AKT CPA

Struggling nonprofit hospital considers merger

2012-02-20T14:12:00.000-08:00

The San Francisco East Bay city of Hayward California has had its own hospital, St. Rose Hospital, since 1962 when it was originally sponsored by the Sisters of St. Joseph of Wichita, KS. As a relatively rare independent hospital in an area dominated by Sutter Health and Dignity Health (formerly Catholic Healthcare West), the nonprofit hospital has struggled to stay solvent. According to a recent article in the Mercury News, in any given month, 20 to 35 percent of emergency room patients do not have health insurance and about 12 percent to 15 percent of hospital customers using inpatient services are uninsured. This has lead to a loss of $1 million a month. Without significant ancillary activities or other ventures that can generate steady cash flow those metrics are hard to overcome. The hospital is looking to merge with the local healthcare district - which may give it the life support that it needs to maintain its independence.
The article can be found here: http://www.mercurynews.com/news/ci_19982791

Investigation into nonprofit hospital captive leads to embarrassing disclosure

2012-02-07T10:10:00.000-08:00

Many nonprofit hospitals have offshore captive insurance companies. It is a prudent means of controlling risk and minimizing cost. And, generally speaking, these captive insurance companies require occasional personal attendance by hospital executives to perform the routine corporate maintenance required by any entity. However, the executives at Atlanta based Wellstar Health System may have taken the travel perk to an extreme by spending "tens of thousands of dollars over the last three years on airfare, five-star hotel stays and fancy restaurants in the Caymans, Puerto Rico and the Bahamas" according to local news affiliate WSBTV.

Without additional information it is difficult to know whether this is an abuse of fiscal discretion or simply the ordinary and necessary cost of doing business. Regardless, the real lesson is clear. Presume that your donors, patients and community will ultimately view every transaction - oftentimes without your ability to provde the hospital's side of the story.

Sale of nonprofit hospitals can provide a silver lining to local governments

2012-01-30T09:50:00.000-08:00

While community activists generally bemoan the sale of a nonprofit hospital to large for-profit corporations, the change in tax status can provide a windfall to local coffers.　In York, PA, the transfer of nonprofit Memorial Hospital to publicly traded Community Health Systems will add $34,694 to the Spring Garden Township and $290,819 to the school district - based on the hospital's current assessment. While this may provide little comfort to those who believe that local nonprofits provide the best care, it can be a material difference to cash strapped local governments.　

http://www.ydr.com/local/ci_19830078

Hospitals are hiring...

2012-01-26T15:38:00.000-08:00

This has been a trend for the past several years but it seems to be increasing rather than decreasing. The American Medical News posted an interesting article by Victoria Stagg Elliott suggesting the "Seven Land Mines of Hospital Employment Contracts". One key point I’d add to the otherwise well written article is the fact that the revenue cycle for the average hospital or health system as compared to the revenue cycle of the average medical practice is dramatically different. The sooner physicians are educated about this key difference the better off both sides of the deal are.

http://www.ama-assn.org/amednews/2011/12/19/bisa1219.htm?utm_source=twitterfeed&utm_medium=twitter

http://www.miamiherald.com/2012/01/22/2601913/hospitals-hiring-doctors-to-get.html#storylink=misearch

Colorado Hospital Sells to For-Profit

2011-07-07T10:45:00.000-07:00

In one enormous deal, Hospital Corporation of America and the Colorado Health Foundation created the largest non-profit in the state (more than $2 billion in assets) and, at the same time, will transfer ownership of Denver's largest hospital group. While the transaction sounds monumental, HCA already had operating control of the partnership with the Colorado Health Foundation. Still, it's a continued consolidation of hospitals inside the HCA empire - with more than 160 hospitals and 100 free-standing surgery centers across the US and Great Britain.

http://www.denverpost.com/news/ci_18284169

IPAs on the Rise

2011-06-13T12:22:00.000-07:00

The very competent Victoria Stagg Elliott posted an article on American Medical News highlighting the role IPAs may play in healthcare reform - particularly as they relate to the potential rise of Accountable Care Organizations. The article, which matches our experience with our own clients on the west coast, highlights the growth of IPAs after a decade of relatively flat or declining market share. In many regards, IPAs may end up being the perfect "middleman" between large hospital systems and the physicians they seek to employ. The article can be found here: http://bit.ly/lc2ljr.

Bumps in the Road Turn into Potholes

2011-05-26T15:46:00.000-07:00

The big four clinics/health systems (Cleveland, Mayo, Geisinger and Intermountain Healthcare) are not on board with ACO models.

In a recent interview with Congressional Quarterly, a Mayo spokesman said, "Are we interested? Absolutely! But is it feasible? There'd have to be substantial revisions."

So what are the problems that need to be revised?

