Internal Revenue Service
Draft 2008 Form 990 Instructions, SE:T:EO
1111 Constitution Avenue, NW
Washington, DC 20224

RE: COMMENTS ON DRAFT FORM 990, SCHEDULE H, AND SELECTED OTHER INSTRUCTIONS

On behalf of Pennsylvania’s nearly 250 member hospitals and health systems, The Hospital & Healthsystem Association of Pennsylvania (HAP), welcomes the opportunity to submit comments on the draft instructions for Form 990, Schedule H for Hospitals, and selected other sections of the draft instructions.

We appreciate the time and effort that the Internal Revenue Service (IRS or Service) has put into the draft instructions, and in particular those for Schedule H. We also want to recognize the Service’s willingness to address questions from the hospital community.

As with the form itself, the instructions need to encompass the Service’s original goals, and we encourage the Service to continue to improve the draft instructions with these goals in mind:

• Enhancing transparency
• Promoting compliance
• Minimizing the burden

We have identified areas of concern or clarification on the recently released draft instructions for the Form 990 and accompanying schedules.

Our comments focus on Schedule H, but also raise issues with several aspects of the draft instructions for Form 990, Schedule J, Compensation Information, and Schedule K, Supplemental Information on Tax-Exempt Bonds.

Schedule H

We recognize and appreciate the Service’s efforts to minimize the considerable burden on hospitals associated with the new form and schedules, particularly Schedule H. It is critical that there be a balanced approach related to the level of information to be collected and the relevancy of such information. With that in mind, there are some areas where the instructions need to be improved to further minimize burden and achieve greater clarity and consistency.

Part I Charity Care and Certain Other Community Benefits
It is important to recognize that many hospital corporate structures include multiple corporations, most of which provide some community benefit activities in addition to those conducted directly by the hospital. The draft instructions provide that Schedule H should aggregate information from disregarded entities and joint ventures, but does not provide a mechanism to capture these important community benefit activities from related corporations that operate within the hospital system or holding company structure. We urge the IRS to clarify in the final instructions how such community benefit activities should be reported, since activity that would have been conducted by the hospital, but for the corporate structure, should be reportable activity.

While Part VI permits an organization that is part of an affiliated health care system to describe the respective roles of the organization and its affiliates in promoting the health of the communities served, we do not believe this question adequately and appropriately addresses the issue presented.

To calculate amounts to be included in the charity care and other community benefit table, the draft instructions provide that organizations may use the worksheets provided with the instructions or other equivalent documentation that substantiates the information reported consistent with the methodology required in the worksheets. It is important to recognize that hospitals have developed or licensed software programs to capture information in connection with various state law community benefit reporting requirements. Such systems need to be recognized and considered as “other equivalent documentation,” so as to avoid duplication of effort or a greater burden in capturing equivalent information on the worksheets.

Grants
We commend the IRS for its treatment of grants restricted for community benefit activities. That determination will encourage hospitals to seek such grants to support programs and services in their community that otherwise might not have been available. The draft instructions do not require grants (whether restricted or not) that an organization
receives and uses to provide community benefit to be counted as “Direct offsetting revenue” in computing “Net community benefit expense” on the charity care and other community benefit table. The draft instructions also provide that an organization may not report on Line 7(i) (Cash and in-kind contributions to community groups) any contributions that were funded in whole or in part by a restricted grant from a related organization. Moreover, the draft instructions provide that unrestricted grants or gifts to another organization that may, at the grantee organization’s discretion, be used other than to provide community benefit may not be reported on Line 7(i). Thus, it appears that if an organization makes a grant to a related organization, including to a foundation or other tax-exempt organization that is not required to file Schedule H, the organization should include such grant in Line 7(i), as long as it is restricted to be used to provide community benefit and was not funded by a restricted grant in the first place. This could also include a grant that was subsequently used by the related organization to fund in whole or in part a grant to another organization. Although this position can be discerned from the draft instructions as written, HAP believes that the IRS should clarify this point in the final instructions.

Medicaid Provider Taxes
The Service specifically has requested comments on how filing organizations should report the cost of Medicaid and provider taxes (Worksheet 1, Line 4) and revenue from uncompensated care pools or programs, including Medicaid Disproportionate Share Hospital (DSH) funds (Worksheet 1, Line 6), as costs and revenues associated with charity care (Worksheet 1) or with Medicaid and other means tested government programs (Worksheet 3).

