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Healthcare Reform and Nonprofits

By Michele Donohue - January 15, 2010

Healthcare reform might be a double-edged sword for nonprofits, with some organizations left in the cold while a new explosion of groups to handle aspects of the new laws spring up, creating more competition in the marketplace.

Nonprofits in general will have to watch how reform will impact insurance for employees, especially as small nonprofits face staggering increases for annual insurance premiums. Nonprofits in the healthcare community should keep watch as legislation details are hammered out, including funding opportunities, increasing scrutiny in charity care, and additional reporting requirements for nonprofit hospitals.

Healthcare reform is a moving target. The U.S. House of Representatives passed the Affordable Health Care for America Act on Nov. 7, and the U.S. Senate on Dec. 23 passed its version, called the Patient Protection and Affordable Care Act.

It must go to a conference committee to work out the differences, including the controversial public option, which is in the House bill but not the Senate version.An estimated 46.3 million people, or 15.4 percent of the population, did not have medical insurance at some point during 2008, according to the U.S. Census Bureau. The Congressional Budget Office estimated with the passed House bill 18 million would remain uninsured while 24 million would be uninsured in the current Senate bill.

Nonprofit leaders need to know what healthcare reform might look like before Congressional members cast their yeas and nays or the ink dries on a presidential signature. The National Council of Nonprofits (NCN) estimates there were more than 100 visits to members of Congress during the “Nonprofits Advocate!”Lobby Day this past June, but nonprofits were still forgotten in the passed House bill language, which would offer tax credits to small businesses providing health coverage.

Nearly 93 percent of nonprofits have revenue of less than $1 million, according to Tim Delaney, president and CEO of the National Council of Nonprofits in Washington, D.C. Many nonprofits are small business employers. But some policymakers don’t seem to know that nonprofits are a driving employment force with more than 15 million employees overall, according to 2008 data from the Agency for Healthcare Research and Quality.

“We were somewhat surprised by the number of policymakers who were surprised that nonprofits are employers,”said Delaney. “We heard such gems, Nonprofits are all volunteers. They don’t need health insurance.’”

Dohn Hoyle, executive director of The Arc Michigan in Lansing, explained that healthcare costs for employees have doubled during the past five years. Hoyle even went as far as to put himself on his wife’s coverage so the insurance premium for other employees would not increase since he reached his 60s.Hoyle explained that he can’t increase salaries because healthcare costs drain his small group, with 14 employees eligible for insurance and an additional four new hires that will be eligible. “At some point this is impossible. We just can’t keep this up,”he said.

The language in the House bill would provide for-profit small businesses a tax credit to augment costs of supplying employee health coverage. There isn’t a provision for small nonprofit employers for a comparable credit or subsidy.

“Most of us, by definition, are small or mid-sized employers and we are community-based. And yet if we cannot provide the same level of benefits as for-profits we will not be able to recruit the best and the brightest to serve the needs of Americans,”said Delaney. “This is an issue that cries out for nonprofits to get more engaged in the process.”

“Health care reform is a critical issue for us all, but particularly for the 65 percent of nonprofits that employ 25 or fewer workers,”said Diana Aviv, president and CEO of Independent Sector, in Washington, D.C. Independent Sector is urgently trying to get Congress to recognize that as employers of more than 15 million people, the charitable community faces rising insurance premiums that force choices between cutting benefits, cutting programs or closing doors.

Aviv explained while the Senate language might put for-profit and nonprofit small employers on the same footing, the nonprofit sector must stay vigilant that the recognition is in the final bill. “Just like our small, for-profit business counterparts, small nonprofits need help in providing health insurance coverage for their employees,”said Aviv.

“Some (nonprofits) are small businesses, and yet relief for mandatory coverage that they (Congress) are examining would largely not impact nonprofits because they are looking more at tax relief options,”said Kyle Caldwell, president and CEO of Michigan Nonprofit Association (MNA).

Nine of 10 nonprofits were “concerned”or “very concerned”about their ability to provide healthcare benefits due to rising costs, according to a survey of 125 Michigan nonprofits by MNA and the Johnson Center for Philanthropy at Grand Valley State University.

Some 95 percent of respondents said healthcare benefits were “important”or “very important”when attracting new personnel, and a majority are concerned that healthcare benefits will get in the way of retaining current employees, according to the survey.

Caldwell explained that the marketplace is flooded with talent due to unemployment. Michigan has a 14.3 percent unemployment rate, compared to the 9.4 percent national average, according to U.S. Bureau of Labor Statistics.

Although economic times are tough, nonprofits need to think about the employment future, especially keeping in mind the imminent wave of Baby Boomer retirements.

Nonprofit CO-OP and other funded programs

The Senate’s healthcare reform bill set aside $6 billion in appropriations to develop a federal program to help establish nonprofit, member-run health insurance issuers, also known as the Consumer Operated and Oriented (CO-OP) program.

Under Section 1322 of the federal Tax Code, these qualified nonprofit health insurance issuers would receive tax-exemption as 501(c)(29) organizations. The appropriations would help carry out the CO-OP program, including start-up assistance loans and grants for which qualified nonprofit health insurance issuers could apply.

Lloyd Hitoshi Mayer, associate professor at Notre Dame Law School and a contributor to the Nonprofit Law Professors Blog, explained that if the bill passes with such language, there could be a “boom in healthcare nonprofits”in reaction to all the opportunities for public entities and private nonprofits.

“If you go through the bill, there are all sorts of training programs, record keeping and stuff like that, and a lot of grant programs built into the bill, most that are restricted to public or nonprofit recipients,”said Mayer.

An example of those opportunities is money for training in public health dentistry. Another example is that the bill includes a temporary high-risk health insurance pool program for insurance coverage to start no later than 90 days after the bill’s enactment, which only state or nonprofit private entities would be eligible to carry out.

