The Impacts on Tax-exempt Status of Nonprofit Nursing Homes

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Recording Charity Care and Bad Debts

The Impacts on Tax-exempt Status of Nonprofit Nursing Homes in New Hampshire

  1. Introduction

Nonprofit organizations (NPOs) have been playing an important role in the community in the United States. Since the mission of NPOs is to provide benefits to the community, the government credits NPOs with tax-exempt status. Today, the tax-exempt categories in the income tax statute include more than 29 different types of federal income tax-exempt organizations; particularly, Section 501(c) contains 29 subsections. 501(c)(3) covers most of the tax-exempt organizations, including organizations operating solely for “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition … or for prevention of cruelty to children or animals …” (Cafardi & Cherry , 2014). In 2012, there were 963,234 public charities under Section 501(c)(3) of the Internal Revenue Code, contributing approximately $887.3 billion to the US economy, and accounting for 5.4% of the US GDP, according to the National Council of Nonprofits. The need for charity services is increasing while NPOs continues to face limited resources (Nonprofit Sector Trends, n.d.).

NPOs have substantially contributed to the financing and delivery of health care. “About 60% of community hospitals are nonprofit, all community health centers are nonprofits, almost 30% of nursing homes are nonprofit, and approximately 17% of home health care agencies are estimated to be nonprofits” (The Value of Nonprofit Health Care, 2011). In New Hampshire, “Health care organizations are among the largest and most important charities” (Charitable Trusts Unit Health Care Organizations, n.d.). However, there was a decrease in the number of nonprofit nursing home between 2010 and 2014, according to Department of Health and Human Services USA (2015). Nonprofit health care organizations provide charity care to patients who are in need and unable to pay for the services rendered. On the other hands, service provided to patients who are determined to have financial capacity to pay but unwilling to settle the claim is classified as bad debts (Valuation and Financial Statement Presentation of Charity Service and Bad Debts by Institutional Healthcare Providers, 2012). Affordable Care Act (ACA) in 2010 requires health care organizations to “make reasonable efforts to determine whether an individual is eligible for assistance under the … financial assistance policy before engaging in extraordinary collection actions against the individual” (501(r) – What Does it Mean for You?, 2013). Determining patients’ ability to pay for the services and collections from the poor become a critical issue. Failure to distinguish bad debts and charity care may prevent health care organizations from receiving tax-exemption privilege since it violates not only the requirements of ACA but also the State law for tax-exempt status (Levin, 2016).

  1. Purpose of the Study

 The purpose of this study is to examine the levels of charity care and bad debts as well as the level of debts collection of New Hampshire charitable nursing homes. The study will collect statistical data obtained from Form 990, Return of Organization Exempt from Income Tax, and relative Schedule H to answer whether there are excess of bad debts and aggressive debts collection, and the impacts on the State property tax-exemption of these organizations. Finally, the study will help to identify potential nonprofit nursing homes in New Hampshire property tax-exempt may be challenged.

  1. Literature Review

    1.      Nonprofit Health Care Organizations and tax-exempt status

Under the Internal Revenue Service (IRS)

Nonprofit organizations that do not pay federal income taxes are tax-exempt organizations, but not all nonprofit organizations are under tax-exempt status. To obtain the tax-exempt status, an organization must follow the process designed by the IRS with the provision of sufficient documents. Health care organizations if qualified will fall under Section 501(c)(3). Requirements for a health care organization qualified the tax-exempt status includes that the entity is operated as nonprofit charitable organization to serve the public. These organizations operate solely for community benefits including provision of medical, hospital care to those who are not able to pay for the services rendered, not exclusive to those who are able and expected to pay, as well as medical education, medical research, and promoting “the advancement of medicine through research and maintenance of conditions conductive to health.” In addition, their net earnings cannot rely directly and indirectly on the benefit of shareholders or individuals (Cafardi & Cherry, 2014).