Providers want a bonus system with no penalties;

Collecting data on 65 quality measures will take expensive technology and additional workforce members;

Financial solvency requirements would be too hard to meet for all but the largest providers;

A requirement that one quarter of the ACO's governing board be beneficiaries raises concerns;

Basing the improvement measures on the current expenses of providers unfairly treats low cost - high quality providers;

Retrospective assignment of patients and the ability of patients to see non-ACO clinicians without restriction will impact an ACO's cost and quality measures because these patients' experiences will count against the ACO;

Final rules will not be issued before late summer at the earliest. Meeting these requirements, the financial solvency requirements and having all quality metrics in place by the January 1, 2012 start date just doesn't seem possible;

CMS's Innovation Center is undercutting possible participation in ACOs by suggesting it will offer providers funding though demonstration projects have not yet been announced.

As Brent James of Intermountain says: "I look at the ACOs coming out as almost fluff and distraction on the side, not that it's not good but it's just that the mainstream is already moving out there on the front line" to other ideas..."We're way past it."

To read the article in its entirety, follow the below link:

http://www.commonwealthfund.org/Content/Newsletters/Washington-Health-Policy-in-Review/2011/May/May-9-2011/Model-ACO-Health-Centers-Skeptical.aspx

Hospital Mergers in the News

2011-05-16T10:22:00.000-07:00

The Chicago Tribune recently hosted an hour long web chat on hospital sales and mergers. The chat featured Scott Becker of McGuire Woods and Kenneth Robbins of Drinker Biddle. It makes for good reading.

http://www.chicagotribune.com/health/ct-health-chat-hospital-merger,0,6136643.htmlstory

Board of Director's Compensation - In the News Again

2011-04-08T08:46:00.000-07:00

Massachusett's Attorney General, Martha Coakley, is in the news related to her on-going challenge to reign in compensation for Tufts Health Plan and Harvard Pilgrim Health Care board members. The health plans have held firm saying that the stipends and fees for attending meetings - which range from $19,500 to $82,500 - are reasonable given what they expect from their board of directors. The article is consistent with what we've observed in the marketplace.

http://articles.boston.com/2011-03-30/business/29362890_1_health-insurers-board-members-nonprofits

They're Here...

2011-04-04T08:44:00.000-07:00

By now, we all know that the Department of Health & Human Services released proposed regulations related to Accountable Care Organizations. The 429 page document is available online at: http://www.ofr.gov/OFRUpload/OFRData/2011-07880_PI.pdf. Happy reading!

Foreign Employees? Latest Version of the Handbook for Employees is Now Available

2011-03-14T09:02:00.000-07:00

The U.S. Citizenship and Immigration Services posted the latest version of their Handbook for Employers: Instructions for Completing I-9 on its website. Given the large employee base of hospitals and academic medical centers, foreign employees tends to be one of the areas we see some of the most inconsistent treatment. While it doesn't answer the tricky questions (these sorts of handbooks never do), it should be a staple on any payroll manager's bookshelf.

http://www.uscis.gov/files/form/m-274.pdf

A Reminder About HFMA Statement 15 and 990 Schedule H

2011-03-09T12:26:00.000-08:00

For those fiscal year hospitals that are just now filing your first Schedule H here's a little reminder about answering the question "does the organization report bad debt expense in accordance with Healthcare Financial Management Association Statement 15?" Here are the basic things you need to consider when answering the question:

HFMA Statement 15 provides guidelines for accounting and policies govering charity care and bad debt. HFMA guidelines suggest that the cost of charity care should be adjusted for any revenue received from patients receiving charity care. This differs from GAAP in that GAAP does not require the adjustment for revenue received, therefore allowing the reporting of charity care where there may actually be a profit on the services provided.
While the IRS asks whether you are following HFMA Statement 15, they specifically state in the instructions that they do not require organizations to adopt Statement 15 or to use it to determine bad debt expense. They have also stated in other guidance that a 'no' response will not reflect poorly on the organization or otherwise cause an organization to be targeted for examination.
It appears FASB is looking into the matter of the discrepancy between GAAP and the guidelines published by the HFMA Statement and are considering an update to the standards. We aren't aware of any recent movement on this issue but back in May 2010 they made public a letter from a consultant that into the issue. The letter can be found at the following link: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156965595

So, while the current guidance doesn't provide a conclusive answer that you must do it one way or the other, it does allow you the chance to continue to make the bad debt and charity care calculations as you always have with no negative consequences.

Tax Treatment of Scholarships, Fellowships, and Stipends

2011-03-08T14:19:00.000-08:00

To view the AKT presentation: Tax Treatment of Scholarships, Fellowships and Stipends, click here.

