June 22, 2014

The Messiest Catch: Fishing for Health-Care Institution Donors in a Changing Sea

Matthew G. Wright

Fishing for donors in ideal conditions is difficult for most charitable organizations due to changing donor demographics, attitudes, technology, and a growing competitive marketplace. Now, health-care charities are facing a perfect storm of increased regulations, shrinking margins, potential taxation, health-care mergers/acquisitions, and growing demand by the donor and consumer. This sea of changes is causing most health-care charities to review areas of potential liability and how they communicate with the ever-vigilant public.


Giving to health care is ranked fifth behind religion, education, human services, and general foundations, with a difference of $70 to $10 billion respectively. Although not ranked first by the public at large, health-care philanthropy is important to the health and well-being of hospitals. Despite the importance, giving to health-related charities has only seen a moderate increase in giving with a 5.6 percent growth compared to an overall giving growth rate of 7.9 percent since 2010. Some have speculated that the national debate on health coverage is starting to change the public’s attitude toward health charities from one of a cause to support, to a guaranteed right that is funded by the government. This inaccurate perception has public policy and philanthropic consequences that will hurt the health-care sector in the long-term. This attitude shift and slow philanthropic growth rate has come at the worst time for health-related charities. 

The health-care philanthropy world is fishing in rough seas, and every cast of the line must count. Charitable health-care legal teams would be wise to develop mitigation strategies that will allow charities the ability to focus on raising money. Health-care institution margins range between one and four percent in recent years, and several large systems saw no or negative margins. Therefore, philanthropic support will be critical for health-care organizations to invest in the physical and human capital required to move from a good health-care provider to a great health-care provider. Everything else is just a distraction. Legal counsel can either tie-up the fishing lines with unnecessary expenses, or cut the lines from the dock and allow the fishing to progress. The key strategy areas include: (1) donor transparency and watchdog groups, (2) state registration, (3) HIPAA and anti-kickback, and (4) deductibility and benefit substantiation. 

Donor Transparency and Watchdog Groups

Twenty years ago, lawyers advising charities would worry about donor transparency as it related to public inspection of the Internal Revenue Service (IRS) Form 990 and board minutes. Following the 9/11 response over a decade ago, the sea changed toward a donor base that has access to those items plus analysis with a touch of a pad. No longer was the donor satisfied that his or her check would be used properly; the donor now wanted proof of proper use, regardless of the size of his or her donation. The various charitable fiascos following the 9/11 disaster opened a door for various groups to position themselves as watchdogs. Not the least of these groups is the United States Congress and the states’ attorneys general. Charity Navigator, the Better Business Bureau’s Wise Giving Alliance, and Charity Watch are the nation’s leading independent charity watchdogs, with each one evaluating charities on different metrics. Furthermore, GuideStar, an online collection of public filings, serves as a ready resource for local media, donors, and the watchdog groups. Some of the various groups use a cost-to-raise-a-dollar ratio, while others utilize the ratio of administrative costs over program expenses. Other groups look at the involvement of the board. Regardless of the method, each group is ranking and reporting on charities. Without an agreed upon rating system, charities can find it difficult to develop a strategy that places in the top rankings of all the watchdogs. 

As attorneys, we tend to focus donor transparency on the technical requirements or narratives in the IRS 990 and board minutes. Now we must ensure that the technical narratives match the materials provided to donors and that the charity has strategically provided the watchdogs with the correct information. GuideStar publishes all publicly available 990s with or without the charities’ involvement. It is imperative that legal counsel advise management and the board on how to effectively manage the information available in the public domain. Most donor reporting is handled outside of legal review and is generally based in the marketing efforts of the nonprofit. These efforts include newsletters, Facebook posts, e-mails, videos, websites, and other printed advertisements. Are these efforts consistent with the more legal filings such as the 990 or annual report? Do these channels deliver consistent messaging about how money is spent and routed to cases? Do these materials tell the story that your patients depended upon philanthropic support received by your charity to improve lives? 

Health-care charities have an additional burden by expressing how the institution benefits the community. Does the health-care entity along with the various philanthropic departments have a method for collecting data on the impact of donations? Do departments have a mechanism for collecting patient stories to give meaning to the various statistics? These questions sound like the role of marketing. Without a clear, concise, and consistent story of impact, charities will be scrutinized by the various watchdog organizations. 

In order to weather the sea change, charitable legal departments need to develop a process for accurately gathering impact statistics, as well as ensuring that the charity is consistent with the presentations of facts to all major watchdogs. Moreover, the charities need to develop a response plan to negative ratings that include a legal, marketing, and donor strategy. 