Under New Hampshire State Law

Entities that are not organized as a form of business is considered to be nonprofit organizations; not all of them operates solely for charitable purposes. Typically, charitable organizations can obtain the 501(c)(3) status from the IRS. However, being recognized 501(c)(3) charitable status by the IRS does not guarantee an organization to be eligible for the ad valorem tax exemption in New Hampshire (Charities and Property Taxes: A Dilemma For Local Officials, 2007). Chapter 72:23-I of the State New Hampshire Revised Revenue Annotated (RSA) states “the fact that an organization’s activities are not conducted for profit shall not in itself be sufficient to render the organization ‘charitable’ for purposes of this chapter, nor shall the organization’s treatment under the United States Internal Revenue Code of 1986, as amended” (Charities and Property Taxes: A Dilemma For Local Officials, 2007). RSA 72:23-I defines “charitable” organizations as those perform “some service of public good or welfare advancing the spiritual, physical, intellectual, social or economic well-being of the general public or a substantial and indefinite segment of the general public that includes residents of the state of New Hampshire, with no pecuniary profit or benefit to its officers or members, or any restrictions which confine its benefits or services to such officers or members, or those of any related organizations.” Besides satisfying the definition of “Charitable” under RSA 72-23-I, charitable health care trusts must organize “to directly provide health care services, including, but not limited to, hospitals, nursing homes, community health services, and medical-surgical or other diagnostic or therapeutic facilities or services. “Health care charitable trust” shall not include any testamentary or inter vivo trust which is not organized to provide health care services” under RSA 7:32-d. Nonprofit nursing homes fall under “health care charitable trust” category. The organizations provide “services for eligible individuals who are ill, frail and need 24-hour nursing care and supervision.” The level of care is ranged from “custodial care to skilled nursing care” (Nursing Home Care, n.d.). The real estate and personal property of these organizations shall be exempt from taxation.

3.2        Charity Care and Bad Debts

Charity care

According to RSA 7:32-d, charity care is defined as “health care services provided by health care charitable trust does not expect and has not expected payment and which health care services are not recognized as either a receivable or as revenue in the trust’s financial statements.” Simply, charity care is either free or discounted health care services provided to patients who are unable to pay and classified to be eligible to receive the charity care using “formal financial assistance policies” of the organizations. Reporting charity care should be in terms of costs, not charges, of care provided to uninsured, eligible patients, as well as to underinsured patients who “qualify for discounted or forgiven charges for amounts” of which patients are responsible to pay (Office of the New Hampshire Attorney General, 2008). Because charity care is given without expecting to receive payments, it is not the same as bad debts.

Bad debts

Different from charity care, bad debts represent costs of conducting business arising when patients who are classified to have capacity but refuse to pay for service provided (Gale, Croom, Croll, & Coburn, 2015). In the first instance, services provided are recorded at the “full-established charges amount in revenue and receivables are recorded as services are rendered.”  Determination of bad debts should only be made when there is “sufficient evidence”. Evidence is based on financial status of the patients which is determined by the “facility’s revenue cycle policies” (Valuation and Financial Statement Presentation of Charity Service and Bad Debts by Institutional Healthcare Providers, 2012). Despite conceptual difference, in practice, both charity care and bad debt are influenced by the extent of charity care promoted by the health care organizations to eligible patients, the availability of income for charity care, the process of “screening programs” to decide whether patients are eligible for charity care, how stringent the applications and income document required to provide by patients, and “assess eligibility at different stages of the billing process” (Gale, Croom, Croll, & Coburn, 2015).

3.3        The impacts of distinguishing bad debts and charity care on NH property tax exemption

Charitable health care organizations implementing “more restrictive eligibility criteria” and demanding more income documentation requirements in their screening process are more likely to exclude low-income patients from being qualified for charity care. Therefore, 

these organizations tend to have low-level of charity care and incur high-level of bad debts (Gale, Croom, Croll, & Coburn, 2015). Failure to distinguish charity care and bad debts may challenge the property tax exemption of charitable health care organizations under State law. Some States already challenged nonprofit health care organizations’ tax-exempt status due to the unreasonable collections of bad debts, failure in screening process to “sufficiently” determine patients eligible for charity care, or simply because of organizations not operating solely for community benefits.

New Jersey: New Jersey tax court deprived property tax-exempt status of Morristown Medical Center because the medical center operated more like for-profit, with aggressive debt (Schencker, 2015). Following the case of Morristown Medical Center, 35 nonprofit hospitals were facing tax appeals filed by local officials to challenge tax-exempt status of these organizations (Livio, 2016).

