An examination of the financial structure of not-for-profit hospitals engaging in joint ventures: is tax-exempt status in jeopardy?The purpose of this study was to examine the inherent financial characteristics of not-for-profit Not-for-profit An organization established for charitable, humanitarian, or educational purposes that is exempt from some taxes and in which no one in profits or losses. hospitals that engaged in joint ventures with for-profit hospitals For-profit hospitals, or alternatively investor-owned hospitals, are investor-owned chains of hospitals which have been established particularly in the United States during the late twentieth century. . Heightened scrutiny of these transactions by the Internal Revenue Service (IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. ) warranted this investigation. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the IRS, over 54 percent of the audits under the Coordinated Examination Program (CEP CEP congenital erythropoietic porphyria. CEP abbr. congenital erythropoietic porphyria ) were aimed at healthcare organizations (Wright, 2000). Inquiry has led the IRS to revoke To annul or make void by recalling or taking back; to cancel, rescind, repeal, or reverse. revoke v. to annul or cancel an act, particularly a statement, document, or promise, as if it no longer existed. the tax-exempt status of some not-for-profit hospitals engaged in joint ventures. Redlands Surgical Services, Inc. of California California (kăl'ĭfôr`nyə), most populous state in the United States, located in the Far West; bordered by Oregon (N), Nevada and, across the Colorado River, Arizona (E), Mexico (S), and the Pacific Ocean (W). is one example where a not-for-profit hospital failed to meet tax-exempt status standards due to a joint venture with a for-profit partner (Wright, 1999). The IRS argued the entity lacked effective control of the joint venture to provide continued charity care and significant private benefit was conferred con·fer v. con·ferred, con·fer·ring, con·fers v.tr. 1. To bestow (an honor, for example): conferred a medal on the hero; conferred an honorary degree on her. to the for-profit partner (Wright & Stokeld, 2001). Both the Tax Court and the Ninth Circuit Court upheld the IRS's decision to revoke exempt status (Wright & Stokeld, 2001). Despite this win, the IRS continues to battle over joint ventures, recently losing a high-profile case against St. David's Healthcare of Texas (St. David's Healthcare System v. United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , 2003; Stokeld, 2004). Despite the IRS's inconsistent success in the courts against not-for-profit hospitals, it continues to focus on joint ventures within the healthcare industry (Harris, 2003; Stokeld, 2003; Stokeld & Gary, 2004). The US House Ways and Means WAYS AND MEANS. In legislative assemblies there is usually appointed a committee whose duties are to inquire into, and propose to the house, the ways and means to be adopted to raise funds for the use of the government. This body is called the committee of ways and means. Committee recently announced plans to investigate the preferential pref·er·en·tial adj. 1. Of, relating to, or giving advantage or preference: preferential treatment. 2. tax treatment granted certain hospitals (Tieman, 2004). Revoking tax-exempt status raises policy questions for both donors and other tax-exempt entities, particularly whether or not the joint venture not-for-profit hospital exhibits characteristics different from other not-for-profit hospitals that choose not to joint venture. If hospitals are viewed as moving away from their charitable mission and into joint ventures, contributions may suffer. Furthermore, the potential tax burden of losing exempt status may negatively affect hospital operations. This study focused on the inherent financial structure of the not-for-profit hospital partners and was an attempt to begin a dialogue surrounding sur·round tr.v. sur·round·ed, sur·round·ing, sur·rounds 1. To extend on all sides of simultaneously; encircle. 2. To enclose or confine on all sides so as to bar escape or outside communication. n. the financial performance of not-for-profit hospitals engaged in joint ventures (hereafter In the future. The term hereafter is always used to indicate a future time—to the exclusion of both the past and present—in legal documents, statutes, and other similar papers. JV hospitals). Comparisons were made with not-for-profit hospitals not engaging in joint ventures (hereafter Non-JV hospitals). This study also compared the financial structure of JV hospitals that were scrutinized by the IRS (hereafter JV-Audit hospitals) and those JV hospitals that were not audited (hereafter Non-Audit hospitals). To the author's knowledge, prior research has not examined the financial structure of JV hospitals or JV-Audit hospitals. Charitable donors, other hospitals, oversight
Oversight may refer to:
JOINT VENTURE INCENTIVES Joint ventures, in general, are undertaken for numerous reasons, depending on the motivations of the individual partners. Reasons cited in the literature for organizations entering joint ventures include: (a) a new line of business and/or market, (b) competition, (c) technological transfer, (d) international diversification International diversification The attempt to reduce risk by investing in more than one nation. By diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce the variability of their returns. , (e) partial divestiture The breakup of AT&T. By federal court order, AT&T divested itself on January 1, 1984 of its 23 operating companies, which became known as the Regional Bell Operating Companies (RBOCs). , and (f) market power/market share (Finnerty, Owers, & Rogers, 1986; Kogut, 1988). Foster and Meinhard (2002) point out that transaction cost theory emphasizes the need to achieve efficiency is a major underlying motivation for collaborating. Additional motivating factors include the ability to provide new or continued services, reduce financial risk, expand the quality of services provided and increase cost savings (Tsilas, 1997; Salins, Kindell, & Friedlander, 1998; Tuckman, 1998; Sansing, 2000). Specific organizational characteristics may also impact a firm's decision to collaborate, such as size, age, and the mandate of the organization (Foster & Meinhard, 2002). Specifically for the healthcare industry, joint ventures are commonly formed to operate ancillary Subordinate; aiding. A legal proceeding that is not the primary dispute but which aids the judgment rendered in or the outcome of the main action. A descriptive term that denotes a legal claim, the existence of which is dependent upon or reasonably linked to a main claim. healthcare services, such as MRI 1. (application) MRI - Magnetic Resonance Imaging. 