New Schedule H and Instructions

2011-03-01T09:32:00.000-08:00

The Internal Revenue Service just released Schedule H and corresponding instructions for the 2010 tax year. In reviewing the revised form, it appears the bulk of the changes were made to comply with the Patient Protection and Affordable Care Act. Key among them are:

*Questions about community health needs assessments are optional for 2010
*Modifications to Part V, were made to require health systems to list each facility and a new
Section B was added to report each facilities policies and practices. This relates to Code
Section 501(r) which requires each facility within a healthcare system to meet the
standards set forth in the Act.
*Modifications to Section B include questions regarding each facility's compliance with Section
501(r)
*Instructions regarding the requirement that hospitals and systems attach their audited
financial statements to their Form 990
*Additional requirements to list all non-hospital healthcare facilities

Despite how onerous Schedule H looks, with enough time and effort (and more time and effort), we have found that it is not exceptionally burdensome to prepare. Schedule H can be viewed on the IRS website at http://www.irs.gov/pub/irs-pdf/f990sh.pdf.

How to Find Medicare Enforcement Actions in Your State

2011-02-21T08:51:00.000-08:00

It's hard to have missed the news that the Medicare Fraud Strike Force just charged 111 individuals for more than $225 million in false billing. The alleged frauds were committed in Florida, New York, California and Texas (among others). If you're wondering what the Health Care Fraud Prevention and Enforcement Action Team (HEAT) has been up to in your particular state, the HEAT website has an interactive map that allows you to search for news in your area. Interestingly, the states of New Mexico, North Dakota, Nebraska, Oklahoma, Arkansas, Indiana, Wisconsin, Delaware and Vermont do not have any news currently associated with it. We'll leave it up to you to determine whether those states have less fraudulent action than their peers.

http://www.stopmedicarefraud.gov/HEATnews/index.html

Report on Health Savings Accounts

2011-02-15T16:52:00.000-08:00

The Employee Benefit Research Institute just released a very thorough study on the trend in HSAs and HRAs over the last five years ("Health Savings Accounts and Health Reimbursement Arrangements: Assets, Account Balances, and Rollovers, 2006 -2010"). In general, the study finds that the number of HSAs and HRAs are growing, rollovers continue to increase (despite a small decline in 2010) and, not surprisingly, healthy behavior equates to higher account balances and higher rollovers. Interestingly, the study found no statistically significant differences in rollover balances between those who exhibit more cost-conscious decision making than those who were not as cost-conscious. We would anticipate that this may change in the future.

The study can be found at: http://www.ebri.org/pdf/briefspdf/IB.Jan11.CEHCS.FinalFlow.03Jan11.pdf

Do For-Profit Hospices Choose Cheaper-To-Treat Patients?

2011-02-14T10:01:00.000-08:00

Some studies of the Journal of the American Medical Association are surprising, others not so much. In a less than surprising study, JAMA reports that for-profit hospices may be selecting patients who are less expensive to treat - leaving the higher acuity and more expensive patients to nonprofit hospices. Reimbursement for most hospice services are currently based on a flat-rate per diem (currently $142.91). The average length of stay in a nonprofit hospice was 16 days as compared to 20 days in a for-profit hospice. We leave you to draw your own conclusions.

http://www.latimes.com/health/boostershots/la-heb-for-profit-hospice-20110201,0,5630476.story

http://jama.ama-assn.org/

The Power of Warm Glow

2010-09-10T10:20:00.000-07:00

We frequently counsel our hospital and system clients that their tax exempt status is one of the most valuable "off balance" sheet assets they have. The following is a thought provoking commentary from Professor Usha Rodrigues of the University of Georgia School of Law which was published in the Texas Law Review. In her note, Professor Rodrigues comments that there is 'something very special about charitable warm glow'. While many people do not associate nonprofit healthcare systems with traditional charities, we know from experience that they do look at life differently than a traditional taxable for-profit corporation. Professor Rodrigues notes that she explores the "special nature more foully, and link it to the psychological concept of social identity, in a separate work - Entity and Identity - forthcoming in the "Emory Law Journal". We look forward to reading that article.

http://www.texaslrev.com/sites/default/files/seealso/vol88/pdf/88TexasLRevSeeAlso149.pdf

Nonprofit System Sells to Private Equity

2010-04-05T09:55:00.000-07:00

People familiar with the Caritas Christi Health Care system will not find this news surprising. They have been looking for a partner, of some sort, for several years. The proposed transaction will inject more than $800 million of desperately needed capital for infrastructure and repairs.

http://www.boston.com/business/healthcare/articles/2010/03/26/hope_hesitation_over_caritas_deal/

Provena Covenant Decision - When "Charitable Is Not Enough

2010-03-23T14:24:00.000-07:00

We have been watching the case of Provena Covenant Medical Center v. Department of Revenue very closely because it addresses the question of how much charity care is sufficient to be considered tax exempt. Last week the Illinois Supreme Court upheld the state tax review board’s decision that, in this case, charity care that equals less than 1% of its revenues is not sufficient to warrant tax exemption in Illinois. The decision adds to the growing number of decisions challenging the exemption of a hospital or healthcare system based on the lack of sufficient charity care (despite the current standard found in IRS Rev. Rule 69-565 which holds that the provision of health services is an inherently charitable purpose that is not obviated by limited hospital access of the medically indigent).