Illinois: section 15-65 of the Property Tax Code (35 ILCS 200/15-65) states that organizations of public charity care receive property tax exemption when “actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit.” Clinics owned by Riverside Medical Center, Plaintiff-Appellee, were granted property tax-exempt status by Kankakee County circuit court under section 15-65 of the Property Tax Code. In this appeal, Department of Revenue of the State of Illinois and the Kankakee County Board of Review as Defendants-Appellants questioned whether the clinics operated solely for charitable purposes by arguing that the amount of charity care provided by these clinics was insufficient compared to the services that were paid by patients. Instead of providing charity care to low-income patients, these clinics ceased collections efforts in case of patients’ inability to pay as write-off bad debts. As the result, Court decided that these clinics owned by Riverside Medical Center are not eligible for exemption from state property taxes.

Washington: Northwest Hospital & Medical Center was accused of failing to “properly screen poor patients eligible for charity care” in a class action suit filed in King County Superior Court. Instead of granting the patients eligible for reduced rates under “Washington state Charity Care Act,” Northwest sent their debts to collections, “allowing their wages to be garnished.” The action violates both ACA requirements and the state’s Charity Care Act, according to (Aleccia, 2016).

  1. Methodology

Since the study focuses on charity care and bad debts of nonprofit nursing homes in New Hampshire, secondary data will be used and analysed. The study will use both quantitative data and qualitative data. Qualitative data includes similar studies, academic journals, articles for supportive information. Moreover, 2 case laws will be used as illustrations and evidence for how bad debts, charity care, and the practice of collections from low-income patients challenge the property tax-exempt status of nonprofit healthcare organizations. These cases are:

RIVERSIDE MEDICAL CENTER, an Illinois not-for-profit corporation, Plaintiff-Appellee, v. The DEPARTMENT OF REVENUE OF the STATE OF ILLINOIS and The Kankakee County Board of Review, Defendants-Appellants.

KAMAL AMIREH and HUGO CABRERA VILLALOBOS, individually and on behalf of others similarly situated, Plaintiffs, v. UW MEDICINE/NORTHWEST. d/b/a NORTHWEST HOSPITAL & MEDICAL CENTER, a Washington corporation, Defendant.

Quantitative data including numerical data of bad debts, charity care, write-off bad debts obtained from Form 990, Return of Organization Exempt from Income Tax, and relative Schedule H of nonprofit nursing homes in New Hampshire (Sample size: 50 organizations; Variables: charity care, bad debts, written debt collection.)

Interpretation: the study will use regression analysis with bad debts as dependent variable that is hypothesized to be influenced by charity care as independent variable to examine the relationship between bad debts and charity care. In addition to the regression analysis, the study also examines the bad debt expense and collection practices of these nursing homes in terms of bad debts as percent of total expense, percentage of bad debts attributable to charity care, debt collection as percent of total estimated bad debts, and whether the collection policy containing the provision for the collection practices on patients who are eligible for financial assistance.

Prediction: Bad debts and charity care will have negative relationship, meaning that organizations with high level of bad debts are likely to have low level of charity care, and vice versa. Organizations with low charity care and excessive bad debts, following with high percentage of bad debts attributable to charity care and high debt collection are likely to face challenges on their property tax-exempt status at State level.

  1. Timeline

End of January / Early February

Mid-February / Early March

Mid-March / Early April

Mid-April / Early May

Identify source of secondary data

Check with IRB to see if IRB approval is needed to use the data.

Register for URC

Obtaining the secondary data

Sorting and cleaning the data

Analyze data

Interpret results

Write the thesis

Prepare poster for URC

Present poster at URC

Submit the first draft

Submit final version of thesis Submit approved thesis to http://scholars.unh.edu/honors/ 

