New rules on 990 forms mean nonprofit hospitals can guard less information on their community work

By Dan Fitzpatrick, Pittsburgh Post-Gazette

When confronted earlier this week about a tax trade-off needed to secure his hospital’s $100 million scholarship gift, University of Pittsburgh Medical Center general counsel Robert Cindrich reminded City Council members that “We are not obligated by law to give anything.”

But the larger view of UPMC’s local obligation is more complex — and potentially in flux.

UPMC’s commitment to help city students go to college, called Pittsburgh Promise, comes at a time when nonprofit hospitals across the United States are under increasing pressure from the Internal Revenue Service and members of the Senate Finance Committee to demonstrate the “benefits” provided to their hometowns as a way of justifying their tax-exempt status — or perhaps face new legislation setting minimum standards. In fact, the IRS yesterday unveiled sweeping changes to the forms that all nonprofits must file detailing their finances, operations and community benefits.

The reporting overhaul — the first for the IRS in more than a quarter century — is a way of bringing more transparency and accountability to the nonprofit world. The changes affect more than 6,000 tax-exempt organizations that operate in southwestern Pennsylvania, the largest being the 44,000-person UPMC. Starting in 2010, UPMC and all other hospitals in the area will have to break out how much they give back to their hometowns in a variety of categories, from free care to unreimbursed Medicaid costs to education programs, research and cash contributions to community groups. The IRS also will ask hospitals to describe any joint ventures, including ownership interests of doctors in any for-profit activities, as well as a more detailed accounting of compensation to top executives. UPMC provides some, but not all, of this information already.

The reforms to the so-called IRS Form 990 and a special section added for hospitals (called Schedule H) were encouraged by Senate Finance Committee Chairman Max Baucus, D-Mont., and Sen. Charles Grassley, R-Iowa, both of whom have expressed concern about overcharging of uninsured patients, the allocation of too few resources to charity care, overstatements of the amount of free care provided, and lavish salaries and perks for hospital executives. The new form “will help the public and the IRS assess whether tax-exempt organizations are staying true to the reasons they were granted exempt status in the first place,” Sen. Baucus said earlier this year. “We must be assured that the public’s donations are used appropriately.”

Asked during a news conference yesterday what the IRS might do with the additional information, IRS exempt organizations director Lois Lerner said: “We want to look at what the hospitals are doing. We think having broader information will better inform us on any decisions we would like to make in the future.”

There have been threats — from Sen. Grassley — that new legislation could require tax-exempt hospitals to allocate at least 5 percent of their annual revenues or expenses to free care for people who cannot afford to pay. There is no individual hospital in southwestern Pennsylvania that currently meets Sen. Grassley’s proposed 5 percent standard, according to figures compiled by the Pennsylvania Health Care Cost Containment Council in Harrisburg. The closest in fiscal 2006 were Aliquippa Community Hospital and UPMC Braddock, providing 4.28 percent and 4.26 percent uncompensated care, respectively. Not that far behind were Mercy Hospital at 3.27 percent, UPMC South Side at 2.64 percent and UPMC McKeesport at 2.61 percent.

Across its system, the 19-hospital UPMC told the IRS that it provided $295.2 million in free or uncompensated care in fiscal 2006 — or 4.9 percent of its $6 billion in revenues that year. It also said it provided $40.2 million in “services to the community” that included outreach programs, screenings and educational classes. UPMC also says it has voluntarily given around $25 million to the city since the mid-1980s, including $1.5 million a year the past three years.

“You shouldn’t be able to buy your way out of the community benefit requirement,” said Democratic U.S. Rep. and former UPMC lobbyist Jason Altmire, citing the $100 million scholarship commitment. But UPMC executives “have shown they are willing to do their fair share.”

UPMC declined to comment on the IRS reporting changes, but a representative of the region’s second-largest hospital network, West Penn Allegheny Health System, expressed concern about the scope of nonprofit reform in Washington, D.C.

“It started out as a good initiative,” said Tom Albanesi, vice president of corporate finance. But “as typically happens when you have some hands in Washington that get involved, it starts to go down other paths.” While West Penn has “nothing to hide,” an arbitrary measure of community contribution, such as Sen. Grassley’s 5 percent free care, “is not going to benefit anyone,” he said. And, “We just want to make sure the level of information being requested of us is reasonable and doesn’t bog down reporting.”

It’s not just hospitals caught up in the new scrutiny from Washington, D.C., even the smallest of nonprofit organizations is part of the sweep. The new Form 990 unveiled yesterday goes into effect during the 2008 tax year, meaning it would be filed in 2009.

Among the changes all groups will have to address are new questions about conflict of interest and whistle-blower policies. There also is a more detailed explanation of executives’ pay and benefits — including any compensation from “related organizations” — and a more prominent display for such information.

Also, a very basic Form 990-N will now be required from organizations with budgets less than $25,000 — previously exempt from any filing. The first reports are due May 15. Any organization that fails to file such a form within three years will lose its tax-exempt status. Organizations larger than $25,000 will have a three-year transitional period to adjust to the new requirements. Details can be found here:

UPMC, it should be noted, has in recent years made more information available on its Form 990, even before the IRS began discussing possible changes. Take the subject of executive compensation, for example. There was a time when it was difficult to know how much UPMC President Jeffrey Romoff really made since he was an employee not of UPMC, but of Managed Care Advisory Services Inc., a company incorporated in December 1993 and under contract with UPMC to provide Mr. Romoff’s services.

But, “We didn’t like the idea that you couldn’t find it easily,” UPMC Chief Financial Officer Robert DeMichiei said earlier this year.

So in fiscal 2006, UPMC listed Mr. Romoff’s base salary ($958,482) along with “incentive compensation” of $2.3 million tied to “specific performance criteria.” Still, there remains a lack of clarity regarding Managed Care Advisory Services. It still appears in UPMC’s compensation section, having received $4.6 million. Spokeswoman Wendy Zellner said Mr. Romoff’s $2.3 million bonus came from that pot. When asked about the remaining $2.3 million, she said it was used for “other management services,” without listing any specific sources. State documents list David Farner as president of Managed Care Advisory Services; Mr. Farner is a senior associate to Mr. Romoff.

Most nonprofit organizations, though, do not have to worry about parsing out multimillion-dollar salaries and bonuses. For Lulu Orr at the nonprofit Good Grief Center in Homestead, the biggest concern about the new Form 990 is simply the paperwork and expertise needed to crunch the numbers. Good Grief has just six employees and a budget of less than $500,000.

“I believe all of our donors need to know we are using the money they generously give us wisely,” she said, but, “I do think it’s a shame that so much energy and time needs to be put into this sort of reporting because at the core of what we all want to be doing is the work of our mission. In our case, it is helping grieving people.”

“It does take away from the work we are trying to do.”

Eighty-five percent of the nonprofits in this area have fewer than 10 employees, said Robert Morris University’s Peggy Morrison Outon, and many do not have the personnel to comply with the new requirements. But she worries about a larger issue — that this process may be eroding the trust the public has in the work of nonprofits. “There seems to be increasing suspicion and doubt,” said Ms. Outon, director of the university’s Center for Nonprofit Management, and, “That suspicion is very dangerous.”
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