For hospitals and healthcare systems who are starting the already daunting task of compiling the necessary information to complete Schedule H of their Form 990, this decision only adds to the stakes – and makes it clear that more than just the IRS is interested in how much charity care you provide.

http://www.leagle.com/unsecure/page.htm?shortname=inilco20100318211

What Does Measure 67 Mean to Healthcare Organizations?

2010-03-08T10:20:00.000-08:00

State Income Tax Planning for Clinics

On January 26, 2010, Oregon voters passed Measure 67, which increased the C-Corporation tax rate on taxable income and created a minimum tax which is required regardless of taxable income. Since then, physician owned clinics and other healthcare organizations have struggled to determine how this tax affects them.

Summary Of The New Law

There are two tax changes at work with C-Corporations. First there is now a minimum tax, which is paid regardless of whether or not there are taxable profits or tax losses in the corporation. Second, there are rate increases for C-Corporations with taxable profits.
The C-Corporation tax rate on taxable income rises from a flat 6.6% to a two tiered system: a 6.6% tax rate on the first $250,000 of taxable income and a 7.9% tax rate on taxable income in excess of $250,000.
The minimum tax is payable by all corporations, regardless of income. If a corporation has taxable income in a particular year, it determines its "regular" Oregon income tax as well as its Oregon minimum tax and pays whichever amount is greater. If a corporation has no taxable income in a particular year, it must still pay its Oregon minimum tax.

How Does This Affect Healthcare Clinics

"Pass through" entities (S-corporations, LLC's and partnership) are not subject to the Oregon minimum tax (other than a small increase in tax to $150). As such, the only effect that the new law has on them is the increase in individual tax rates for the physician owners.
Clinics which are taxed as corporations will generally be subject to the minimum tax because most tof them "zero out" their net income to zero (or close to zero) by making physician distributions. However, these same clinics will likely have large gross revenue numbers. For instance, a practice with zero taxable income and $25,000,000 in revenue will pay $30,000 in state income taxes.

What Should I Do?

For questions regarding your situation please refer to our healthcare experts at: mmoll@aktcpa.com.

State's Look for More Revenue

2010-03-05T09:40:00.000-08:00

The New York Times is the latest publication to highlight what we have seen as a growing trend among states to look to nonprofit organizations for revenue. Not that nonprofit hospitals or healthcare systems don’t have enough to worry about … but … if you haven’t thought about this, you should. Spend some time with your legislator. Make sure that they understand the value you bring to the community. Remain active in your state association. Identify a point person to monitor trends in your particular state. Do it now, before it’s too late.

http://www.nytimes.com/2010/02/28/us/28charity.html?partner=rss&emc=rss

L3Cs - Lots of Interest, Not a lot of Progress

2010-03-01T09:58:00.000-08:00

Much has been written on L3Cs and their potential to be a ‘game changer’ in the world of nonprofit healthcare as it applies to research and development and technology transfer. We have worked with several clients who have looked at L3Cs as a vehicle to leverage existing foundation dollars by attracting outside investors interested in enabling "socially beneficial enterprises" in the field of molecular biology, genetics and similar cutting edge research. Unfortunately, a closer look at the existing L3C legislation has led us to believe that, thus far, the hybrid entity is not quite the breakthrough that has been hoped for. Apparently, we are not the only ones who have come to this conclusion. Most recently, professor Daniel Kleinberger of the William Mitchell College of Law has authored "The Snare and Delusion of the L3C". The article puts L3Cs clearly in the crosshairs and concludes that using foundation funds to offer market-rate returns is "at best a complicated device, not appropriate for ‘branding’ and simplistic appeals to social conscience". It is recommended reading if you are considering ways to leverage your existing foundation dollars.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1554045

The New 990 Form - Are You Ready?

2010-02-24T10:13:00.000-08:00

Martin Moll and Joylyn Ankeney presented this to 50 people at the Winter meeting of the Oregon HFMA. Highlights included Martin’s insight into the implications of Schedule H and Joylyn’s discussion of the need to gather information from a multitude of people inside a hospital’s organization in order to properly tell the hospital’s story. There was also discussion about the lack of guidance in some areas of the form, and the opportunity that provides to create a standard within the industry.

Report on Corporate Boards - Directly Applicable to Nonprofit Boards as well

2010-02-22T14:23:00.000-08:00

Boyden Global Executive Search has released its latest installment in its Board of Director Series entitled Better Directors for Better Boards. One of the themes of the report is that good board members are harder to find and, as a result, corporations are becoming more sophisticated in how they go about recruiting and retaining a qualified board. The report notes that board service is far less attractive than it was in past decades due to increased scrutiny, risk and liability concerns. As such, it is no longer seen as a sought after perquisite for retired corporate CEOs and academics.
This comes as no surprise to the recruitment committee of any major hospital or healthcare system board. The requirements to really understand healthcare, reimbursement, charity care, capital markets, competition and regulation make service on a nonprofit hospital’s board of directors onerous at best. As a result, we are seeing longer tenures for existing board members (because recruiting new ones is difficult). We have also noted greater interest in meaningful compensation for board members to reimburse them for the time and commitment that meaningful board service requires.
http://www.boyden.com/media/1528/boydens_board_of_directo/index.html