2. MRI - Measurement Requirements and Interface. facilities and ambulatory surgery centers ambulatory surgery center A free-standing center that performs various types of surgery (Salins et al., 1998). Furthermore, hospitals seek to collaborate in order to gain access to capital, achieve economies of scale, gain access to managed care contracts and reduce expenses from shared overhead (Byrd & McCue, 2003; Mahon, 2003). These transactions offer management the ability to collaborate to increase cost savings, without the pressures of radical changes such as complete mergers (Bazzoli, LoSasso, Amould, & Shalowitz, 2002). Marlin, Huonker, & Sun (2002) suggested that hospitals must differentiate its products and services, and joint ventures provided this opportunity. The American Institute of Certified Public Accountants With over 330,525 CPA members (in August 2006), the American Institute of Certified Public Accountants (AICPA) is the largest professional organization of Certified Public Accountants (CPAs) in the United States of America. (AICPA AICPA See American Institute of Certified Public Accountants (AICPA). ) asserts one reason for healthcare providers to partner with for-profits is to acquire significant tangible property tangible property n. physical articles (things) as distinguished from "incorporeal" assets such as rights, patents, copyrights, and franchises. Commonly tangible property is called "personalty. and equipment (AICPA, 2002). According to Mahon (2003), the movement toward using joint ventures in collaboration Working together on a project. See collaborative software. efforts was due to the shift in Medicare Medicare, national health insurance program in the United States for persons aged 65 and over and the disabled. It was established in 1965 with passage of the Social Security Amendments and is now run by the Centers for Medicare and Medicaid Services. reimbursements from a cost-based to a fixed, per case system, which altered the financial incentives of hospitals. The consolidation of the industry has led management to fight for resources, and develop alternative strategies for raising money (Byrd & McCue, 2003). Due to various economic and organizational constraints CONSTRAINTS - A language for solving constraints using value inference. ["CONSTRAINTS: A Language for Expressing Almost-Hierarchical Descriptions", G.J. Sussman et al, Artif Intell 14(1):1-39 (Aug 1980)]. , joint ventures represent an example of strategic restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). that have become a more popular option for hospital management. Despite the numerous reasons why not-for-profit hospitals seek joint ventures, reasons for IRS scrutiny have not been consistent in the courts. At the 2000 AICPA National Health Care Industry Conference, managers from the Tax Exempt/Government Entities Division of the IRS discussed details of the IRS coordinated examination program (Wright, 2000). It was disclosed that during audits the IRS examines the kinds of activities the joint venture will engage in when the provision of healthcare is not undertaken. When charity care is provided, the IRS scrutinizes the joint venture's business plan and its definition of charity care. IRS agents also examine whether or not tax-exempt hospital assets are transferred to the joint venture based on fair market value (Wright, 2000). Another important aspect to the IRS is the promotion of community health. In the St. David's case, the IRS argued that promotion of healthcare was not 'per se' charitable, and that the hospital needed to provide sufficient indigent indigent 1) n. a person so poor and needy that he/she cannot provide the necessities of life (food, clothing, decent shelter) for himself/herself. 2) n. one without sufficient income to afford a lawyer for defense in a criminal case. care. The tax courts appear to also value the issue of control, which centers on whether the activities of the joint venture further the interests of the for-profit partner (St. David's Healthcare System v. United States, 2003). If the not-for-profit partner retains control, then it is presumed that not-for-profit activities will be enhanced, thus furthering an exempt purpose (St. David's Healthcare System v. United States, 2003). IRS investigations are based on the facts and circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or of the specific joint venture, thus management must be aware of these issues when choosing collaborative structures. FINANCIAL CHARACTERISTICS OF NOT-FOR-PROFIT HOSPITALS Existing literature has investigated the overall financial performance of not-for-profit hospitals (Cleverley & Rohleder, 1985; Zeller, Stanko, & Cleverley, 1996; Watkins, 2000; Krishnan, Yetman, & Yetman, 2002; Younis, Forgione, Khan khan Historically, the ruler or monarch of a Mongol tribe. Early on a distinction was made between the title of khan and that of khakan, or “great khan.” Later the term khan was adopted by the Seljuq and Khwarezm-Shah dynasties as a title for the highest , & Barkoulas, 2003). Zeller et al. (1996) used factor analysis in order to explore financial ratios that accurately summarized hospital financial performance. Their results revealed seven financial characteristics of hospital performance, including profitability, capital structure, liquidity, and debt coverage. Watkins (2000) further expanded the literature of hospital financial performance by investigating financial and non-financial variables, particularly patient days, admissions per bed and case mix index. Her results indicated non-accounting information also contributed to the measurement of hospital financial performance. Discussions of not-for-profit hospital financial performance center on comparisons to for-profit hospitals, because under certain circumstances the two organizational forms compete for the same resources (Lewin, Derzon, & Margulies 1981; Watt, Renn, Hahn, Derzon, & Schramm 1986; Hoerger, 1991; Sear sear 1 v. seared, sear·ing, sears v.tr. 1. To char, scorch, or burn the surface of with or as if with a hot instrument. See Synonyms at burn1. 2. , 1991; Cordes & Weisbrod, 1998; Gentry & Penrod, 2000; Younis et al., 2003). The financial performance variables analyzed an·a·lyze tr.v. an·a·lyzed, an·a·lyz·ing, an·a·lyz·es 1. To examine methodically by separating into parts and studying their interrelations. 