AHLA's Speaking of Health Law
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AHLA's Speaking of Health Law
Top Ten 2024: Tax-Related Developments
Based on AHLA’s annual Health Law Connections article, this special series brings together thought leaders from across the health law field to discuss the top ten issues of 2024. In the seventh episode, Debbie Ernsberger, Principal, PYA, speaks with Douglas M. Mancino, Partner, Seyfarth Shaw LLP, about the tax-related issues that the health care industry faces. They discuss what tax-exempt organizations should anticipate related to community benefit, Section 501(r) compliance, best practices regarding community benefit data, and executive compensation. Sponsored by PYA.
Watch the conversation here.
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A HLA is pleased to present this special series highlighting the top 10 health law issues of 2024, where we bring together thought leaders from across the health law field to discuss the major trends and developments of the year. Support for A HLA in this series is provided by PYA, which helps clients find value in the complex challenges related to mergers and acquisitions, clinical integrations, regulatory compliance, business valuations , and fair market value assessments, and tax and assurance. For more information, visit PYA pc.com.
Speaker 2:Thank you for joining us today as we continue to focus and expand on the recent A HLA article, top 10 Issues in Health Law 2024. My name today is Debbie Berger. I'm a principal at PYA and I am so excited that joining me today is Doug Manino. I'm pleased that Doug is here to expand on the number seven topic in the health law issue that he authored , um, in the article, and it's specific to tax related developments in 2024 . So, Doug, would you like to introduce yourself and maybe share a bit about your background?
Speaker 3:Sure . Debbie . Uh, I'm Doug Manino. I'm a partner in Los Angeles with s Farth Shaw, LLP. Uh, I've been a member of the A HLA and its predecessor organizations going back to probably 1975 or 74. And I'm a past president of A HLA and, and delighted to be here today to talk about , uh, what I see on the horizon for tax issues facing healthcare organizations in 2024.
Speaker 2:Great, Doug, well, I'm excited to have you expand on several items that you've highlighted in the article. Um, certainly tax exempt hospitals have been a focus in 2023 , and you indicate that 2024 is gonna be a consequential year as well , um, for nonprofit hospitals and the health systems, for a number of reasons. The exact words that you used were tax exempt status will remain under fire. And I thought those, that was just a brilliant , um, summary of really to explain where many of these tax exempt organizations currently are. So with that said , um, what should tax exempt organizations anticipate in 2024 related to community benefit with pressures coming from state organizations as well as now various senators?
Speaker 3:Uh , yeah . I think the issue facing nonprofit healthcare organizations and hospitals in particular is the fact that they've been barrage by a great deal of what I would say potentially unfair, and in any case, bad publicity concerning the lack of sufficient community benefit , uh, relative to the value of tax exempt status that they derive from both the federal government as well as state and local governments from the property tax and sales tax exemption standpoint. I mean, a critical example, for example, is the Pennsylvania decisions involving property tax. Uh, three, three cases came out last year , uh, and all in all three of those cases, they're all , all three part of the same system. Um , the, i , the state denied property tax exemption in part because of the perception that they didn't provide sufficient community benefit. And , and in addition to that , uh, I would say this , um, a lot of the data that's been used by the critics of nonprofit hospitals has been prior to covid . What they failed to factor in is the fact that the most health systems actually lost considerable money , uh, during COVID because of the inability to deal with , um, uh, elective surgeries, for example. And as a result , um, they incurred sub substantial net operating losses. And I think that's widespread throughout the United States, both large and small , small health systems alike.
Speaker 2:Great. So we've talked a little bit about the community benefit. Um, what about the impact to 5 0 1 r compliance in a , in a bigger perspective, given many of those outside pressures?
Speaker 3:Well, 5 0 1 R compliance is gonna be a persistent problem for a number of reasons. First of all, the regulations that were issued and finalized by treasury and IRS are highly prescriptive, making the opportunity for footfalls to be massive in any well run organization, not to mention the, the problems with less well run organizations. So I think that , uh, I, I, I believe that the IRS will be stepping up its level of , uh, compliance checks , uh, for 5 0 1 R compliance , uh, mainly because of congressional pressures. And at the same time, I think they're gonna be discovering a lot of non-compliant organizations that thought they were compliant.
Speaker 2:Great. So let me ask you as well, you know, in light of this continued focus on community benefit, the related reporting that's been in Schedule H of the Form nine 90 and how, you know, so many third party watchdogs are taking a look at that information, what do you think are some of the best practices with regards to community benefit? And then also what could our organizations be doing now really to focus on that and prepare for any additional scrutiny?
Speaker 3:Well, I think a couple of things come to mind. First of all, I think that , uh, compliance with 5 0 1 R requirements should be a number one priority for every nonprofit hospital in the United States. Whether it's a 2020 bed critical access hospital or a 500 bed teaching hospital , uh, I think that the organizations should expect the IRS to be coming to to them and seeking to determine their level of compliance with all of the detailed requirements, which are numerous. Uh, I've written about this in my, the new third edition of the treatise that A HLA just published , uh, last month taxation of hospitals and healthcare organizations, and we devoted an entire chapter to this topic because it's so important and the consequences for failing to comply are tremendous.
Speaker 2:Great . Um, one of the other areas that your article focused on really talked about the continued scrutiny as it relates to executive compensation for many of these tax exempt organization. You know, it continues to be a focus area, and we saw it even woven into , um, the report from the help committee , um, in relation to community benefit. So what are the areas of focus for a tax exhibit organization related to executive compensation, and what do they need to be continued to focus on or maybe focus on more as it relates to supporting that compensation for the key executives?
Speaker 3:Well, the , the , as as I tell my clients, the key is documentation. Uh , you know, hospital executives deserve to be paid at competitive levels. Um , and as a consequence, the need for recruiting and retaining executives remains a high priority for every health system that I work with throughout the United States. And , uh, in that same respect, I think that hospitals and health systems need to do a really good job documenting their compliance with the rebuttable presumption of reasonableness, which means documentation, documentation, documentation, and timeliness. They need to be very careful about their selection of their peer groups. And , uh, what we've already seen last year with those property tax cases in Pennsylvania was the weaponization of , uh, organizations that , uh, paid compensation in excess of million dollars in our subject to 21% excise tax. I think there's gotta be a very solid explanation for all of those organizations to ensure that when they communicate to the public that they are communicating the message that this is really important. These people are very important to our success as an organization and to our benefit to the community.
Speaker 2:Great. How would you recommend that people focus in on those , uh, comparable peer groups?
Speaker 3:Well, I think first of all, in many respects , uh, healthcare organizations compete on a national basis, you know, except for the smaller institutions where they're local , um, every large health system I represent really competes on a national basis for the executive talent that they have and medical talent that they want. Uh, secondly , um, the selection of the selection of peer group is probably one of the most important decisions that a organization along with their compensation consultant need to take into consideration , uh, because that's the first area that the IRS will attack if they're a challenging the reasonableness of compensation that's being paid .
Speaker 2:Great. Well, it's been a real joy being with you today, Doug, and reading your article, and I just appreciate everything that you do for a HLA .
Speaker 3:Thank you, Debbie . Thank ,
Speaker 2:Thank you , Doug . Thank you everyone.
Speaker 1:Thank you for listening. If you enjoyed this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts. To learn more about AHLA and the educational resources available to the health law community, visit American health law.org.