital
Has a governing body composed of independent community members
Makes medical staff privileges available to all qualified physicians in the area
Operates a full-time emergency room open to all regardless of ability to pay
Admits as patients those able to pay for care
Applies excess funds to expansion, debt, patient care, and medical training, education, and research.
Community benefit does not contemplate charity care.

7. Finding the Appropriate Venue to Address the Un and Underinsured
Federal courts rejected Scrugg’s lawsuits.
501(c)(3) creates neither a contract nor a trust.
Only the IRS can sue to enforce the tax code.
Tax-Exempt status is granted and revoked only by the IRS.
501(c)(3) does not require charity care for patients unable to pay.
Scruggs, however, is “pessimistic that politicians will tackle a system in which 45 million people are without insurance.”

8. The Debate Over Defining “Community Benefit”
Four different perspectives
American Hospital Association (“AHA”)
The IRS
Catholic Health Association (“CHA”)
Congressional Budget Office (“CBO”)

9. The Debate Over Defining “Community Benefit” - AHA
AHA wants to include two additional factors in the community benefit determination
Uncompensated care
Foregone revenue due to charity care and bad debt.
Equaled $31.2 billion in 2006, or 5.7% of total expenses.
Underpayments
The difference between costs incurred and the reimbursement received from Medicare and Medicaid.
Equal to $29.9 billion in 2006.

10. National Uncompensated Care Based on Cost (1980-2006)
Year
Number of Registered Community Hospitals
Uncompensated Care Cost ($B)
% of Total Expenses
1980
5828
$3.9
5.1%
1985
5729
$7.6
5.8%
1990
5370
$12.1
6.0%
1995
5166
$17.5
6.1%
2000
4915
$21.6
2005
4936
$28.8
5.6%
2006
4927
$31.2
5.7%
NOTE: Uncompensated care includes both charity care and bad debt expense.
Source: Health Forum, AHA Annual Survey Data,

11. National Government Underpayment for Medicare and Medicaid (1980-2006)
Number of Registered
Underpayment ($B)
Year
Community Hospitals
Medicare
Medicaid
Total
2000
4915
$1.4
$2.6
$4.0
2001
4908
$2.4
$2.1
$4.5
2002
4927
$3.4
$2.3
$5.7
2003
4895
$8.1
$5.0
$13.1
2004
4919
$15.0
$7.1
$22.1
2005
4936
$15.5
$9.8
$25.3
2006
$18.6
$11.3
$29.9
NOTE: Medicare and Medicaid payments include all applicable payment adjustments (Disproportionate Share, Indirect Medical Education, etc.). Payments include both fee-for-service and managed care payments.
Source: Health Forum, AHA Annual Survey Data,

12. The Debate Over Defining “Community Benefit” - IRS
The IRS does not include bad debt or underpayments in community benefit.
In 2006, the IRS initiated the Hospital Compliance Project to study community benefit.

13. The Debate Over Defining “Community Benefit” - IRS
Findings of the Hospital Compliance Project
Considerable variation among hospitals in defining uncompensated care, which totaled 56% of reported community benefit.
Average of 7.44% of hospital revenue was spent on uncompensated care.
Average of 9.66% of patient visits resulted in uncompensated care.
IRS proposed creating a Schedule H for Form 990 on which hospitals can report efforts to meet community benefit standard.

14. Reported Community Benefits by Category
Category of Reported Expenditure
# of Respondents
Reporting Such
Expenditures
% of 487
Respondents
Aggregate
Reporting
(487 hospitals)
% of Total
Community Benefit
Uncompensated Care
472
97%
$5.2 billion
56%
Medical Education & Training
368
76%
$2.1 billion
23%
Medical Research
101
21%
$1.4 billion
15%
Studies on Unmet Comm. Needs
134
28%
$6.4 million
<1%
Immunization Programs
197
40%
$12 million
Newsletters & Publications
364
75%
$32 million
Medical Screenings
369
Lectures, Seminars, Educational Programs
377
77%
$54 million 1%
Improving Access to Health Care
264
54%
$207 million 2%
Other Health Promotion Activities
154
32%
$246 million 3%
Total Community Benefit Expenditures
479
98%
$9.3 billion
100%
NOTE: Components of uncompensated care not explicitly or consistently defined.
Source: IRS Hospital Compliance Project, Interim Report, at 51.

15. Percentage of Total Revenue Spent on Uncompensated Care
Percentage of Hospitals
Percentage of Total Revenue Spent
NOTE: Components of uncompensated care not explicitly or consistently defined.
Source: IRS Hospital Compliance Project, Interim Report, at 24.

16. Percentage of Total Patient Visits Resulting in Provision of Uncompensated Care
Percentage of Hospitals
Percentage of Patient Visits
NOTE: Components of uncompensated care not explicitly or consistently defined.
Source: IRS Hospital Compliance Project, Interim Report, at 25.