PWC's Top Ten

2010-02-15T12:06:00.000-08:00

While not as funny as David Letterman, PricewaterhouseCooper’s Health Research Institute’s Top 10 health industry issues in 2010 is good reading nonetheless. While some of the top ten priorities are obvious "gimmees" (reducing healthcare costs, cracking down on fraud and abuse) some of the priorities the report identifies are issues that we have been hearing with greater frequency in hospital and clinic boardrooms and executive offices. They include incorporating health IT (noting the fact that the double bonus carrot will soon turn into a stick), alternative care delivery methods (retail health clinics, home health services, remote patient monitoring) and physician hospital partnership (where both parties actually come out ahead).

http://www.pwc.com/us/en/healthcare/publications/top-ten-health-industry-issues-in-2010.jhtml (Free registration required)

How Not To Increase Patient Volumes

2010-02-12T11:01:00.000-08:00

The former Chief Financial Officer at the Tustin Hospital Medical Center plead guilty to charges of hiring recruiters to bring hundreds of homeless patients to the hospital for unnecessary medical tests and procedures. According to court documents, the hospital paid several million dollars to various skid row recruiters who allegedly guaranteed 40 to 50 patients a month – and netting the hospital more than $10 million in Medicare and Med-Cal payments. The CFO faces up to 15 years in prison and is the fifth person charged in the scheme. Tustin Hospital, a 100 bed facility nine miles south of Disneyland, is owned by the Pacific Health Corp. The hospital terminated the CFO upon learning of the scheme.

http://latimesblogs.latimes.com/lanow/2010/02/former-tustin-hospital-executive-agrees-to-guilty-plea-in-skid-row-patient-scheme.html

How Much Are You Paying For Your Retirement Plan?

2010-01-11T15:00:00.000-08:00

It’s the beginning of the year, which means it’s time for new year’s resolutions. This is when many of our clients renew their focus on the bottom line. Depending on the size of your company and the amount of assets in your retirement plan, the fees that you pay for your retirement plan may be substantial. But do you really know how much you are paying? Retirement plan fees are one of those areas that are notoriously hidden by smoke and mirrors. Here’s a little insight provided by Carl Pinkard of AKT Wealth Advisors:

"It is important to understand that there are two types of fees being charged – direct and indirect. Direct fees are those that are usually paid by the plan sponsor (business owner) and might include fees for plan documents, compliance testing, and investment advisory services. Indirect fees are usually charged to the plan assets (participants) and usually involve the recordkeeping and investment management fees. The indirect fees are usually the hardest to track down and can be substantial. Often times, bundled service providers won’t charge any direct fees and everything is billed indirectly to the plan. This is where some fall into the misconception that their plan is basically free.

Why is this important and why should you make an effort to understand the fees you are paying? Saving money is the obvious answer but did you know that as a fiduciary you are required by law to understand the fees and make sure that they are reasonable for the services provided. Here are some steps you should take to get you started:

Review your current contract and agreements with all providers.
Request fee information from all of your providers, including the investment fees.
Ask specifically for indirect fee information and what each of your providers is getting paid. Some of these fees are called 12b-1, revenue sharing, sub-TA, investment advisory, sales loads.
Request information about sources of revenue for your providers and how any conflicts of interest are avoided.
Document your fee review and any decisions that you make.

The easiest way to determine if you are paying reasonable fees is to look at the annual charge as a percentage of assets. Most plans pay between 0.50-2.5 percent of the assets in the plan on an annual basis. You can also visit the Department of Labor website for additional information in their Retirement plans section (www.dol.gov)."

Sounds like good advice to me. Happy New Year and good luck digging for those dollars.

IRS Goes Hollywood

2009-10-22T10:23:00.000-07:00

Customer Education and Outreach, including Form 990 compliance, has been a major push of the IRS' Exempt Organization Division. To that end, they have recently released a series of videos (yes, really, videos) to help organizations understand the new Form 990. While it's easy to poke fun of any video series produced by the Internal Revenue Service and dedicated to completing a tax form, they have good production values and are informative. That said, I'd leave the popcorn at home. http://www.irs.gov/charities/article/0,,id=210358,00.html

Conference Board Task Force Releases Report on Executive Compensation

2009-10-05T14:24:00.000-07:00

The Conference Board recently released its Report on Executive Compensation. While the report focuses on large publicly traded organizations, its recommendations are equally relevant to healthcare organizations. Among its recommendations for CEO compensation programs are the following:

Compensation programs should drive a company’s business strategy and objectives and create shareholder (or community) value, consistent with an acceptable risk profile and through legal and ethical means. This means a significant portion of pay should be incentive compensation.
Total compensation should be attractive to executives, affordable for the company, proportional to the executive’s contribution and fair to shareholders and employees.
Companies should avoid practices such as multi-year employment agreements providing generous severance payments, gross-ups for tax consequences and benefits that are not generally available to other managers.
Credible board oversight of executive compensation is critical.
Compensation should be transparent, understandable and effectively communicated.