2. Chemistry To make a chemical analysis of. 3. in this study included capital structure, profitability, commercial activity and charity care. Prior research has analyzed the capital structure policy of not-for-profit hospitals (Wedig, Hassan, & Morrisey, 1996; Ligon, 1997; Wheeler, Smith, Rivenson, & Reiter, 2000; Magnus, Smith, & Wheeler, 2003). Not-for-profit hospitals are not afforded the opportunity to raise capital through equity markets therefore they must seek out access in the tax-exempt debt markets (Wheeler et al., 2000). According to Wedig et al. (1996), not-for-profit hospitals are capable of including more debt in their capital structure due to favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. interest rates available through this market. Despite the opportunity to have more debt, Wheeler et al. (2000) reported that the average capital structure of not-for-profit hospitals remained stable over the past decade. The debt to asset ratio is a common measure used in the literature (Watt et al., 1986; Wedig et al., 1996; wheeler et al., 2000) and was used in this study to explore capital structure through the following hypothesis:</p> <pre> [H.sub.1]: There is a significant difference in debt ratios of JV hospitals and Non-JV hospitals, based on measures obtained from Form 990 tax return data. </pre> <p>Profitability analysis within the not-for-profit healthcare sector often centers on comparisons with for-profit hospitals (Forgione, Schiff, & Crumbley, 1996; Younis et al., 2003). Results have consistently determined that not-for-profit hospitals exhibited lower profitability than for-profit hospitals (Pattison & Katz Katz , Bernard 1911-2003. German-born British physiologist. He shared a 1970 Nobel Prize for the study of nerve impulse transmission. , 1983; Watt et al., 1986; Pattison, 1986; Hoerger, 1991; Sear, 1991; Forgione et al., 1996; Gentry & Penrod, 2000; Younis et al., 2003). According to Watt et al. (1986) these profitability measures help determine the success of management's strategies regarding financial performance. Profitability is an important financial variable to examine within the not-for-profit sector, particularly because "profit is nonetheless a primary factor which affects the attainment of their mission" (Zeller et al., 1996, p. 165). This study explored the financial health of JV hospitals through the following hypothesis:</p> <pre> [H.SUB.2]: There is a significant difference in profitability between JV and Non-JV hospitals, based on measures obtained from Form 990 tax return data. </pre> <p>This study measured profitability using return on fund balance (ROFB ROFB rec.outdoors.fishing.bass ), which is equivalent to return on equity in the for-profit sector, return on assets Return on assets (ROA) Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets). (ROA ROA See: Return on assets ROA See: Right of accumulation ROA See return on assets (ROA). ) and profit margin (MARGIN). These represent common measures used in prior literature (Gentry & Penrod, 2000; Forgione et al., 1996; Younis et al., 2003). Research conducted within the not-for-profit sector examined commercial activity due to a growing number of not-for-profit organizations being viewed as competing with for-profit organizations in the healthcare industry (Tuckman, 1998; Weisbrod, 1998). This 'commercialism' exhibited by not-for-profit organizations has led researchers to argue not-for-profits are indistinguishable from for-profit organizations (Weisbrod, 1998). Researchers have not come to a consensus on a single definition of 'commercialism' in the not-for-profit sector, and empirical research Noun 1. empirical research - an empirical search for knowledge inquiry, research, enquiry - a search for knowledge; "their pottery deserves more research than it has received" measures commercialism in a variety of ways (Cordes & Weisbrod, 1998; Greenlee & Bukovinsky, 1998; Tuckman, 1998; Yetman, 2001). Some of these measures include (1) total unrelated business income (UBI UBI Universidade da Beira Interior (Portugal) UBI Unrelated Business Income UBI Unified Business Identifier UBI United Bank of India UBI UKW-Sprechfunkzeugnis für den Binnenschifffahrtsfunk ), (2) charitable contributions charitable contribution n. in taxation, a contribution to an organization which is officially created for charitable, religious, educational, scientific, artistic, literary, or other good works. as a percentage of total revenues, commonly referred to as the contribution and grants ratio and (3) whether or not the organization files a Form 990-T tax return (which is required if the not-for-profit organization has at least $1,000 of gross unrelated business income). Empirical research has indicated that a not-for-profit organization's industry and size affect its propensity to engage in commercial activities and certain not-for-profits shift costs from tax-exempt activities to taxable ones (Cordes & Weisbrod, 1998; Yetman, 2001). Results also illustrated that not-for-profits in the health services health services Managed care The benefits covered under a health contract industry were more likely to report revenue subject to the unrelated business income tax Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 USCA 501 organization that is not related to the tax-exempt purpose of that organization. (UBIT UBIT Unrelated Business Income Tax UBiT Universitetsbiblioteket I Trondheim (NTNU Library) ). Furthermore, larger not-for-profit organizations were also more likely to file a Form 990-T tax return (Cordes & Weisbrod, 1998). Based on these empirical findings concerning commercial activity within the sector, the following hypothesis was proposed:</p> <pre> [H.sub.3]: There is a significant difference in the commercial activity between JV and Non-JV hospitals, based on measures obtained from Form 990 tax return data. </pre> <p>For purposes of this study, commercial activity was measured using (a) UBI as a percentage of total revenue and (b) contributions and grants as a percentage of total revenue (contributions and grants ratio). A higher UBI ratio was expected for JV hospitals based on Cordes and Weisbrod's (1998) finding that healthcare not-for-profit organizations were more likely to report unrelated business income revenue. Regarding the contributions and grants ratio, it was expected that JV hospitals would report lower ratios than Non-JV hospitals. This assertion was based on the Cordes and Weisbrod (1998) finding of a negative relationship between the source of donation and commercial activity revenue. The aspect of charity care is of high importance when discussing not-for-profit hospitals and joint ventures. Most hospitals have received tax-exempt status under Section 501(c)(3) of the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. (IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. ). In granting tax exemptions tax exemption, immunity from the requirement of paying taxes. Federal, state, and usually local law provide exemption from taxation for a wide variety of organizations, usually not-for-profit, such as churches, colleges, universities, health care providers, various , the IRS requires nonprofit organizations Nonprofit Organization An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well. Notes: Examples of non-profit organizations are charities, hospitals and schools. to have certain characteristics, including (but are not limited to): (a) the organization serves a common good, (b) the organization is not a for-profit entity, (c) the net earnings of the organization do not benefit the owners, and (d) the organization does not exert political influence (IRC Section 501(c)(3); Hopkins Hopkins, city (1990 pop. 16,534), Hennepin