August 10, 2007
Mr. Dean A. Zerbe
Senior Counsel and Tax Counsel
Minority Staff
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510
Dear Mr. Zerbe:
The
Iowa Health System (“IHS”) writes in response to the request by
the Senate Finance Committee – Minority Staff (“Committee”) for
comments on the “Tax exempt Hospitals: Discussion Draft” proposing
reform in the area of nonprofit hospitals. IHS appreciates the
opportunity to share our views on this topic.
IHS is a 501(c) (3) nonprofit corporation formed 12 years ago. We are
the largest health system in Iowa and western Illinois, serving as the
parent organization to the eleven urban hospitals and physician clinics
whose governing boards decided to join the health system. These
hospital affiliates are Iowa Methodist, Iowa Lutheran and Blank Children’s
in Des Moines; St. Luke’s in Cedar Rapids; Allen Memorial in Waterloo;
St. Luke’s in Sioux City; Trinity in Fort Dodge; Finley in Dubuque;
and Trinity 7th Street, Trinity Terrace Park and Trinity
West in the Quad Cities. The physician clinics are located in
each of the affiliate hospital’s communities. Each of our affiliate
organizations has served their communities for over 100 years. The
IHS governing board as well as the governing boards of each of the hospital
affiliates are comprised of local community leaders. Over 19 community
leaders serve on these respective boards of directors.
IHS
hospitals and physicians provide nearly thirty percent of all inpatient
care received by Iowa residents. Annually, we admit over 100,000
patients to our hospitals. On an average day, approximately 6,500
patients are treated by an IHS provider. As Iowa’s second largest
employer, IHS and its affiliates employ over 18,000 individuals in coordinating,
providing and administering healthcare to those in need. We employ
approximately 450 physicians who provide services at our hospitals and
at over 128 clinic sites in over 70 communities in Iowa, eastern Nebraska
and western Illinois. In addition, over 2,600 physicians are on
the active medical staffs of our facilities.
We
treat all residents who seek care from these providers and facilities
regardless of their ability to pay. In 2006, our affiliate hospitals
provided approximately $77.5 million dollars of charity care. 1
This charity care represented approximately 4.6 % of the 1.7 billion
dollar total operating expenses of IHS in 2006.2
Our total quantifiable benefit to our communities was approximately
$100 million in 2006, representing approximately 5.7% of IHS total operating
expenses.3 In 2006, we received approximately
$80.5 million of benefit by being tax exempt. This represents
approximately 4.7% of IHS total operating expenses.4
The
Committee has recommended special rules for Section 501(c)(3) nonprofit
hospitals to qualify for tax exempt status, in addition to other rules
for nonprofit hospitals that seek exemption under Section 501(c)(4). 5
Overall, IHS and its affiliates are in favor of reform that sets forth
accountability requirements for hospitals to qualify for 501(c)(3) status.
We take seriously the privilege of being tax exempt nonprofit organizations.
Our mission is to improve the health of the people and communities we
serve. Clear requirements in the area of charity care and community
benefit are a reasonable manner for nonprofit hospitals to demonstrate
they are mission focused and deserve the benefits of being tax exempt.
Several
points in the Discussion Draft, in our view, would not make good public
policy. In general, however, we whole-heartedly agree with the
majority of the points raised in the Discussion Draft. We will briefly
identify both types of issues in this paper and would appreciate the
opportunity to discuss these points in detail with the Committee.
Discussion
●
501(c)(3) nonprofit hospitals should be held accountable for provision
of a quantifiable amount of charity care and community benefit
We
support additional regulation to hold 501(c)(3) hospitals accountable
to provide quantifiable amounts of charity care and community benefit
to their communities. Speaking of our system specifically, the quantifiable
benefit we give to our communities (5.7% of operating expenses) is greater
than the benefit we receive from being tax exempt (4.7% of operating
expenses). IHS earns its tax exempt status. We believe it is
entirely reasonable to be expected to do so. We believe that all tax
exempt organizations should be required to do the same. Accountability
accompanies the privilege.