Interestingly, the report highlighted the fact that the median total annual compensation for CEOs dipped by less than 1% in 2008 (compared to the S&P 500 index which dropped nearly 40%).

The report can be found at http://www.conferenceboard.org/pdf_free/ExecCompensation2009.pdf

Worker Classification in the News...Again

2009-09-30T15:55:00.000-07:00

The GAO and Congressional Research Service released a report suggesting that the federal government stands to collect more than a billion dollars in taxes if the IRS is successful in its efforts to re-classify workers as employees rather than independent contractors. Using old data, the report stated that 15% of employers misclassified 3.4 million workers as independent contractors rather than as employees, causing an estimated total loss of $1.6 billion in taxes. It included 19 specific recommendations for reducing employee misclassification, among them:

Clarify the distinction between employees and independent contractors under federal law.
Ensure that workers have adequate legal protection against retaliation after filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Define misclassification as a violation under the Fair Labor Standards Act (FLSA).
Lift the ban on IRS/Treasury issuing regs or revenue rulings clarifying the employment status of individuals for purposes of employment taxes.
Require service recipients to provide standardized documents to workers that explain their classification rights and tax obligations.
Create an online classification system to guide service recipients and workers on classification determinations.
Require service recipients to withhold taxes for independent contractors whose TINs IRS cannot verify, or who the IRS has determined are not fully tax compliant.
Require universal tax withholding for payments made to independent contractors, using tax rates that are relatively low (e.g., 1% to 5% of payment amounts).
Require each independent contractor to apply for a separate business TIN.
Enhance coordination between IRS, DOL, and other federal agencies to share data and address misclassification.

Given the number and extent of relationships hospitals and healthcare systems have with outside providers, they have always been subject to scrutiny in this area. We have yet to be involved with an employment tax audit for a hospital where the IRS hasn’t found some grounds of employee misclassification. Areas of particular risk include:

Medical directors
Nighthawks
Former employees
Interim management

For any independent contractor relationship, if you don’t have a clear and convincing argument as to why they should be classified as independent, you risk a challenge as the IRS again increases its scrutiny.

CEO Personally Responsible for Payroll Taxes

2009-09-29T11:24:00.000-07:00

Several years ago, the Granada Hills Community Hospital in Florida entered into bankruptcy and, as a result, hired a turn-around firm to assist them through the process. The firm brought in a consultant who acted as the hospital’s interim president and was "vested with the responsibilities incumbent upon those offices", including the remittance of payroll taxes. Unfortunately, Mr. Doulgeris chose to make payments to creditors rather than submit those funds as payroll deposits. During testimony, he admitted that he knew that the taxes were due and that his decision to pay creditors was willful. The court found him personally liable for $1,935,204.33 in payroll taxes which were not deposited.

This case serves as a potent reminder that the officers and directors of hospitals who are experiencing financial adversity should pay close attention to the responsibilities of the hospital to continue to make its payroll deposits. The stakes are obviously very high.

The case can be found at: James Doulgeris v. United States; No. 8:08-cv-00282 (3 August, 2009)

The Real Cost of a Stark Violation

2009-08-27T16:44:00.000-07:00

Covenant Medical Center has agreed to pay the United States $4.5 million to resolve alleged Stark law violations. The charges stem from compensation made by Covenant to several high producing physicians. A review of Covenant's Form 990s show that, for tax year 2002, two orthopedic surgeons and a gastro-intestinal specialist made $2.14 million, $1 million, and $2.1 million respectively. It is not clear from the press release whether Covenant had obtained reasonableness opinions for any of these compensation arrangements - and, if so, whether the Department of Justice relied on those opinions as evidence of reasonableness. It's also not clear whether the Internal Revenue Service will follow-up with an "intermediate sanctions" claim - but one would imagine that the Covenant board of directors has pointedly asked this question. Covenant has specifically not admitted any wrongdoing (through its own press release).

A quick search on Google reveals that at least 60 different news sources have picked up this story to date. As such, the real long-term damage done to Covenant and its reputation in the community may go far beyond the $4.5 million fine.

Study on Nonprofit Nursing Homes Quality of Care

2009-08-26T11:21:00.000-07:00

A Canadian study by clinical researchers has determined that nonprofit nursing homes provide a higher quality of care than their for-profit counterparts. The comprehensive study relied on the following as metrics for what constitutes good or poor quality of care: number of staff per resident, physical restraints, pressure ulcers and regulatory deficiencies. While many healthcare systems have divested themselves of ownership in long term care facilities, they still play a part in many of the systems we work with. The study can be found at http://pnhp.org/nursing_home/nursing-homes.pdf.