State Registration

Building on the need for consistent information within the various IRS filings and marketing literature is the growing concern over state registration. The history of attorneys general having the responsibility to oversee the community’s nonprofits can be traced back to the common law in England. Thomas Greaney, Kathleen M. Boozang. “Mission, Margin, and Trust in the Nonprofit Health Care Enterprise,” 1 Yale Journal of Health Policy, Law and Ethics 1 (2013). Over the centuries, the various states have enacted legislation that gives the attorneys’ general offices the necessary tools to investigate and hold accountable charitable organizations. State registration represents the single largest attempt to regulate the charitable sector since the codification of the IRS tax-exempt regulations. At the time of this article, 39 states and the District of Columbia have enacted laws dealing with state registration. The registration process is timely and often confusing due to a lack of uniformity between the states. Although an attempt has been made with the creation of the Unified Registration Statement (URS), a lack of cohesion still exists. In fact, some states require the URS statement, in addition to, a similar state specific registration. 

Counsel need to consider the reach of their nonprofit’s fundraising efforts. Although the majority of attorneys general have agreed that certain forms of social media and passive websites do not typically require registration, this agreement is not a legal defense and can be withdrawn by any of the states. 

For another industry publication, Texas and Missouri attorneys’ general offices agreed to an interview with this author on the subject of charitable registration. During the interview with attorneys’ general offices, both stated that their offices receive complaints regarding questionable fundraising pitches and tactics on a daily basis. These complaints are made against national, regional, and local charities alike, and trigger the watchful eye of the state and possibly local officials. According to both offices, the easiest way to avoid potential problems is to “tell the absolute truth when making your fundraising pitches. Don’t lie.” Although, this sounds like basic advice, it is echoed in the BBB, AHP, and AFP codes, and complaints continue to be filed against established charities. 

Many states take a proactive and corrective approach when dealing with complaints and a failure to register. Texas and Missouri both stated that they seek corrective actions before seeking punitive actions against legitimate charities that are acting in good faith. 

In assisting a charity client with the registration process, the following questions should be considered:

  • Do you have a website? Do you have a method of donating on the website?
  • Do you mail materials out-of-state? What states?
  • How much money do you receive from donors in each state, accounting for foundation grants, corporate gifts, corporate matching gifts, corporate marketing sponsorships, and donations from individuals?
  • Do you have any, or have you ever received in estate gifts from out-of-state? Do you have any annuities or trusts of people living out-of-state or held by an institution out-of-state?
  • Do you conduct a Facebook, Twitter, Text-to-Give, Mobile-Give, or e-mail campaign?
  • In what states are your fundraising vendors located, i.e., direct mail house, call center, planned giving advisors, consultants, etc.? 

If your client has a majority of positive responses, then the balance shifts towards registering in all available states. 

HIPAA & Anti-Kickback

Health Insurance Portability and Accountability Act (HIPAA) of 1996 and the Patient Safety and Quality Improvement Act of 2005 has become a tool for attorneys to impede professional fundraisers from accessing the very constituents that desire to give. As lawyers, we need to understand that fundraisers were at the forefront of patient privacy and assisted in the creation of HIPAA.           

HIPAA is not a restrictive law, but a permissive law that requires fundraiser participation. HIPAA could have been a devastating regulation on health-care fundraising had the professional organization of health-care fundraising, the Association of Healthcare Philanthropy (AHP), not been involved in the initial drafting. AHP’s involvement and continued focus on awareness, coupled with the simple fact that fundraisers understand the need for privacy, has helped the health-care industry avoid potential problems. In addition, health-care fundraisers are required to protect and advocate for patients’ privacy, because we want to build trust with the potential donor. The Association of Fundraising Professional’s Code of Ethical Principles and Standards, the Better Business Bureau’s Standards for Charity Accountability, and the AHP’s Statement of Professional Standards of Conduct all require professional fundraisers to protect and be advocates for privacy. 

Philanthropic support makes the difference between providing standard care and advanced care in most hospitals. Money raised from individuals in the community provides over 80 percent of all charitable giving to health care, outpacing foundations and corporations. Studies have shown that people give to what they know and give to whom they believe is making a difference. Oftentimes, individuals give to health-care institutions that provided care to the donors themselves, sick loved ones, or to institutions working to cure a specific disease. Without the support of individuals, who are generally patients, a major stream of revenue in health care would slow to a trickle. Fundraisers need to know who is in their hospital so they can ethically build a relationship with grateful patients and families and the community they serve. It is important to note that fundraising offices understand privacy and how to treat confidential information. It is not in their best interest to divulge embarrassing medical information about a donor with whom they are seeking to establish a relationship. 