co., SE Minn., a suburb of Minneapolis; inc. as West Minneapolis 1893, name changed 1928. The city manufactures machinery, computer and electronic parts, steel products, air pollution equipment, ophthalmic lenses, tools, , 1998; Swords, 1998). In analyzing joint ventures, the IRS commonly relies on a two-prong test consisting of (1) the charitable purpose test and (2) the private benefit test (Petroff, 1998). The charitable purpose test analyzes whether the joint venture furthers a charitable purpose, while the private benefit test analyzes whether the arrangement results in more than incidental Contingent upon or pertaining to something that is more important; that which is necessary, appertaining to, or depending upon another known as the principal. Under Workers' Compensation statutes, a risk is deemed incidental to employment when it is related to whatever a private benefit (Tsilas, 1997; Peregrine & Sullivan, 1998; Petroff, 1998; Korman, Balsam balsam (bôl`səm), fragrant resin obtained from various trees. The true balsams are semisolid and insoluble in water, but they are soluble in alcohol and partly so in hydrocarbons. , & Patterson, 2000). Investigating the level of charity care of JV hospitals is pertinent PERTINENT, evidence. Those facts which tend to prove the allegations of the party offering them, are called pertinent; those which have no such tendency are called impertinent, 8 Toull. n. 22. By pertinent is also meant that which belongs. Willes, 319. to both donors and oversight agencies, particularly considering recent scrutiny by state and local governments (Maiuro, Schneider, & Bellows bellows, expansible, gas-tight chamber used to pump or store a gas. One of the simplest and most familiar types of bellows is the manual one used for providing a forced draft to a fire. The expansible chamber consists of a leather bag with pleated sides. , 2004). Donors desire hospitals to increase charity care in order to substantiate To establish the existence or truth of a particular fact through the use of competent evidence; to verify. For example, an Eyewitness might be called by a party to a lawsuit to substantiate that party's testimony. the entity's tax-exempt status and its goal to provide for the community (Eldenburg & Vines, 2004). Prior empirical research has measured charity care in a variety of ways. Most common measures include uncompensated care uncompensated care, n health care services provided by a hospital, physician, dental professional, or other health care professional for which no charge is made and for which no payment is expected. , bad debt expense, charity care as a percentage of total revenue, or as a percentage of total expenses (Ferris & Graddy, 1999; Nicholson, Pauly, Burns, Baumritter, & Asch, 2000; Eldenburg & Vines, 2004). Beginning in 1990, not-for-profit hospitals report the level of charity care provided to the community in the notes to the financial statements Notes to the financial statements A detailed set of notes immediately following the financial statements in an annual report that explain and expand on the information in the financial statements. (Eldenburg & Vines, 2004). Due to the IRS's scrutiny of JV hospitals and the government's emphasis on the level of charity care provided by these hospitals, the following hypothesis was proposed:</p> <pre> [H.sub.4]: There is a significant difference in charity care between JV and Non-JV hospitals, based on measures obtained from Form 990 tax return data and audited financial statements. </pre> <p>Charity care is recognized as "care acknowledged as being for the medically indigent" (Ferris & Graddy, 1999, p. 24). For purposes of this study, charity care was measured as total charity care as a percentage of program service expense. Program service expenses are directly related to the entity's exempt purpose. Total charity care was obtained from the audited financial statements and program service expense was obtained from the Form 990 tax return. This study sought to obtain a measure of the level of charity care relative to what was spent toward the hospital's exempt purpose activities. This measurement followed presentation established on the Form 990, where each entity is required to describe its program service accomplishments (i.e. exempt purpose achievements), and what funds were spent on those programs. METHOD Measures Financial characteristics of not-for-profit hospitals were used to determine the variables of interest. The constructs examined in this study were debt, profitability, commercial activity, and charity care. Debt was operationally defined as the debt to total assets ratio (DEBT%), measured as total liabilities divided by total assets. The operational definitions of profitability were (1) Return on Assets (ROA) = net income divided by average total assets; and (2) Return on Fund Balance (ROFB) = net income divided by average fund balance. Commercial activity included the following measures: (I) UBI% = total unrelated business income divided by total revenue and (2) CONTRIB CONTRIB Contributor % = total contributions / total revenue. Charity care (CHARITY) was defined as total charity care divided by total program service expense. This study used Form 990 tax return data for the sample not-for-profit hospitals for the period 1994 through 1998 because joint ventures gained popularity within the health sector during that period (Petroff, 1998). Furthermore, during that period the IRS announced its efforts to audit transactions conducted by not-for-profit hospitals (Holmes, 1998; Petroff, 1998). Form 990 tax returns report revenues, expenses, functional expense allocations, balance sheet items, changes in net assets Net assets The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand. net assets See owners' equity. or fund balance for not-for-profit organizations, and are typically prepared based on the audited financial statements of the entity. According to Froelich, Knoepfle, & Pollak, (2000), Form 990 tax return data are a "reliable source of information for basic income statement and balance sheet entries" (Froelich et al., 2000, p. 251). Despite documented reliability and preparation based on audited financial statements, potential errors may exist in the data due to the lack of verification of each data item (National Center for Charitable Statistics, 1998; Gordon, Greenlee, & Nitterhouse, 1999). Tax return data have been used on a limited basis in prior research of not-for-profit hospitals, because of data accessibility restrictions. This limitation has been partially overcome due to publicly available datasets from the National Center for Charitable Statistics (NCCS NCCS National Coalition for Cancer Survivorship NCCS National Center for Charitable Statistics NCCS National Children's Cancer Society NCCS North Canton City Schools (Ohio) NCCS National Catholic Committee on Scouting ). The NCCS draws returns from the IRS Statistics of Income (SOI (Silicon On