Our
concern with the Committee’s discussion of a 5% requirement for charity
care is that the Committee has created a two-tiered system between nonprofit
hospitals that will be required to provide a quantifiable amount of
charity care (501(c)(3)’s) and nonprofit hospitals that will be required
to provide a quantifiable amount of community benefit (501(c)(4’s).
The Committee suggests that 501(c)(3)’s will provide a set level of
free and subsidized care and thereby receive greater tax exempt benefits
than 501(c)(4)’s who will provide a quantifiable amount of community
benefit other than free and subsidized care. The fundamental premise
behind this suggestion is that free and subsidized care given by nonprofit
hospitals is more valuable to our communities than other types of community
benefit provided by nonprofit hospitals.
It
is this fundamental premise with which we do not agree. It is
of substantial value to our communities that our affiliate hospitals
provide free and subsidized care. This does not mean that the
other services provided by nonprofit hospitals to their communities
are less valuable to vulnerable populations. For example, the
following services are provided to our communities that are not free
care: (1) behavioral health6; (2) substance abuse units7;
(3) a specialty children’s hospital8; (4) emergency rooms open to all9;
(5) trauma centers10; (6) a poison center; (7) a burn unit;
(8) physical rehabilitation units and (9) primary care clinics. These
services are offered because they are needed in our community, are not
being offered by for profit entities, and constitute valued community
benefits to those we serve. These services annually operate at
a loss, but we provide them because there is a critically high need
for these services in our communities. As such, these services
should be counted by the government in evaluating the benefits provided
by the nonprofit hospital.
Our
suggestion is that 501(c)(3) nonprofit hospitals be held accountable
for a quantifiable amount of benefit to the community which encompasses
both charity care and community benefit. Community benefit can
be ascertained by following the CHA definition of community benefit
categories. The CHA guidelines provide a common yardstick by which
all nonprofits can be evaluated. The CHA template provides a clear
standard to measure a combination of free care and community benefit
provided by 501(c)(3) nonprofit hospitals. The adequate level
to be obtained under the CHA could be proposed by legislation.
One
purpose of the Discussion Draft is to spur regulation that will “ensure
that in exchange for the . . . tax breaks nonprofit hospitals [receive
they] . . . provide concrete benefits to the community, especially to
the most vulnerable in our nation.” We caution that the
Committee should promote not only the provision of free care, but the
provision of all services that benefit vulnerable populations. 11
Only through a measuring standard that takes into account both free
care and community benefit can this purpose be properly served.
● All
hospitals and health systems should
be required to quantify charity care and community benefit
The
Committee has exempted critical access hospitals from the requirement
of providing a quantifiable amount of charity care and community benefit.
We do not support this exemption As indicated above, we believe that
every tax exempt hospital or health system, including critical access
hospitals, should be required to earn the benefits of tax exemption.
Both CAH’s and urban hospitals serve vulnerable populations.
Both are nonprofit organizations. We suggest it is poor public
policy to presume that CAH’s, that receive the same tax benefits of
nonprofit hospital status as urban hospitals, are meeting the needs
of their communities. This is particularly true in Iowa where
many of the urban hospitals are not that much different than “rural”
hospitals which have been legislatively designated as CAH’s.
For example, several CAH’s in Iowa are geographically located
approximately 20 to 50 miles from our urban hospitals and serve the
same vulnerable populations.
●
Charges to the uninsured or underinsured
should reflect actual cost and negotiated
private insurance reimbursement
The
Committee has suggested that a hospital may not charge a medically indigent
patient who is uninsured or under-insured a rate that exceeds the lower
of: (i) the lowest rate that would be paid by Medicare/Medicaid or (ii)
the actual cost to the hospital for such service. For the majority
of hospital services provided in Iowa, this will mean that hospitals
will not be able to charge over the Medicare or Medicaid rate, because
in most instances these rates are considerably lower than the actual
cost to the hospital for providing the services. We suggest that
rather than using the governmental reimbursement rate as the set charge
for a medically indigent patient who is uninsured or under-insured,
a charge that reflects a combination of both negotiated insurance reimbursement
rates and actual cost be used.
