Webcast to Discuss Draft IRS Form 990 April 29, 2008

1. Child Health Corporation of America (CHCA)in collaboration with National Association of Children’s Hospitals (N.A.C.H.) Webcast to Discuss Draft IRS Form 990 April 29, 2008

2. Speakers • Kassandra Jensen, Vice President, Solutions, CHCA • Kassandra.Jensen@chca.com • Donna Shelton, Director, Child Health Policy Research and Analytics, N.A.C.H.R.I • DShelton@NACHRI.org • Keith Hearle, President, Verité Healthcare Consulting, LLC • Keith.Hearle@VeriteConsulting.com • Michael Peregrine, Partner, McDermott, Will & Emery • MPeregrine@mwe.com

3. Objectives • Meeting Objectives: • Gain a better understanding of the draft instructions to Form 990 and supporting schedules • Gain awareness of key governance and executive compensation considerations • Identify critical elements of feedback that should be communicated to the IRS

4. Agenda • Overview of Schedule H • Overview of the process leading to April 7, 2008 release of Draft Instructions to Form 990 • Identification of most significant issues and their resolution • Issues that still remain • Biggest challenges for tax exempt hospitals • Resources • Governance, Management, and Disclosure • Compensation • Transactions with Interested Parties • Related Organizations, Disregarded Entities, and Joint Ventures

5. Process Overview • IRS issued draft 990 and instructions in June 2007 • Many comments filed, including from N.A.C.H. • Most visible issues regarding definition of community benefit: • Medicare and Bad Debt • Community Building • October 2007 Senate Finance Committee “Round Table” • Impact of a 5 percent (of revenue or expense) charity care requirement for 501(c)(3) status on children’s hospitals mentioned prominently • “Draft” 990 issued in December 2007 • Many important details were left to the Instructions

6. Process Overview (Continued) • January 2008: IRS seeks assistance with Draft Schedule H Instructions • “Stakeholder group” established, including NACHRI • Series of meetings, first discussing cross-cutting issues, then walking through each row of Part I, Line 7, then Part II, then other components of Schedule H • February 2008: • IRS clarifies that no changes are forthcoming to Schedule H itself, though some are recommended • IRS asks for help with drafting language for the instructions

7. Process Overview (Continued) • March 7, 2008: draft issued to Stakeholder Group for comment • March 12, 2008 meeting to discuss • Comments submitted by March 24, 2008 • April 7, 2008: draft issued for public comment • End of May: comments due to IRS • Summer/Fall: final Instructions published for Tax Year 2008

8. Most Significant Issues Raised and (Preliminarily) Resolved • Definition of a hospital • Rely on state licensure requirements • Who must file • If multiple hospitals are exempt under one federal EIN, then the organization may file a Schedule H with consolidated results • Costing methods: one mandated approach or “most accurate”? • Organizations are to use their most accurate method, including perhaps the “ratio of patient care cost to charges” in Worksheet 2 • “Accuracy” chosen over “consistency” • GAAP versus “IRS accounting” methods • Proportionate treatment of joint venture community benefits • “Total expense” to come from Core Form, not audited financials

9. Most Significant Issues Raised and (Preliminarily) Resolved • Double counting numbers between Part I and Part III (the “community benefit table” and bad debt and Medicare) • No bad debt to be included in Part I (remove from subsidized health services) • No Medicare that is reported in Part I can be reported in Part III (subsidized health services and GME) • Whether or not HFMA Statement 15 would be required / suggested / supported by Schedule H (charity care and bad debt accounting) • While optional worksheets were prepared, they were not accepted for Tax Year 2008

10. Most Significant Issues Raised and (Preliminarily) Resolved • How to adjust the “ratio of patient care cost to charges” for “other operating” activities • Encourage use of actual non-patient care cost data rather than proxies • Definition of research: only studies funded by tax-exempt or government sources? Or funded by any source so long as results are “generalizable” and benefit the public? • Current Instructions say include only studies funded by tax-exempt or government sources and where results are generalizable • Including restricted grants in “direct offsetting revenue”, because funder is taking credit for the community benefit • Don’t offset restricted grants (including research grants) • But also, don’t re-grant these resources