Insulator) A chip architecture that increases transistor switching speed by reducing capacitance (build-up of electrical charges in the transistor's elements), and thus reducing the discharge time. The power requirement is also reduced in some designs. ) Sample Files, containing over 300 variables for samples of over 10,000 organizations (National Center for Charitable Statistics, 1998). The SOI sample files contain the Form 990 tax return data for 501(c)(3) organizations with assets over $10 million. The use of tax return data for this study was relevant for numerous reasons. First, the IRS uses this type of data to screen the activities reported by hospitals and to evaluate its performance. Second, donors and various oversight agencies (such as the Better Business Bureau Wise Giving Alliance) rely on publicly available tax return data to measure and compare organizational performance Organizational performance comprises the actual output or results of an organization as measured against its intended outputs (or goals and objectives). Specialists in many fields are concerned with organizational performance including strategic planners, operations, . Furthermore, management must be aware of the tax issues surrounding transactions that have an impact on the organization's future financial health. Focusing solely on traditional non-tax measures, such occupancy rates Noun 1. occupancy rate - the percentage of all rental units (as in hotels) are occupied or rented at a given time pct, per centum, percent, percentage - a proportion in relation to a whole (which is usually the amount per hundred) and market share, does not allow management to evaluate the entire impact of joint ventures on an entity's tax-exempt status. Sample Selection In order to identify the JV hospital sample, a search of Factiva (a collaboration of the Dow Jones Dow Jones the best known of several U.S. indexes of movements in price on Wall Street. [Am. Hist.: Payton, 202] See : Finance News Retrieval System and Reuters Reuters British cooperative news agency. Founded in 1851 by Paul Julius Reuter, it was initially concerned with commercial news but began to serve a growing newspaper clientele after the London Morning Advertiser subscribed in 1858. ) and Lexis-Nexis was conducted, resulting in over 300 articles for the time-period 1994-1998. The resulting articles were read for specific content, and only those articles that contained the announcement of a joint venture between a not-for-profit and for-profit hospital were selected for sample inclusion. This analysis process resulted in 47 not-for-profit hospitals announcing a joint venture with a for-profit partner. Twenty-four hospitals were eliminated from the sample for numerous reasons, including: (1) the identified not-for-profit partner was not a hospital, (2) the announced joint venture did not occur within the examined time frame, or (3) complete tax return data for the organizations were missing. The JV hospital sample of 23 included hospitals announcing joint ventures with forprofit hospitals because emphasis of this study was on the innate financial characteristics of not-for-profit hospitals engaged in these types of activities. The success or failure of the actual joint venture was not a focus of this study, however, the financial impact of the joint venture on the hospital's position may be investigated in future research. The Non-JV hospital sample (n = 67) represents a sample of hospitals not engaged in joint ventures, controlled for size, teaching status, and location, which represent common variables used in the literature (Zeller et al., 1996; Watkins, 2000; Younis et al., 2003). The JV-Audit sample includes seven hospitals that have undergone IRS audit during the time period investigated. This was a small sample, yet it reflects a realistic sample of hospitals that have undergone IRS audit due to joint venture issues. For analysis purposes, this sample of audited hospitals was compared to the remaining sixteen hospitals in the JV sample, representing the Non-Audit hospitals. RESULTS JV vs. Non-JV hospitals Descriptive statistics descriptive statistics see statistics. in Panel A of Exhibit 1 revealed the average DEBT% for the JV hospital group was 40.06%, with a median of 46.14% and a standard deviation In statistics, the average amount a number varies from the average number in a series of numbers. (statistics) standard deviation - (SD) A measure of the range of values in a set of numbers. of 22.30%. The debt to asset ratio for JV hospitals ranged from 3.44% to 76.42%. For the Non-JV sample, an average debt ratio of 44.68% was obtained. The KolmogorovSmimov (K-S K-S Kolmogorov-Smirnov (statistical test) ) test for normality normality, in chemistry: see concentration. was performed on all variables (Hollander & Wolfe, 1999). Results of the K-S test revealed the data were not normally distributed therefore nonparametric nonparametric said of statistical techniques which do not depend on the data having a normal or some other definable distribution. tests were used to compare the financial structure of the hospital groups. Results of the Wilcoxon Rank Sum test revealed debt ratios were not statistically different between the two groups (W = 973, p = 0.25). The examination of profitability revealed sample Non-JV hospitals reported significantly higher averages on most measures. Average ROA for the JV hospitals was 1.63% and 4.80% for the Non-JV group (W = 854, p = 0.03). Non-JV hospitals also reported significantly higher ROFB (6.47%) than the JV group (2.90%) (W = 874, p = 0.05). The profitability measure that did not reveal a significant difference was profit margin, despite an average of 13.64% for Non-JV hospitals compared to 0.26% for the JV sample (W = 926, p = 0.13). Analysis of commercial activity indicated average UBI% for the JV hospital group was 0.55%, with a median of 0.13% and a standard deviation of 0.81%. The Non-JV sample reported average UBI% of 0.88%, with a median of 0.31% and a standard deviation of 1.76%. Nonparametric tests did not indicate a significant difference in the commercial activity conducted by the two hospital groups (W = 1007, p = 0.35). The contribution and grants ratio, CONTRIB% averaged 4.45% for the JV hospitals with a median of 0.29% and standard deviation of 18.46%. Average CONTRIB% for Non JV hospitals was 4.08%, with a standard deviation of 11.23% and median of 0.41%. Statistical tests did not reveal a significant difference between the hospitals (W = 959, p = 0.21), which was not consistent with hypothesis [H.sub.3]. Analysis of charity care revealed only marginally significant differences between the two hospital groups. Average charity care for the JV hospital sample was 61.15%, with a median of 3.33%. The Non-JV hospitals reported average charity care of 9.70%, with a range of zero percent to 82.22%. Nonparametric tests indicated a marginally significant difference between the hospital groups (W = 