● Further
regulation of joint venture relationships
may drive private joint venture partners from the
market and create a for profit system of
health care services in Iowa
IHS
has several physician joint venture relationships that we believe serve
the community by better integrating the physician and health system
resources and by better aligning financial incentives. These partnerships
focus primarily on providing specialty surgical or clinical services.
To some extent, the health care market in our communities have encouraged
nonprofit hospitals to enter into joint venture relationships with physicians
to ensure that certain services can be most effectively coordinated
for our communities. As the Committee is aware, substantial regulation
of joint venture relationships with nonprofit hospitals and for profit
physician partners exists today. Because these joint venture relationships
are highly regulated, for profit partners are often hesitant and reluctant
to enter into partnerships with nonprofits hospitals. Our concern
is that further regulation of joint venture relationships between for
profit partners will make relationships with a nonprofit hospital even
less attractive to specialty providers. This policy would likely
drive physicians to provide the specialty services on their own, without
the benefit of integrated and coordinated delivery with a hospital partner.
This would create a duplication of the same services in the community
and would put the hospitals in direct competition with specialty clinics
or hospitals.
This
is not in the best interest of patient care and our communities.
For profit surgery centers or physician-owned specialty hospitals do
not seek to provide charity care. Charity care and community benefit
would be reduced in these specialty areas of care if for profit providers
were further incented to avoid joint ventures of care delivery with
nonprofit hospitals.
●
Good governance is essential for 501(c)(3)
nonprofit hospitals. Independent Directors (not political appointees)
is the factor most critical to good governance.
IHS
follows the majority of the governance practices set forth by the Committee
in its discussion of Governance on pp14-15 of the Discussion Draft.12
Our suggestion is that board members continue to be chosen based on
their experience in the healthcare field, business acumen or community
background. We do not believe that requiring public officials
to control the hospital governing boards would enhance oversight beyond
the level of oversight provided by independent community leaders.
● Reasonable
sanctions are appropriate for 501(c)(3)’s
who do not meet standards and those
who exceed standards should be rewarded
The
Committee has stated one goal of the Discussion Draft is to increase
care to vulnerable populations. Requiring nonprofit hospitals
to contribute their fair share to this goal makes good public policy.
However, regulating the operation of nonprofit hospitals to the extent
that they are inordinately burdensome to operate could result in significant
negative impact to our communities. We strongly urge a cautious approach
to fully develop the understanding of this potentially severe adverse
impact. Over regulation could discourage hospitals and health systems
from seeking or maintaining nonprofit status and potentially from being
providers of governmental reimbursed services. If our Iowa nonprofit
hospitals operated as for profit entities, it would result in a loss
of services provided to vulnerable populations. It has been suggested
by Senator Grassley that some for profit hospitals provide “as much
if not more charity care than some nonprofit hospitals.”13
Not true in Iowa where all of the hospitals are nonprofit. Iowa
Health System believes this contributes to Iowa’s rate of uninsured
persons in Iowa which is among the lowest in the United States.14
The potential savings to the U.S. Treasury that are realized when the
rate of uninsured individuals is low, is more than off-set by creating
over-regulation that results in the decision of tax exempt hospitals
to convert to for profit status, withdraw from the provision free care
and essential community services, and have the resultant burden fall
on the government. The Committee reform proposals should seek
to enhance local, independent governance and the continued provision
of these critical healthcare services.
IHS
suggests that hospitals and health systems that meet or exceed congressional
standards set for quality; charity care; community benefit; transparency
and governance should be recognized by the federal government for their
contributions and achievements. These hospitals and health systems should
receive additional reimbursement for the provision of services that
will allow such nonprofit entities to remain financially viable and
competitive with for profit services. In this way, the federal
government promotes the provision of high quality care to vulnerable
populations by well run entities.