References

  • (n.d.). Retrieved Nov 25, 2018, from National Council of Nonprofits: https://www.councilofnonprofits.org/
  • Nicholas P. Cafardi, Jaclyn Fabean Cherry . (2014). Tax Exempt Organizations: Cases and Materials. New Providence, New Jersey : LexisNexis.
  • 501(r) – What Does it Mean for You? (2013, April 4). Retrieved Nov 25, 2018, from Becker’s Hopital CFO Report: https://www.beckershospitalreview.com/finance/501r-what-does-it-mean-for-you.html
  • Aleccia, J. (2016, Jun 21). Suit claims Northwest Hospital fails to screen for charity care. Retrieved Nov 25, 2018, from The Seattle Times: https://www.seattletimes.com/seattle-news/health/suit-claims-northwest-hospital-fails-to-screen-for-charity-care/
  • Charitable Trusts Unit Health Care Organizations. (n.d.). Retrieved Nov 25, 2018, from New Hampshire Department of Justice Office of the Attorney General: https://www.doj.nh.gov/charitable-trusts/health-care.htm
  • Charities and Property Taxes: A Dilemma For Local Officials. (2007, May). Retrieved Nov 25, 2018, from New Hampshire Municipal Association: https://www.nhmunicipal.org/TownAndCity/Article/60
  • Department of Health and Human Services USA. (2015). Nursing Home Data Compendium. Center for Medicare and Mediaid Services. Retrieved Nov 25, 2018, from https://www.cms.gov/Medicare/Provider-Enrollment-and-Certification/CertificationandComplianc/Downloads/nursinghomedatacompendium_508-2015.pdf
  • John A. Gale, Jamar Croom, Zachariah Croll, Andrew F. Coburn. (2015, June). Charity Care and Bad Debt Activities of Tax-Exempt Critical Access Hospitals. A Performance Monitoring Resource for Critical Access Hospitals, States, and Communities, 2-5. Retrieved Nov 25, 2018, from http://www.flexmonitoring.org/wp-content/uploads/2015/06/PB38.pdf
  • Levin, S. (2016). For What It’s Worth: The Proactive Approach to Maintaining Nonprofit Status As A Charitable Entity. Waltham, MA, USA. Retrieved Nov 25, 2018, from Connance: http://www.connance.com/wp-content/uploads/Connance-Charity-White-Paper.pdf
  • Livio, S. K. (2016, Aug 19). N.J. towns sue 35 hospitals over property taxes. Retrieved Nov 25, 2018, from NJ.com: https://www.nj.com/politics/index.ssf/2016/08/lawsuits_against_hospitals_continue_to_pile_up_ove.html
  • Nonprofit Sector Trends. (n.d.). Retrieved Nov 25, 2018, from National Councils of Nonprofits: https://www.councilofnonprofits.org/nonprofit-sector-trends
  • Nursing Home Care. (n.d.). Retrieved Nov 25, 2018, from New Hampshire Department of Health adn Human Services: https://www.dhhs.nh.gov/dcbcs/beas/nursinghome.htm
  • Office of the New Hampshire Attorney General, D. (2008, Nov). Comunity Benefit Reporting Guide. Retrieved from New Hampshire Department of Justice: https://www.doj.nh.gov/charitable-trusts/documents/community-benefits-guide.pdf
  • Riverside Medical Center v. Department of Revenue of State of Illinois, 795 NE 2d 361 (Appellate Court of Illinois, Third District July 30, 2003). Retrieved Nov 25, 2018, from https://scholar.google.com.vn/scholar_case?case=3194378362214019143&q=bad+debts,+charity+care&hl=en&as_sdt=6,30
  • Schencker, L. (2015, Jul 8). Not-for-profit hospital’s tax exemption case could signal trouble for others. Retrieved Nov 25, 2018, from Modern Healthcare: https://www.modernhealthcare.com/article/20150708/NEWS/150709925
  • (2011). The Value of Nonprofit Health Care. Alliance for Advancing Nonprofit Health Care. Retrieved Nov 25, 2018, from http://www.nonprofithealthcare.org/uploads/ValueOfNonprofitHealthCare.pdf
  • Valuation and Financial Statement Presentation of Charity Service and Bad Debts by Institutional Healthcare Providers. (2012, 12). HFMA’s Principles and Practices (P&P) Board. Retrieved Nov 25, 2018, from Principles and Practices Board Statements and Publications: https://www.hfma.org/Content.aspx?id=1069

         Nh. Revised Statutes Ann. § 7:32-d(2003)

         Nh. Revised Statutes Ann. § 72-23-I (2003)

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