1185, p = 0.10). Logistic regression In statistics, logistic regression is a regression model for binomially distributed response/dependent variables. It is useful for modeling the probability of an event occurring as a function of other factors. was also performed in order to determine whether the hospital types could be distinguished through the financial measures chosen. This method aided in determining the likelihood of a not-for-profit hospital engaging in a joint venture. The full model for this analysis included the debt to asset ratio, profit margin, commercial activity (UBI% and CONTRIB%), and charity care, with teaching status and size as control variables. Panel A of Exhibit 2 reported a likelihood ratio chi-square chi-square (ki´skwar) see under distribution and test. chi-square n. value of 23.66 for the full model with a corresponding p-value p-value, n in statistics, the probability that a random variable will be found to have a value equal to or greater than the observed value by chance alone. This value provides an objective basis from which to assess the relative change in the data. of 0.001. This indicated the financial measures chosen, as a group, allowed for somewhat better classification between the sample JV and Non-JV hospitals. Despite the existence of a significant model, the parameter (1) Any value passed to a program by the user or by another program in order to customize the program for a particular purpose. A parameter may be anything; for example, a file name, a coordinate, a range of values, a money amount or a code of some kind. estimates revealed two variables were significant, including profit margin (p = 0.05) and charity care (p = 0.09). These results were consistent when the model was revised to include an indicator variable for the presence (or lack thereof) of unrelated business income. JV-Audit vs. Non-Audit hospitals This study additionally examined the financial characteristics of those JV hospitals that were audited by the IRS. Panel B of Exhibit 1 reported the descriptive results of the JV-Audit and Non-Audit hospitals. Descriptively de·scrip·tive adj. 1. Involving or characterized by description; serving to describe. 2. Concerned with classification or description: a descriptive science. 3. , the JV-Audit hospitals reported higher profitability than the Non-Audit firms. For example, JV-Audit hospitals reported average ROA of 4.22% while Non-Audit hospitals reported an average of 0.49% (W = 90, p = 0.35). Average ROFB was 7.36% for the JV-Audit group and 0.95% for the Non-Audit hospitals (W = 89, p = 0.38). Profit margin was also not statistically different between the two groups--JV-Audit hospitals reported an average of 5.67%, while Non-Audit hospitals reported an average profit margin of -2.11% (W = 82, p = 0.46). Analysis of the capital structure of audited hospitals indicated average debt ratios were 38.55% for the JV-Audit sample firms. This was not statistically different from the 40.72% average for the Non-Audit hospitals (W = 82, p = 0.46). In terms of commercial activity, neither hospital group reported average UBI% above one percent (0.34% for JV-Audit and 0.64% for Non-Audit hospitals), and this difference was not significant (W = 87, p = 0.43). JV-Audit hospitals reported average charity care of 18.61%, while NonAudit hospitals reported an average of 79.77% (W = 90, p = 0.35). Due to the small sample size (n = 23) for this comparison, the Non-Audit hospital sample was expanded to include all of the Non-JV sample hospitals. Research conducted via Lexis-Nexis determined that none of the original sample Non-JV hospitals were subject to IRS audit during the time period investigated. Results based on this larger sample size (n = 90), reported in Panel C of Exhibit 1, did not yield significant differences between the hospital groups. Logistic regression analysis for the JV-Audit and Non-Audit hospitals was presented in Panel B of Exhibit 2. The full model for this analysis included the debt to asset ratio, profit margin, commercial activity (UBI% and CONTRIB%), and charity care, with control variables of teaching status and size. The model was not significant (p > 0.20), and resulted in the lack of significant findings for the parameter estimates. Stepwise stepwise incremental; additional information is added at each step. stepwise multiple regression used when a large number of possible explanatory variables are available and there is difficulty interpreting the partial regression logistic regression procedures were performed in order to possibly obtain a more parsimonious par·si·mo·ni·ous adj. Excessively sparing or frugal. par  si·mo model. The
lack of significant findings for the stepwise procedures indicated that
the financial structure variables chosen did not assist in classifying
sample hospitals between the audit and non-audit groups. The model was
revised to include a dichotomous di·chot·o·mous adj. 1. Divided or dividing into two parts or classifications. 2. Characterized by dichotomy. di·chot variable for charity care--whether the level of charity care provided was significantly different from zero. Results from this analysis were consistent with those in Panel B of Exhibit 2. These findings were consistent when the sample size was expanded to include all original sample hospitals (n = 90). DISCUSSION Limitations of Study One limitation of this study was reliance on a single source for the joint venture announcement date. It is possible not-for-profit hospitals announced in other trade or industry publications other than the Dow Jones News System. It is also possible that not-for-profit hospitals chose not to announce joint ventures until negotiations were complete and the joint venture began operations. The accuracy of the data was another limitation to this study. Analysis was performed on information provided in the NCCS database, but potential errors could exist in the data (Gordon et al., 1999). Implications Descriptive analyses revealed the sample hospitals were not highly leveraged and did not significantly differ in terms of debt structure. Management may have considered the opportunity to enter a joint venture more favorably fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. since the entity was not heavily leveraged. Differences were observed in specific financial performance measures, such as profitability. Results indicated that for the time period examined, the sample JV hospitals reported lower profitability than the Non-JV hospitals. Lower profitability for these sample hospitals illustrated some form of financial difficulty during the period prior to entering the joint venture. Sample hospitals may have viewed a joint venture as an opportunity to increase efficiency. Furthermore, these results supported arguments that there were innate differences in the financial performance between the hospital groups. This study's findings may allow management to become more aware that joint ventures may trigger IRS scrutiny in the future. Examination of commercial activity indicated sample hospitals did not heavily rely on unrelated business activities as a source of revenue. These low percentages indicated hospitals were not involved in extensive commercial activities that were subject to the unrelated business income tax. Sample hospitals also did not generate large percentages of revenues from outside donations. Cordes and Weisbrod (1998) found that public donors have an aversion a·ver·sion n. 1. A fixed, intense dislike; repugnance, as of crowds. 