● Nonprofits
should not engage in unfair billing and
collection practices
We
support the expansion of the FDCPA to internal hospital billing and
collection practices. Further, we recommend hospitals establish
their own internal billing and collection practices.15
●
Transparency in executive compensation and
other Matters
We
practice transparency in all facets of our organization. IHS believes
this is a fundamental practice that should be required of 501(c)(3)’s.
For example, in regard to executive compensation, 16
we have published the total compensation of our Health System and hospital
chief executives on our website for over two years. 17
Additionally, we report an executive’s total compensation on the Form
990 filed by the Health System and each of our hospitals. Our executives’
W-2 compensation is the same as the amounts seen by the public on our
website and on our Form 990’s.
To
avoid transparency, we understand that some tax exempt organizations
choose to split an executive’s compensation among related entities
which receive services from the executive. As a result, the compensation
reported on that organization’s 990 will be less than the executive’s
W-2 income, because the amounts paid to the executive by the other related
entities do not appear on the 990 of the reporting organization.
Nor does it appear necessarily on the 990s of the related organizations
because only the top five salaries need to be disclosed on the 990.
Not so with IHS – the executive’s total W-2 compensation, is reported
on the applicable, single 990, and is on our website as well.
We
are also working on a pricing model that will
allow potential patients to assess what the cost of their clinical or
surgical services will be to them if they obtain the healthcare service
from our facility—the cost they will pay out of their own pocket. This model will allow potential patients
to make informed choices regarding their financial liability for healthcare
services.
Conclusion
The
Committee has stated that the reforms contemplated for nonprofit hospitals
are not a “cure-all” to improve healthcare for low income families.18
Picking up on this note, we remind the Committee that nonprofit hospitals
operate in a complex environment.19 While performing the duties
of a charitable organization, nonprofit hospitals deal with the reality
that their ability to provide compensated and uncompensated care to
their communities, in addition to community benefits, depends on transactions
with many for profit entities such as insurance companies, pharmaceutical
companies, healthcare supply vendors and physicians. A “cure-all”
will not come through reform of the nonprofit hospital alone. In seeking
ways to reform our healthcare system, we encourage Senator Grassley
to maintain the parts of the system that work to provide quantifiable
benefit to our communities and its vulnerable populations, and to also
look to the other parts of the healthcare delivery market place to consider
a more global reform instead of focusing on one facet of the system.
We
appreciate the opportunity to share our thoughts on this proposal.
IHS is committed to the principles of accountability to our communities,
good governance and transparency, and supports reasonable legislation
promoting these principles. We recognize that a significant amount
of time and effort has been put into the research, examination and recommendations
in the discussion draft, and look forward to discussing these issues
further.
Sincerely,
Sabra Rosener
1
The $77.5 million of charity care was calculated using the Senate Finance
Committee’s proposed definition of charity care set forth in the Discussion
Draft, pp 7 -8.
All IHS affiliate hospitals
follow the IHS charity care and financial assistance policy, which in
part, provides:
Charity care and
financial assistance discounts shall be based on the following guidelines:
Hospital
Patients
Full charity care
shall be provided to underinsured and uninsured patients earning 200%
or less of the Federal Poverty Income Guideline (FPIG).
For financially
needy underinsured or uninsured patients (a) earning between 201% and
1000% of the FPIG, and (b) whose patient account balance exceeds the
minimum balance on the table below, discounts shall be provided to limit
such patient’s payment obligation to the lower of
the equivalent of
7% of the patient’s Annual Household Income (as defined below) each
year for up to 3 years, or
the amount of the
patient account balance after subtracting the percentage discount applicable
to the patient’s FPIG Household Income provided in the following table.