More From the IRS on Independent Contractors

2009-07-28T10:52:00.000-07:00

Ever vigilant in its quest to educate and enforce the rules regarding independent contractors, the Internal Revenue Service has just issued Notice 989, (http://www.irs.gov/pub/irs-pdf/n989.pdf) providing answers to commonly asked questions related to what to do when the IRS determines your work status is employee. The subject matter of this notice is not terribly surprising given the increased activity we have seen from the IRS in challenging independent contractor relationships. The notice does address some of the more vexing challenges created when an individual has been treated as an independent contractor for part of the year, and an employee for the rest of the year.

Understanding the Cy Pres Doctrine

2009-06-29T10:41:00.000-07:00

Hospital foundations routinely accept charitable gifts that are restricted in terms of scope, duration, purpose and outcome. While such gifts are often times "memorialized" with a well crafted gift acceptance agreement, they are just as frequently accepted with a loose description of the donor's intent. Either way, time can have a way of making the most well intentioned bequest or gift seem out of date, which can be a real dilemma for foundation executives and future generations.

University of Tennessee College of Law Professor, Iris Goodwin, has written a remarkably thoughtful analysis of the cy pres doctrine (which holds that courts will only act to change the donor's original intent in the event that their wishes are "impossible, impracticable or illegal" to fulfill). Her article centers on a conflict between Princeton University and a large donor whose original gift became subsequently difficult to administer. The article is very thorough, informative, and recommended reading for any foundation director or large gift officer. It can be accessed on the Social Science Research Network or here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1124573.

Senate Finance Committee Report on Healthcare Reform

2009-05-26T10:54:00.000-07:00

The Senate Finance Committee has provided it's own commentary on how to begin the herculean challenge of healthcare reform. Most of the contents are the same time-honored we have seen in the past. Of note is the fact that the Committee recommends that tax-exempt hospitals "regularly conduct a community needs analysis, provide a minimum level of charitable patient care, not refuse service based on a patient's inability to pay, and follow certain procedures before instituting collection agents against patients". The report also suggests codifying the definition of student as it specifically applies to residents.

http://www.finance.senate.gov/sitepages/leg/LEG%202009/051809%20Health%20Care%20Description%20of%20Policy%20Options.pdf

Hiring Former Employees?

2009-05-20T08:46:00.001-07:00

Our hospital clients have definitely not been immune to the mass layoffs that have plagued the country. And, not surprisingly, many of these same hospitals are now inquiring whether it is possible to retain some of the former employees as independent contractors since there is too much work for the remaining employees. In deciding whether you can classify the individual as an independent contractor, along with the well established IRS criteria (http://www.irs.gov/businesses/small/article/0,,id=99921,00.html), consider the following:

Make sure the former employee has taken the necessary steps to hold him or herself out as generally available for the services you are hiring them for;
Consider at least a six month separation period between employee and independent contractor status;
Don't allow them to supervise other employees (especially employees they supervised previously);
Consider having them work in a different department or division or, if they will work in the same department, at least have them work in a different capacity;
Ensure that you have identified a unique skill or knowledge, and substantiate that in your contract.

How Valuable is Your Tax-Exempt Status

2009-05-15T09:23:00.000-07:00

The staff of the Joint Committee on Taxation prepared some background reading for the Senate Committee on Finance Roundtable on Healthcare Financing. A section of the report was dedicated to helping the committee understand the value of tax exemption for tax-exempt hospitals. It cited a 2006 Joint Committee on Taxation analysis of the federal costs associated with tax-exempt status for private nonprofit hospitals. Looking only at federal corporate income tax, tax-exempt bond financing and the federal income tax benefit of charitable contributions, the Committee placed the value at that time to be $6.1 billion dollars. The report goes on to mention that this analysis does not include information on state or local tax liability (including property taxes), records book depreciation rather than tax depreciation, and reflects limited analysis on tax-exempt debt.

Our firm is occasionally asked to provide a specific value to a hospital's tax-exempt status, and the size of the number always surprises a few on the organization's board. And, of course, those are just the quantifiable dollars. If you factor in the additional intrinsic value that charitable status has in the community, for most organizations, exempt status is likely the most valuable asset on their balance sheet.