The wording in the instructions for Worksheet 1, Line 4, is confusing, and results in a narrower-than-intended interpretation of what hospitals should report. We suggest the following changes:

Line 4: Enter the amount of Medicaid provider taxes paid by the organization, if payments received from an uncompensated care pool or Medicaid Disproportionate Share Hospital (DSH) program in the organization's home state are intended primarily to offset the cost of charity care. If such payments are primarily intended to offset the cost of Medicaid services, then report this amount in Worksheet 3, Line 4(A). “Medicaid provider taxes,” sometimes termed a "fee" or "assessment," or “health care-related tax,” means amounts paid or transferred by the organization to one or more states as a mechanism to generate federal Medicaid funds.

Note that we have suggested that the Service delete the last sentence because it does not add to the definition and creates the false impression that provider tax programs uniformly benefit individual providers.

On Worksheet 1, Line 4 and Worksheet 3, Line 4, delete the word “or.”

Definition of Subsidized Services
Hospitals subsidize a range of services to meet the specific needs of their communities. These needs differ greatly based on demographic, economic, and geographic factors. For example, an inner-city hospital experiencing a high number of emergency department visits for uncontrolled asthma may establish a clinic offering free or reduced-fee services for children with asthma. A small rural hospital may need to subsidize physician on-call coverage to ensure the community has 24/7 access to emergency services.

The criteria that the IRS provides for “subsidized services” are clear and comprehensive and the examples cover a range of common service offerings. However, it is important to recognize that there are unique circumstances that individual communities face, and do not feel that specific types of services should be excluded from the definition of subsidized services provided that provided that they meet the criteria outlined. These include physician clinic services, skilled nursing services and ancillary services.

Part II Community Building Activities
Under Line 8 (Workforce development), the IRS should broaden the category to include other circumstances under which physician recruitment can be reported, such as the absence or shortage of a particular physician specialty. To that end, the IRS could amend the existing language to add after “underserved”: “or in other circumstances where there is an identified community need for a particular type of physician(s).”

Part III Bad Debt, Medicare & Collection Practices
We urge the IRS to include language the following language in the instructions themselves, explicitly recognizing, that this section permits:

• important and uniform reporting of bad debt expense information and an explanation of why certain portions of bad debt should be considered community benefit; and
• important information regarding Medicare revenues and costs, shortfalls or surpluses and an explanation of why certain portions should be treated as community benefit.

Section A
Line 4 requires an organization to provide the text of the footnote to the organization’s financial statements that describes bad debt expense. The draft instructions further provide that footnotes related to “accounts receivable,” “allowance for doubtful accounts,” or similar designations may satisfy this reporting requirement. We understand that many health care organizations’ financial statements do not contain footnotes relating to bad debt expense or any noted or similar designations. HAP suggests that the IRS include language in the draft instructions to this question to clarify that, if this is the case, organizations are not required to create footnotes in financial statements to satisfy this question.

Section B
Under Section B-Medicare, Line 8, the IRS has not provided adequate guidance to hospitals about the type of explanation it would find useful in better understanding which portions of Medicare underpayments constitute community benefit. To that end, we recommend that the IRS include the following language, into the instructions:

An organization’s rationale may have any reasonable basis, including the amount of the shortfall that might otherwise have been used to support the programs included in Parts I or II, an estimate of the income range of the organization’s Medicare patients, an estimate of the number of Medicare patients also eligible for the Medicaid program (dual eligibles), or whether the organization reports the amount of Medicare shortfall to any state government authority identified in Part IV, Line 8, or any other government authority.

As the IRS is aware, this is an area in which hospitals have been provided little guidance in the past and in which guidance, like that suggested above, would be quite useful.

Under the introductory paragraph for Part III on page 9, we suggest that the IRS add the word “likely” after the word “who” in the first sentence to be consistent with the phrasing on the following page.