Percentage Discount & Minimum
Guarantor Balance Table
Minimum Guarantor Balance
Based on
Family Size
FPIG
1
2
3
4
5
or >
Discount
< 200%
0
0
0
0
0
100%
201%
- 400%
2,000.00
1,500.00
1,000.00
800.00
650.00
80%
401%
- 600%
5,000.00
3,500.00
2,500.00
2,000.00
1,500.00
60%
601%
- 800%
15,000.00
10,000.00
7,500.00
6,000.00
5,000.00
40%
801%
- 1000%
25,000.00
16,500.00
12,500.00
10,000.00
8,000.00
20%
A minimum balance
listed in the table must exist before this Policy is applicable.
This policy also provides
for waivers or discounts of Medicare or Medicaid co-pays, or deductibles
based on financial need, and contains extensive provisions on the method
of communicating the availability of charity care and financial assistance
to patients. The entire policy can be found at: http://www.ihs.org/documents/documents/2557_1BR34_financial%20assistance.pdf.
2
Operating expenses excludes the cost of bad debt.
3
Our total quantifiable community benefit was calculated using the Catholic
Health Association (CHA) definition and reporting guidelines for charity
care and community benefit which have been endorsed by Senator Charles
Grassley in his September 12, 2006 press release regarding the manner
in which nonprofit hospitals should measure charity care and community
benefit, and by the Committee in this Discussion Draft, p 13.
Neither bad debt nor Medicare shortfall is included in these calculations.
When calculating Medicaid shortfall, the difference between cost of
service and Medicaid reimbursement was counted, rather than the difference
between the charge master and Medicaid reimbursement. This methodology
is in accordance with CHA guidelines.
4
This number represents the tax liability from which IHS and its affiliate
hospitals are exempt due to their 501(c)(3) status: property tax, sales
tax, federal and state income tax, savings on interest rates and unemployment
taxes.
5
The Discussion Draft suggests that only 501(c)(4)’s be required to
provide a minimum quantitative amount of community benefit, while the
draft does not identify a quantifiable amount of community benefit to
be provided by 501(c)(3) hospitals. See Draft pp 12-13.
6
IHS hospitals provide one-fourth of the inpatient mental health care
in the state of Iowa. Our care of mental health patients typifies
how much of the care we render is compensated care but is serving vulnerable
populations. The compensation rate does not cover the cost of
offering the service.
7
IHS hospitals provide 92% of the medically managed inpatient substance
abuse care and 50% of the primary/extended residential substance abuse
care in the state of Iowa. Our care of substance abuse patients
is another example of care that we are reimbursed for that serves a
vulnerable population. The rate of compensation we receive for
the service does not cover the cost of service.
8
Blank Children’s Hospital was founded in 1944, and is a leader in
pediatric emergency services; pediatric intensive care; neonatal intensive
care; pediatric cancer care; and many other specialty and primary care
areas. Blank is a teaching hospital and is one of only two hospitals
in Iowa to train residents in pediatrics. The children Blank serves
come from across the state and beyond.
9
Every IHS hospital offers a 24 hour accessible emergency room open to
all members of the public, regardless of the ability to pay.
10
There are seven designated Trauma Centers among our affiliate hospitals,
and one Level One Trauma Center at Iowa Methodist in Des Moines.
11
The community services described above, which are provided at a financial
loss, are worthy of measurement by the government in evaluating nonprofit
hospitals’ worth to their communities. By excluding these critically
needed services from this calculation, the Committee discourages nonprofit
hospitals from continuing to provide these services, services which
have already been marginalized by reimbursement decisions by the government.
Many services that the governing hospital boards have decided to continue
to provide, even though government sponsored health benefits do not
pay the cost of providing the services, create a tension with the board
member’s fiduciary duties who have a legal obligation to maintain
their hospital’s finances so the hospital can continue to provide
services to constituents. The hospitals’ missions, as defined
by these local leaders, is to provide these services because they are
needed. If the standard suggested by the Committee becomes legislation,
these leaders will need to understand that these services will not be
counted by the government in evaluating the amount of community benefit
provided by the hospital.