The relevant section begins on page 39:
http://finance.senate.gov/JCT.pdf

Forewarned, Forearmed; to be Prepared is Half the Victory

2009-04-13T09:44:00.000-07:00

The IRS released three publications, 4740,4741 and 4752 to assist tax-exempt organizations as they begin the process of gathering their information for the newly revised Form 990. Pub 4740 is a simple preparation checklist that identifies steps which most hospitals and healthcare systems already follow. Pub 4741 is a summary of the key changes in the form. It includes a brief paragraph about Schedule H, Hospitals and Schedule K, Supplemental Information on Tax-Exempt Bonds (but, again, nothing new). Pub 4752 describes the new "e-Postcard" for smaller tax-exempt organizations. There's nothing really new in any of these publications - other than to serve as a friendly warning that preparing an accurate, complete and timely Form 990 will most likely be much more time consuming and involved than in the past. (With apologies to Miguel de Cervantes)

The publications can be viewed on the IRS website at: http://www.irs.gov/pub/irs-pdf/p4740.pdf http://www.irs.gov/pub/irs-pdf/p4741.pdf http://www.irs.gov/pub/irs-pdf/p4752.pdf

Seventh Circuit Opinion on Reasonable Compensation

2009-03-17T14:15:00.000-07:00

Like the rest of the industry, we spend a lot of time discussing, analyzing, presenting, comparing and opining on the executive issues for our nonprofit hospitals and healthcare system clients. The standard we ascribe to is whether the compensation paid to an executive is "reasonable". The Internal Revenue Service defines reasonable compensation in this context as "the value that would ordinarily be paid for services by like enterprises under like circumstances". And, like the rest of the industry, we are some times challenged as we apply theory to real world facts and circumstances.

Apparently we're not the only one. Yesterday, the always eloquent Judge Richard Posner recently issued a very pointed opinion reversing a tax court decision on a CEO's reasonable compensation. While the opinion applies to the taxable world (the executive in question is the CEO of Menards, a closely held hardware chain) and addresses issues that don't generally apply to tax exempt organizations, it is nonetheless great reading and provides some very helpful analytics for comparing one executive's compensation to another's.

http://www.ca7.uscourts.gov/tmp/M10QHGGK.pdf

Response to IRS' Study of Exempt Hospitals

2009-03-10T08:07:00.000-07:00

Martin, thanks for a great post on the IRS' study of the exempt hospitals. One thing in particular that I think is important to recognize is that the IRS' position is and always has been that hospitals are not per se tax-exempt. Lois Lerner, Director of the IRS Exempt Organizations Division, reiterated that at her press briefing on the release of the study last week. This goes along with an ongoing change in their language surrounding all tax-exempt organizations: at more and more conferences that I attend we hear the term tax-preferred and tax-subsidized used much more frequently. This change of just one word is a huge shift in thinking: exemption is not a natural right, it is preferential treatment being afforded organizations in furtherance of good public policy. In this case, do hospitals represent good public policy worthy of government subsidies?

Another important point to note from Ms. Lerner's briefing is that the IRS is aware that it would be a hardship for many hospitals to meet quantitative charity care tests. I think this reinforces the position that the IRS isn't going to push for guidlines that are completely unreasonable. I think as the IRS moves forward, it will be important for hospitals to play an active part in the discussion. My challenge for the hospitals is: if the IRS is willing to listen, are you willing to talk?

A link to Ms. Lerner's statement:
http://www.irs.gov/pub/irs-tege/lernerstatement_hospitalproject_021209.pdf

Will Sharing Your Patient List With Your Foundation Become a HIPAA Violation?

2009-03-09T15:07:00.000-07:00

It will be if Congress has its way. As proposed in H.R. 1 SEC 4405(d) and SEC 4406(b), nonprofit hospitals and systems will not be able to provide the names and addresses of their patients with their own charitable foundations. This is a departure from the existing rules – which includes fundraising as “for the benefit of the covered entity” as a healthcare operation. Understandably, the Association for Healthcare Philanthropy, Healthcare Financial Management Association, American Hospital Association and Catholic Health Association of the United States clearly oppose any change in the current law.

http://www.ahp.org/government-relations/docs/AHP%20Position%20statement%202-10-09a.pdf

Final IRS Hospital Released

2009-03-09T14:34:00.000-07:00

Yesterday the IRS released their final report on its tax-exempt hospital project. The project, which began in May, 2006, was centered around a questionnaire which was sent to almost 500 tax-exempt hospitals and healthcare systems. The final report weighs in at a whopping 191 pages and is recommended bedside reading for every hospital CFO, general counsel and CEO. Among their findings was a not very surprising observation that healthcare is very complex and there is a wide and disparate variety of types and sizes of hospitals (and, correspondingly, community benefit as well as executive compensation). The report also concluded that a small minority of nonprofit hospitals provide the bulk of compensated care for the poor.

What can you do?

Continue to focus on the basics. The standards presented in Revenue Ruling 69-545 (http://www.irs.gov/pub/irs-tege/rr69-545.pdf) and 83-157 (http://www.irs.gov/pub/irs-tege/rr69-545.pdf) still present the definitive guidance for what it takes for a hospital or healthcare system to qualify for tax-exempt status.

If you don't already do so, quantification and qualification of your charity care, as well as other areas of community benefit is a must. And if you already do this, make sure that you can support it if called upon by the IRS, congress, state regulators or the press.

Regardless of how you compensate your CEO, the process and the outcome should be well documented and meet the "rebuttable presumption of reasonableness" standard.

For a complete copy of the report: http://www.irs.gov/pub/irs-tege/frepthospproj.pdf