We urge the IRS to allow hospitals the same options for accounting for Medicare costs as are available for other parts of Schedule H. The current instructions are confusing and provide conflicting guidance. For example:

• By using the word “allowable cost” in Line 5, the IRS implies that hospitals should use Medicare cost reporting rules and accounting standards to calculate the Medicare shortfall. The inclusion of multiple choices on Line 8, however, implies that hospitals still have the ability to use the most accurate method available to them as they do elsewhere on Schedule H. The instructions provide no guidance on what those checkboxes mean.
• Line 5 of Part III says to “Enter total revenue received from Medicare (including DSH and IME),” and the instructions provide further guidance on what revenues to include or exclude. One item that is specifically included is Part B physician services. On the worksheet supporting Line 6, the IRS says to take Medicare allowable costs (from the Medicare Cost Report). The Medicare cost report does not account for the revenues and costs of Part B physician services because they are paid under a different payment system. Thus the IRS is including Part B physician services in revenues, but excluding them from costs.

Medicare cost report accounting is very different from Generally Accepted Accounting Principles (GAAP) standards and, as such, will be very different from what hospitals determine is the most accurate costing method to use elsewhere on Schedule H. The Medicare cost report is designed only to produce cost estimates for a specific subset of Medicare programs. It excludes parts of the Medicare program that may contribute to Medicare gains or losses for the hospital like Part B physician services, as mentioned above, and the revenues and costs associated with Medicare Advantage patients. Worksheet 3 specifically asks hospitals to include the revenues and costs associated with Medicaid
managed care patients. To be consistent with the calculations on other parts of the form and provide a full accounting with respect to Medicare, Section B should capture the costs and revenues associated with all Medicare services and patients using the most accurate approach available.

Part V Facility Information
In the draft instructions, the IRS has proposed to adopt a definition of “facility” that is too broad. Under this broad definition, large health care systems that operate numerous hospitals will be required to report every building, structure, clinic, etc. Such a reporting requirement will amount to dozens of pages of information being submitted to satisfy this question. Thus, for large complex health care systems, such a broad definition would require details that are not meaningful to understanding the hospital. HAP urges the IRS to provide further clarification on the definition of “facility” as “an entity that is licensed and/or certified as a hospital.”

FORM 990 – KEY EMPLOYEE
Although the IRS has made many improvements to the Form 990 instructions, some concerns remain. Of immediate concern is the breadth of the definition of “key employee.” We have consistently advocated for a much more focused definition that would reduce the burden of providing this information. Hospitals and hospital systems can be large and complex organizations, and the new definition does too little to mitigate the burden associated with this new reporting requirement. We note that even within our own organization, the revised definition could capture Human Resource executives who have virtually no “responsibilities, powers or influence over the organization ... that is similar to those of officers, directors or trustees.” The same would be true for hospitals.

We also agree with the American Society of Association Executives (ASAE) that the definition of “key employee,” even as revised by the draft instructions, remains too broad and sweeping and should be further refined. Both the percentage threshold (now 5 percent) and the control standard (management) need to be revised; a threshold well above 5 percent and a tighter control standard coupled with an upper limit on the number of employees to be reported - preferably limited to three - should replace the current definition. If experience with the new form ultimately suggests a more expansive definition, the Service should revise it at that time.

SCHEDULE J - DEFERRED COMPENSATION
The draft instructions to Schedule J require deferred compensation to be reported in the year earned, whether or not funded, vested or subject to substantial forfeiture, and in the year paid. Although final Schedule J includes column (F) for the reporting of amounts that were also reported in another year, HAP believes that this addition does not address the unfairness and misperception associated with reporting compensation that is not yet considered to be income
to the recipient. HAP urges the IRS to require that amounts of unpaid, unvested deferred compensation be reported only in the year the compensation is paid to the recipient.

SCHEDULE K - SUPPLEMENTAL INFORMATION ON TAX-EXEMPT BONDS
The draft instructions to Schedule K require organizations to complete the Schedule for each outstanding tax-exempt bond that both had an outstanding principal amount in excess of $100,000 as of the last day of the tax year and was issued after December 31, 2002. The draft instructions further provide that refundings after December 31, 2002 of pre-2003 issues must be treated as post-2002 issues and reported on Schedule K. HAP urges the IRS to clarify in the instructions that such reporting does not include information on expenditure and investment of proceeds or uses of bond-financed facilities occurring prior to 2003.

We appreciate the opportunity to submit our comment on the draft instructions for the core Form 990 and related schedules, and thank you in advance for consideration of our comments and recommendations.

Should you have any questions regarding our comments please contact Tina Latin-True, vice president and controller, HAP, at (717) 561-5311.

Sincerely,

PAULA A. BUSSARD
Senior Vice President
Regulatory Services