12
The IHS board of directors is made up of 19 individuals either appointed
by the boards of directors of the hospitals from the seven communities
previously mentioned, or elected by the IHS board of directors.
We have devoted substantial effort to identify and implement “best
practices” in the area of corporate governance. In 2003, shortly
after the Sarbanes-Oxley Act was passed by Congress in response to corporate
scandals and financial collapses, IHS voluntarily adopted over 40 changes
to policies and governance requirements. IHS takes its governance
very seriously. Accordingly, we strongly believe IHS is governed
well, and that we are administering the business of healthcare in a
responsible and appropriate manner.
Our Board ensures the organization
fulfills its charitable mission. The Board has established independent
standing committees of the Board which govern director independence,
the compensation of the organization’s executives, and the finances
of the organization. We have established an effective corporate compliance
program and conflict of interest policies.
13
Quote of Senator Grassley, Hospital Charity Care Is Probed,
Washington Post p.D2 September 13, 2006
14
Approximately 9.1 percent of Iowans do not have insurance coverage.
Approximately 5 percent of Iowa children are uninsured. Iowa ranks
3rd among the states, in number of residents, who have health
insurance coverage. Statement of Susan Voss, Insurance Commissioner
of Iowa, Iowa General Assembly 2007 Committee Briefing, Affordable Healthcare
Commission Meeting, June 20, 2007.
15
IHS has developed the following guidelines for billing and collections:
Standards and scope
of practices to be used in any collection efforts have been defined
and collection agencies are instructed to adhere to such standards and
scope of practices.
Bills to patients
include a) a statement that indicates that, if the patient meets certain
income requirements, the patient may be eligible for financial assistance;
and b) a statement that provides the patient with the name and telephone
number of a facility employee or office from whom or which the patient
may obtain information about the financial assistance policies for patients
and how to apply for such assistance.
Collection efforts
do not include seizure of real estate.
Extended payment
plans offered to patients in settling past due outstanding hospital
bills is interest-free.
Board of director
involvement in administration and oversight of financial assistance
policies and CFO approval of collection activities. Multiple follow-ups
w/patient before collection activity goes to litigation.
16
IHS believes that it complies with the regulations issued by the IRS
under the Taxpayer Bill of Rights 2 (“TBR2”) concerning executive
compensation. The IHS Board of Directors has delegated to its Executive
Committee the authority to oversee the setting and adjustment of executive
compensation and benefits. The Executive Committee consists entirely
of disinterested board members. These board members review extensive
market data compiled by an independent national compensation consulting
firm for each executive position – data that is derived from health
systems and hospitals of a similar size to the organization for which
each Iowa Health executive works. These board members meet several
times each year in extensive meetings to review the data, to understand
the competitive market, to ask questions of the consultant, to make
sure that the data results in an “apples to apples” comparison,
and to decide on what the committee considers to be reasonable compensation
for each executive. The Committee receives expert legal advice
to help assure compliance with this law. IHS believes its process compiles
with the IRS regulations and that it would receive the benefit of the
rebuttable presumption of reasonableness provided in the regulations.
17
Website: http://www.ihs.org/body.cfm?id=1048
18
Discussion Draft, p. 4.
19
The changes in healthcare in the recent past and those that lie ahead
of us have been and will continue to be great. Peter Drucker,
a well known management expert and a man BusinessWeek called
“the most enduring management thinker of our time,” said that a
“large healthcare organization may be the most complex organization
in human history.”
The
past three decades have seen unprecedented change in our system of health
care: new financing mechanisms, accelerating technology innovations,
and new paradigms for care. Experts predict these changes will
pale in comparison to the investments providers must make. If
the health system cannot consistently deliver today’s science and
technology, we may conclude that it is even less prepared to respond
to the extraordinary scientific advances that will surely emerge during
the first half of the 21st century. Mission Critical: The Essential
Role of Not-For profitFor profit Community Hospitals to California’s
Health Care Delivery System,
Comments to Senate Finance
Committee – Discussion Draft
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