2. A feeling of extreme repugnance accompanied by avoidance or rejection. to not-for-profit organizations engaging in commercial activities. Given this argument, further research is needed to determine if this aversion to commercial activities applies in the joint venture arena. JV hospitals were found, on average, to report higher charity care as a percentage of program service expenses than the Non-JV hospitals. This may be an indication of continued importance of hospitals providing significant charity care to the public. Comparisons of JV-Audit and Non-Audit hospitals did not reveal significant differences among any of the financial variables. It is possible that the variables used in this study did not greatly influence the IRS's decision to audit hospitals involved in joint ventures. Future research may assist in determining whether the individual facts and circumstances of each joint venture transaction may assist in predicting the likelihood a hospital is audited by the IRS. Despite the lack of a statistical difference in charity care between the audited and non-audited hospitals, results indicated that JV-Audit hospitals did not report high levels of charity care as a percentage of reported program service expenses. Future research incorporating a case study approach may allow further evidence concerning whether reported levels of charity care were a contributing factor in the IRS decision to audit hospital operations. A case study approach may also help determine the organizational motivations underlying the selection of a joint venture, rather than other collaborative structures. CONCLUSION Considering recent calls to investigate the merit of tax-exempt status received by certain not-for-profit organizations, this research will assist policy makers in the evaluation of not-for-profit hospitals. Joint ventures between hospital groups are a significant trend in the industry, and more research should be conducted in this area due to the IRS concern that certain not-for-profit hospitals abused their tax-exempt status by participating in joint ventures with for-profit partners. The dramatic step of revoking tax-exempt status sends a signal to the industry that this will continue to be an issue of major concern to the IRS. Constituents, including donors and other hospitals, will continue to question whether joint ventures cause exempt entities to lose their focus on charitable activities. Results of this study provided preliminary evidence of characteristics associated with hospitals involved in joint ventures. Based on the sample investigated, these findings can be used by researchers to further examine the joint venture arena within the healthcare sector. If a hospital is considering engaging in a joint venture then these results highlight certain characteristics that appear to be associated with commercial activities. The perception of increased commercial activity may place the organization's tax-exempt status in jeopardy jeopardy, in law, condition of a person charged with a crime and thus in danger of punishment. At common law a defendant could be exposed to jeopardy for the same offense only once; exposing a person twice is known as double jeopardy. . Anecdotal evidence anecdotal evidence, n information obtained from personal accounts, examples, and observations. Usually not considered scientifically valid but may indicate areas for further investigation and research. suggests that oftentimes of·ten·times also oft·times adv. Frequently; repeatedly. Adv. 1. oftentimes - many times at short intervals; "we often met over a cup of coffee" frequently, oft, often, ofttimes management may consider revocation The recall of some power or authority that has been granted. Revocation by the act of a party is intentional and voluntary, such as when a person cancels a Power of Attorney that he has given or a will that he has written. of tax-exempt status as a remote possibility, but recent scrutiny in the joint venture area indicates the possibility of more cases undergoing federal audit investigations (Gibson, 2004; Tieman, 2004). The IRS scrutiny of these types of transactions may encourage management to fully examine both the tax and non-tax implications of entering a joint venture with a for-profit hospital. This paper is based in part on my dissertation dis·ser·ta·tion n. A lengthy, formal treatise, especially one written by a candidate for the doctoral degree at a university; a thesis. dissertation Noun 1. at Virginia Virginia, state, United States Virginia, state of the south-central United States. It is bordered by the Atlantic Ocean (E), North Carolina and Tennessee (S), Kentucky and West Virginia (W), and Maryland and the District of Columbia (N and NE). Tech. I would like to thank my chairman, W. Eugene Seago, and my other committee members, Robert Brown Noun 1. Robert Brown - Scottish botanist who first observed the movement of small particles in fluids now known a Brownian motion (1773-1858) Brown , Debra Callihan, Jim Yardley
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EXHIBIT 1
COMPARISON OF HOSPITAL FINANCIAL CHARACTERISTICS
PANEL A. JV AND NON-JV HOSPITALS
Variable Type (a) Mean Median Std. Dev.
DEBT% JV 40.06% 46.14% 22.30%
Non-JV 44.68% 46.08% 22.91%
ROA JV 1.63% 2.75% 8.10%
Non-JV 4.80% 5.02% 5.73%
ROFB JV 2.90% 8.72% 16.61%
Non-JV 6.47% 9.06% 20.91%
MARGIN JV 0.26% 5.51% 30.14%
Non-JV 13.64% 6.48% 23.99%
UBI% JV 0.55% 0.13% 0.81%
Non-JV 0.88% 0.31% 1.76%
CONTRIB% JV 4.45% 0.29% 18.46%
Non-JV 4.08% 0.41% 11.23%
CHARITY JV 61.15% 3.33% 227.3%
Non-JV 9.70% 1.69% 20.38%
Variable Wilcoxon Rank Sum Statistic
DEBT% JV W = 973, p = 0.25
Non-JV
ROA JV W = 854, p = 0.03
Non-JV
ROFB JV W = 874, p = 0.05
Non-JV
MARGIN JV W = 926, p = 0.13
Non-JV
UBI% JV W = 1007, p = 0.35
Non-JV
CONTRIB% JV W = 959, p = 0.21
Non-JV
CHARITY JV W = 1185, p = 0.10
Non-JV
Notes:
(a) JV = joint venture not-for-profit hospitals (n = 23)
Non-JV = not-for-profit hospitals not engaging in joint ventures
(n = 67)
Definitions of Variables:
DEBT% = Total Liabilities / Total Assets
ROA = Net Income / Average Total Assets
ROFB = Net Income / Average Fund Balance
MARGIN = Net Income / Total Revenue
UBI% = Total Unrelated Business Income / Total Revenue
CONTRIB% = Total Contributions / Total Revenue
CHARITY = Total Charity Care / Program Service Expense
PANEL B: JV-AUDIT vs. NON-AUDIT HOSPITALS (N = 23)
Variable Type (a) Mean Median Std. Dev.