HIPAA, when enacted, was the largest federal legislation affecting health care since Medicare, and people panicked. Misinformation and misapplication of the law, particularly regarding permissive fundraising continues today. Pick three hospitals in your area and all will have a different interpretation of HIPAA regarding fundraising. Some will not allow the fundraising office any information, while others provide more information than necessary. So what do you need to know to help your client institution raise funds, but at the same time protect the privacy of patients? 

In general, HIPAA was designed to ensure that people can remain covered by insurance when they change employers, and their personal health information will be protected. Foremost, HIPAA ensures access to and the transfer of health-care insurance between carriers. In addition, reducing fraud but increasing efficiency of health-care claims was a primary aim. Moreover, HIPAA gives patients more control over the use of their private or “Protected Health Information” (PHI). For the purposes of this article, we are discussing HIPAA as applied to fundraisers who are part of a department within the hospital, or work for a foundation directly linked with a health-care organization and considered an “Institutionally Related Foundation” under HIPAA guidelines.           

Second, the writers of HIPAA included fundraisers, and Congress recognized the need for fundraisers to access information. Within the original regulations, fundraising is mentioned an estimated eight or nine times, and more importantly, Congress categorized fundraising as part of “healthcare operations.” 45 CFR §164.514 (2006). This is an important distinction, because fundraisers enjoy a guaranteed right to access the information. Due to this distinction, the information accessible to fundraisers is available without prior consent of the patient. The patient enjoys a right to opt out of the fundraising list.           

Health information that is individually identifiable and that is received, created, maintained, or transmitted in any form by a health-care provider is considered PHI. Fundraisers may use demographic information relating to an individual and the dates of health care provided to the individual. The industry has generally included name, address, phone, e-mail, date-of-birth, gender, status of insurance, and dates of service. Information such as diagnosis, prognosis, and past conditions are off-limits to fundraisers. A clarification was made in 2013 that allowed fundraisers access to the general department of service, the treating physician, and clinical outcome information. “Modifications to HIPAA Help Fundraisers Improve Efficiency,” www.wealthengine.com, March 5, 2013.           

In general, HIPAA allows fundraising offices that are either a department within the institution or an “Institutionally Related Foundation,” to use limited patient contact information for fundraising purposes. As always, other exceptions and rules apply for third-party vendors and multiple-entity systems, but the overall theme of HIPAA is one of permission, and not limitation, regarding fundraising.           

The anti-kickback and Stark laws are now beginning to seep into health-care fundraising with unintended consequences. In general, the anti-kickback and Stark laws were written and designed to protect patients from unnecessary procedures due to incentives and benefits given to physicians by hospitals and diagnostic centers to encourage referrals or admissions, or in which there is an inappropriate financial interest by a physician in the referral. As a result of the severe penalties or threat thereof, hospitals are taking a look at the donors who are non-employed physicians. Some have even gone as far as to place Stark and anti-kickback language on donor pledge cards and gift agreements. The various Stark and anti-kickback legislation does not discuss providers providing charitable gifts. It is important to remember that the IRS has already addressed this issue on a global scale. Tax deductibility can only be obtained if the donor has charitable intent. If the non-employee physician is providing financial resources to a health-care entity for the purpose of receiving a special benefit of referrals, then no charitable gift exists. Health-care charities and charities in general would be wise to steer clear of gifts that lack any form of charitable intent; thus the anti-kickback and Stark laws would never become a factor. 

Gift Substantiation

Health-care charities, as well as many social service charities, struggle with maintaining adequate gift substantiation procedures. This includes a very complicated issue regarding corporate contributions and naming opportunities. Many small, medium, and large nonprofits, as evidenced by their Form 990 returns, view every transaction involving cash paid as a charitable gift. Peter Panelpento, “A Question of Calculation,” Chronicle of Philanthropy, Feb. 7, 2008 at 33. The reality is that the courts have determined and view a gift very differently. The U.S. Supreme Court said that a transfer of money that is “voluntary and is motivated by something other than consideration” is counted as a gift. Commissioner v. Duberstein, 363 US 278, 286 (1960). For example, you attend the annual ball at the local women’s shelter and you pay $250 for two tickets for dinner and dancing. Have you given a gift, or have you made a payment? Most nonprofit professionals, board members, and volunteers would claim that you made a gift. Wrong. The presumption under the law is that you made a payment. Is that illegal? No, but the charity has to report and treat that payment differently than a gift. Purchases, tickets, and items of value given to a donor are legal transactions that may not be a charitable “gift” according to the law. Understanding the difference and realizing that a nonprofit can seek and accept non-gift payments will help ensure compliance as well as increase new streams of revenue. 