11. Most Significant Issues Raised and (Preliminarily) Resolved • How should IME and CHGME be handled? • Don’t include IME as a revenue that offsets the cost of health professions education • Do include CHGME – a separate row was added to Worksheet 5, recognizing that these resources are not Medicaid nor Medicare • What if there are community benefit “surpluses” in any row of Line 7, e.g., Medicaid? • Unlike the CHA approach, which says record $0 community benefit, the IRS wants the gain to be reported (a negative community benefit expenditure) • “What counts” criteria to apply when documenting community health initiatives, donations, subsidized health services, others • Use summarized version of CHA definitions

12. Most Significant Issues Raised and (Preliminarily) Resolved • How much guidance to put in the Instructions regarding “what counts” • Numerous examples were drafted for inclusion in the Instructions • IRS left them out, not wanting to create safe harbors or exclusions • Examples for the types of programs that generally are excluded from consideration as a subsidized health service (physician clinics, skilled nursing facilities) • IRS is guiding organizations not to include services that in some cases meet the definition of community benefit

13. Issues Remaining in the Draft Instructions • How should organizations split Medicaid DSH funds across charity care and Medicaid losses? • How should organizations that have adopted Statement 15 complete Schedule H? • Splitting education costs, as required by the Instructions between: • The organization’s staff • Community participants • Definition of research – do any industry-funded studies produce “generalizable knowledge”? • Consistent definition of “total expense” throughout the 990, including Schedule H worksheets?

14. Issues Remaining in the Draft Instructions • Need to correct some errors: • Adjusting out Medicaid-funded education expense in Worksheet 3, but the RCC already is adjusted for this community benefit • Unclear language guiding hospitals if they can’t differentiate between Medicaid and SCHIP (or other means-tested public programs) • Error in Instruction for Part III, A3 (bad debt for patients who were eligible for charity care): “only include the costs of treating that patient less the amount of the discount.” • Should be “cost associated with the charges written off to bad debt” • Apparent exclusion of physician clinics and skilled nursing facilities from the definition of subsidized health services • Comment on the treatment of restricted grants?

15. Issues Remaining in the Draft Instructions • Once again – whether more examples in the Instructions would be helpful • IRS only allowing cash and in-kind donations that support the specific kind of community benefit reported in Part I, Line 7 • What about supporting organizations that focus on community building? • How organizations can respond effectively given limited space, particularly for the questions in Part VI

16. Biggest Challenges in Schedule H • Not appearing to be an “outlier” on any question (policies, numbers, explanations) • Peer organizations • Other organizations in the community • If an “outlier”, clearly explaining community characteristics • Conducting a program inventory (if the organization never has reported community benefit) • Reconciling IRS and state-level reporting requirements

17. Biggest Challenges in Schedule H • Rationale for including the following as community benefit: • Community building • Any bad debt • Any Medicare not already in Line 7 • Accounting: • Ratio of patient care cost to charges • Splitting education costs • Splitting DSH funding • Provider tax mechanics • Handling double counting between Parts I and III

18. Biggest Challenges in Schedule H • Methodology for quantifying “the amount of bad debt expense that could be attributable to patients eligible under the organization’s charity care policy” • The optics of removing research grants from Line 7 • Recommendation: disclose the amount of excess hospital funds used to support research in Part VI

19. Resources • 990 Coalition for Hospitals • Catholic Health Association Website • “What Counts Task Force” materials • Presentations • Guidelines • Updated CHA Guide to Planning and Reporting Community Benefit • Other

20. Governance, Management and Disclosure • Independent Voting Members • Relationships Among Officers, Directors, etc. • Material Diversion of Assets

21. Governance, Management and Disclosure (Continued) • Documentation of Meetings and Actions • Governing Body Review • Conflicts of Interest Policy

22. Governance, Management and Disclosure (Continued) • Executive Compensation • Joint Ventures • For Profit Subsidiaries • Schedule O

23. Compensation • Key Employees • Former Officers • $10,000 Exclusion • Schedule J

24. Transactions with Interested Parties • Reporting transactions with “insiders” • Large board exception • Loans

25. Related Organizations, Disregarded Entitiesand Joint Ventures • Related Organizations • Unrelated Organizations • Disproportionate Allocations