“There’s going to be an influx of people establishing these nonprofits because there is money there,”said Mayer. “And the big unknowns are how are they going to work, how well are they going to be monitored and how are we going to make sure these are truly nonprofit entities and that there are not owners.”

Mayer explained that the nonprofit CO-OP might be easier to swallow than the well-debated and controversial public option. “I think it makes a big difference because what people don’t like and what they are concerned about, and rationally so, is government bureaucrats making the decisions,”said Mayer. “They are much more comfortable with a private entity, that’s subjected to some government restrictions and requirements, but a private entity.”

Additional nonprofit hospital requirements

Important features in the Senate’s bill outline additional requirements for nonprofit hospitals that mirror requirements made by the Senate Finance Committee, including one that demands nonprofit hospitals to perform a community needs assessment at least once every three years.

The legislation would require the hospital’s community needs assessment to have input from the community, especially those knowledgeable in public health, and make the assessment public. Hospitals would then adopt implementation strategies to meet the needs identified through the assessment. Hospitals would also have to describe the needs found in the assessment and explain why the needs that are not being addressed.

Bill McGinly, CEO of the Association for Healthcare Philanthropy (AHP) in Falls Church, Va., explained that many nonprofit hospitals already perform community assessments, just in a different form.

“In most instances, that community assessment is really done by the marketing department primarily. Part of their interest is not the same focus on the service to the community. It’s more about how they get the competitive edge, what kinds of programs should they introduce to meet community needs but also keep them competitive,”he said. McGinly explained that one problem is that most people can’t distinguish between a for-profit hospital and a nonprofit hospital. “They think we are all for-profit, and the real difference is that anything we are able to generate off of operations stays in the community as opposed to going to stockholders. So it’s reinvestment, which is a plus,”he said.

McGinly urged nonprofit hospitals to stop burying details of community benefit in annual reports. “You have to be out there talking to the community and educating them about the resource this hospital is to the community,”he said. “You have to demonstrate your value to the community — dollar for dollar. And I don’t think there is a hospital out there that cannot do that.”

McGinly explained that those worried that reform would replace philanthropy should look at the robust fundraising at Canadian nonprofit healthcare organizations. “They have a single payer system, but philanthropy flourishes because the single payer system doesn’t pay for capital improvements. It doesn’t pay for equipment improvements. There is a huge gap there. It doesn’t matter what system you put in place, you can’t afford all the healthcare we could, and should, deliver,”he said.

“To one extreme, some of my members are talking about, Well, if we have a public option, there will not be any more philanthropy because the government will pay for it all,’’”said McGinly.

Other requirements in the Senate bill include written policies for financial assistance eligibility and emergency medical care regardless of financial assistance eligibility. Hospitals that fail to comply will be slapped with a $50,000 excise tax.

Charity care

The revised federal Form 990 gives more insight on governance and disclosure at nonprofits, and Schedule H for nonprofit hospitals is just one aspect of the increased reporting.

Schedule H is new for the federal Form 990 and required for licensed nonprofit hospitals as of tax year 2009. The first question asks if the organization has a charity care policy, and goes on to inquire about using Federal Poverty Guidelines to determine eligibility for free and discounted care.

The Internal Revenue Service (IRS) has not required specific thresholds for charity care since 1969, but looks for a more general community benefit to qualify for a federal tax exemption. But even “community benefits”are not defined by a certain percentage of charity care or specific actions, so the term could take on different roles and hospitals have various measurements.

Charity care can include free and discounted care and cover shortfalls in Medicare and Medicaid assistance.

There are community benefit requirements in 15 states and 10 of those states have detailed requirements, according to a report issued by U.S. Government Accountability Office in 2008. For example, Texas requires a minimum charity care threshold at 4 percent of net patient revenue.

But what happens if a healthcare reform bill is passed which covers an estimated 92 to 94 percent of the population? Mayer, the Notre Dame professor, explained that if healthcare reform passes, conceivably some areas would significantly reduce reliance on charity care, due to the high concentration of coverage in one form or another.

“What if you can’t find enough patients?,”Mayer asked rhetorically. “The hospitals and other healthcare entities are going to be able to make a convincing case that you shouldn’t impose charity care requirements on us because there’s not as much demand anymore. So even the modest amount that we are doing is enough.”

The Senate’s bill requires a report on charity care levels conducted by the U.S. Secretary of the Treasury with the Secretary of Health and Human Services. The provision stipulates an annual report on issues, such as charity care levels and unreimbursed costs for services from government programs.

The report isn’t just aimed at nonprofit hospitals. Both public and for-profit hospitals will have to provide information. The report will be submitted to entities, such as the House of Representatives Committee on Ways and Means and the Senate Committee on Finance and Health, and study trends in charitable care.

Mayer explained that although charity care might decrease significantly with increased healthcare coverage; don’t expect the government to start stripping nonprofit hospitals of their tax-exemptions.

“The structure in which Congress is struggling to put in place depends on private providers. And to yank charitable status, as opposed to make them better with things they already have, because you are not providing enough charity care because there are not enough charity patients would be counterproductive because you are going to shut down private providers ultimately,”he said. Mayer said that healthcare reform isn’t built on creating public healthcare providers. It’s about increasing coverage to uninsured Americans.

“You need to have a lot of hospitals out there to take all the money that is flowing through the various avenues. If you start telling these hospitals, Well, you’re not charitable,’ some of these hospitals, especially in the most high-demand areas like rural and inner city, are going to shut down. And then, you don’t have a provider,”said Mayer.

“It doesn’t matter if you have insurance if there isn’t a hospital within 50 miles of you,” he said.

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