17. The Debate Over Defining “Community Benefit” - CHA
In 2004, CHA issued guidelines for all Catholic hospitals to use in reporting community benefit.
Similar to IRS in excluding bad debt and Medicare underpayments.

18. The Debate Over Defining “Community Benefit” - CHA
CHA Guidelines for calculating Charity Care as part of community benefit:
Hospitals should include costs associated with
Providing free care to the uninsured;
Providing discounts to the uninsured;
Forgiving charges or providing discounts to qualifying low-income underinsured;
Medicaid underpayments and underpayments from other indigent care programs.

19. The Debate Over Defining “Community Benefit” - CBO
The CBO has no official position on what should be included in community benefit.
In 2006, the CBO released its report Nonprofit Hospitals and the Provision of Community Benefits that compared not-for profit hospitals with for-profit hospitals in terms of community benefit.

20. The Debate Over Defining “Community Benefit” - CBO
Key findings from the CBO report
Nonprofits provided higher levels of uncompensated care than similar for-profits.
Nonprofits are more likely to provide certain specialized services.
Nonprofits care for fewer Medicaid patients as a share of total patients.
Nonprofits tend to operate in areas with higher incomes, lower poverty rates, and lower rates of uninsurance than for-profits.

21. The Debate Over Defining “Community Benefit” - CBO
Estimated value of tax exemptions for nonprofit hospitals in 2002
Federal exemptions
$2.5 billion in corporate income tax
$1.8 billion in tax-exempt bond financing
$1.8 billion in charitable contributions
State exemptions
$.5 billion in corporate income tax
$2.8 billion in sales tax
$3.1 billion in property tax
Total: $12.6 billion

22. Burdens on the Nonprofit Health Care Industry
Problems with the proposed IRS Form 990 Schedule H
AHA and 300+ members of Congress have urged the IRS to redesign the proposed Schedule H.
Does not include bad debt expense or Medicare underpayments
Demands expansive and burdensome information
AHA is lobbying for less restrictive criteria and more time to adopt the new reporting rules.

23. Burdens on the Nonprofit Health Care Industry
Local Attempts to Tax Hospitals
Cook County, Illinois has studied and considered taxing nonprofit hospitals to generate an estimated $240 million in annual revenue.
Champaign County, Illinois Board of Review revoked Provena Covenant Medical Center’s state nonprofit status because of arrangements with for-profit providers and the low level of charity care it provided.
In Provena Covenant Med. Ctr. v. Illinois Dep’t of Revenue, an Illinois Court of Appeals held that there was “uncontested evidence” that Provena satisfied the state’s requirements for the exemption. An appeal to the Illinois Supreme Court is pending.

24. Burdens on the Nonprofit Health Care Industry
Sen. Charles Grassley (R-IA) has proposed that nonprofit hospitals should provide 5% of annual patient revenue as required charity care.
Costs of defending litigation like the Scruggs suits.
States vary greatly in their oversight of how nonprofit hospitals determine community benefit.

25. Community Benefit Reporting by State – States with Mandatory Reporting
Government sponsored health care
Other community benefits (net expense)
Charity Care
Bad Debt
Medicare shortfall
Medicaid shortfall
Other public programs shortfall
Community health services
Health professions education
Subsidized health services
Research
Financial & in-kind contributions
Community-building activities
Community benefit operations
CHA/VHA Method X
AHA Method
California
Connecticut*
Georgia*
Idaho**
Illinois**
Indiana
Maryland
New Hampshire
New York*
Rhode Island
Texas
Washington
* These states have mandatory reporting of community benefits, but do not have a standard form for reporting.
** ID requires reporting by hospitals operating 150 or more beds; IL requires it for hospitals with more than 100 beds.
Source: Minnesota Hospitals: Uncompensated Care, Community Benefits, and the Value of Tax Exemptions, Minnesota Department of Health, January 2007, at 22.

26. Community Benefit Reporting by State – States with Voluntary Reporting
Government sponsored health care
Other community benefits (net expense)
Charity Care
Bad Debt
Medicare shortfall
Medicaid shortfall
Other public programs shortfall
Community health services
Health professions education
Subsidized health services
Research
Financial & in-kind contributions
Community-building activities
Community benefit operations
CHA/VHA Method X
AHA Method
Massachusetts
Michigan
Missouri
Nebraska
North Carolina
Oregon
Pennsylvania*
Tennessee
Utah*
Wisconsin
* These states do not have mandatory reporting, but nonprofit hospitals must provide a minimum level of community benefit in order to retain their exemptions from property taxes.
Source: Minnesota Hospitals: Uncompensated Care, Community Benefits, and the Value of Tax Exemptions, Minnesota Department of Health, January 2007, at 22.