DEBT% Audit 38.55% 48.55% 18.29%
Non-Audit 40.72% 43.60% 24.37%
ROA Audit 4.22% 5.13% 5.11%
Non-Audit 0.49% 2.41% 9.01%
ROFB Audit 7.36% 11.45% 7.779
Non-Audit 0.95% 6.86% 19.16%
MARGIN Audit 5.67% 6.90% 6.72%
Non-Audit -2.12% 4.59% 35.98%
UBI% Audit 0.34% 0.29% 0.35%
Non-Audit 0.64% 0.06% 0.92%
CONTRIB% Audit 0.41% 0.33% 0.53%
Non-Audit 6.28% 0.27% 22.10%
CHARITY Audit 18.61% 7.70% 30.09%
Non-Audit 79.779 3.35% 272.40%
Variable Type (a) Wilcoxon Rank SumStatistic
DEBT% Audit
Non-Audit W = 82, = 0.46
ROA Audit
Non-Audit W = 90, p = 0.35
ROFB Audit
Non-Audit W = 89, = 0.38
MARGIN Audit
Non-Audit W = 82,p = 0.46
UBI% Audit
Non-Audit W = 87,p = 0.43
CONTRIB% Audit
Non-Audit W = 83, = 0.48
CHARITY Audit
Non-Audit W = 90,p = 0.35
Notes:
(a) Audit = JV hospitals that were subject to IRS audit (n = 7)
Non-Audit = JV hospitals that were not subject to IRS audit (n = 16)
PANEL C: JV-AUDIT VS. NON-AUDIT (w = 90)
Variable Type (a) Mean Median Std. Dev.
DEBT% Audit 38.569 48.55% 18.29%
Non-Audit 43.91% 46.08% 23.10%
ROA Audit 4.22% 5.13% 5.11%
Non-Audit 3.97% 4.94% 6.65%
ROFB Audit 7.36% 11.45% 7.77%
Non-Audit 5.41% 8.98% 20.58%
MARGIN Audit 5.67% 6.91% 6.72%
Non-Audit 10.61% 6.46% 27.19%
UBI% Audit 0.34% 0.29% 0.35%
Non-Audit 0.83% 0.17% 1.63%
CONTRIB% Audit 0.41% 0.32% 0.53%
Non-Audit 4.50% 0.32% 13.84%
CHARITY Audit 18.61% 7.70% 30.099
Non-Audit 23.21% 1.95% 121.10%
Variable Type (a) Wilcoxon Rank Sum Statistic
DEBT% Audit W = 283, t = 0.29
Non-Audit
ROA Audit W = 299, of = 0.38
Non-Audit
ROFB Audit W = 294, of = 0.35
Non-Audit
MARGIN Audit W = 288, n = 0.32
Non-Audit
UBI% Audit W = 316, of = 0.48
Non-Audit
CONTRIB% Audit W = 285, of =0.31
Non-Audit
CHARITY Audit W = 382,p = 0.17
Non-Audit
Notes:
(a) Audit = JV hospitals that were subject to IRS audit (n = 7)
Non-Audit = Sample hospitals that were not subject to IRS audit
(n = 83)
EXHIBIT 2
LOGISTIC REGRESSION
PANEL A: JV AND NON-JV HOSPITAL SAMPLE
[Status.sub.i] = [[beta].sub.0] + [[beta].sub.1]DEBT% + [[beta].sub.2]
[MARGIN.sub.i] + [[beta].sub.3] CONTRIB%.sub.i] +
[[beta].sub.4] [UBI%.sub.i] + [[beta].sub.5] [CHARITY.sub.i] +
[[beta].sub.6] [SIZE.sub.i] + [[beta].sub.7] [TEACH.sub.i] +
[[epsilon].sub.1]
Parameter
Variable estimate p-value
Intercept 0.5861 0.52
DEBT% -2.4677 0.15
MARGIN -7.4897 0.05
UBI% -32.9414 0.25
CONTRIB% -16.4126 0.27
CHARITY 1.9096 0.09
SIZE 0.7986 0.19
TEACH -1.5180 0.19
Notes:
The sample consists of 90 hospitals (23 JV hospitals and 67 Non-JV
hospitals).
Variable Definitions:
Status = 1 if JV hospital, 0 otherwise
DEBT% = Total Liabilities / Total Assets
MARGIN = Net Income / Total Revenue
UBI% = Total Unrelated Business Income / Total Revenue
CONTRIB% = Total Contributions / Total Revenue
CHARITY = Total Charity Care / Program Service Expense
SIZE = 1 if total assets greater than sample median, 0 otherwise
TEACH = 1 if a teaching hospital, 0 otherwise
PANEL B: .N-AUDIT Vs. NON-AUDIT HOSPITAL SAMPLE
[Audit.sub.i] = [[beta].sub.0] + [[beta].sub.1] [DEBT%.sub.i] +
[[beta].sub.2] [MARGIN.sub.i] + [[beta].sub.3] [CONTRIB%.sub.i] +
[[beta].sub.4] [UBI%.sub.i] + [[beta].sub.5] [CHARITY.sub.i] +
[[beta].sub.6] [SIZE.sub.i] + [[beta].sub.7] [TEACH.sub.i] +
[epsilon.sub.i]
Parameter
Variable estimate p-value
Intercept -0.5793 0.69
DEBT% -0.5235 0.83
MARGIN -0.3698 0.95
UBI% -38.1595 0.64
CONTRIB% -14.5604 0.61
CHARITY 0.7064 0.67
SIZE 0.8030 0.45
TEACH -11.0976 0.97
Notes:
The sample consists of 23 hospitals (7 JV-Audit hospitals and 16
Non-Audit hospitals).
Variable Definitions:
Audit = 1 if considered a JV-Audit hospital, 0 otherwise
DEBT% = Total Liabilities / Total Assets
MARGIN = Net Income / Total Revenue
UBI% = Total Unrelated Business Income / Total Revenue
CONTRIB% = Total Contributions / Total Revenue
CHARITY = Total Charity Care / Program Service Expense
SIZE = 1 if total assets greater than sample median, 0 otherwise
TEACH = 1 if a teaching hospital, 0 otherwise
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