The above example highlights one of the most troublesome areas for nonprofits: how do you value and properly acknowledge a gift? This is a day-to-day function of our work, but is the least understood. Careful attention is required on substantiation of gifts made at special events. The IRS in recent years has informed nonprofit organizations that they have an obligation to notify attendees of the actual deductibility of their payment to participate in a special event. In addition, the nonprofit is required to provide a good-faith estimate of the value. 

A common error in special event planning is the falsehood that if a donor donates the dinner, entertainment, or program, then the entire payment by the attendee is deductible. This is incorrect, because the IRS and the courts look at the attendees or recipient’s perspective of receiving something that they value, not the cost paid by the organization. The federal courts state that it is not what it costs the organization to provide the special event; it is the value of what the attendee is receiving that determines the formula for deductibility. Veterans of Foreign Wars, Dept. of Mich. v. Commissioner, 89 TC 7 (1987); Veterans of Foreign Wars, Dept. of Mo. v. United States, 85-2 USTC ¶ 9605 (W.D. Mo 1984). Essentially, the IRS presumes that the amount charged at a special event is the value of the service or item received. 

A charity can help its donor overcome this presumption by providing proper documentation and substantiation of a gift. Documentation of proper gift valuation is critical for corporate philanthropy and will avoid sponsorship and unrelated business income tax liability. The confusion regarding valuation of gifts at special events and in the regular course of business become illuminated when the donor is receiving something of value, but is overpaying for the item with the intent of helping the charity. This describes a split gift. Congress and the IRS understood the need to allow charities to provide charitable deductions as well as purchases all in the same transactions, and thus wrote a rule that allows people to make split gifts. 26 CFR § 1.170A-1(h)(1)–(2) (2005). 

The brother or sister to substantiation is the law enacted by Congress under what has been described as the Quid Pro Quo Rules. 26 USCA § 6115(e) (West 2014). According to the tax laws, the penalty for violating the Quid Pro Quo Rules includes monetary fines up to $5,000 per mailing or fundraising event. A charity can easily satisfy substantiation and the Quid Pro Quo Rules in the same document, as long as they follow the stricter standard under the Quid Pro Quo Rules. 

A quid pro quo disclosure is required when a donor pays $75 or more and receives a benefit. The charity should disclose to the donor (1) the amount of the charitable deduction which is the difference between what the donor paid and the fair market value of the item received, and (2) a good faith estimate of the fair market value of the item. The IRS website encourages charities to make the disclosure before or at the time of the donation. 

A quid pro quo disclosure is also required for the sale of auction items and requires all the information listed above. In addition, the charity must provide an acknowledgement that includes (1) a description of the item, (2) the amount paid, and (3) a statement to seek professional advice on the value and tax consequences. Since the item is property that is not stock or cash, additional forms must be completed. If the auction item is valued at more than $500 and is sold within two years, the charity must file IRS Form 8282 and provide a copy to the donor. The donor must complete IRS Form 8283 and, if the item is over $5,000, an additional appraisal must be attached. 

The critical aspect to the Quid Pro Quo Rule for auction items is that the individual must know before the purchase that he or she is going to be paying more than the fair market value. There is no deductible donation available if the individual pays less than fair market value for the item. It is the responsibility of the donor to prove prior knowledge of the fair market value of the item. In order to help their donors, some institutions publish a guide to the auction that includes fair market values of each item. 

Gift substantiation can cause serious problems in the fundraising world and for clients’ donors. The penalties for failing to understand and properly apply the rules lead to fines by the government, bad publicity, and the catastrophic harm of placing a donor in jeopardy of fines by the IRS. 


The complexities of the fundraising environment in health care are complex, and given the national attention focused on health-care missteps by charitable institutions, could lead to industry-wide penalties. Lawyers advising charitable health-care clients are required to look at the various regulations on how they impact donors and the ability to form relationships with donors. As complexities arise, we as a profession will need to develop new tools that will provide our clients’ fundraisers and their donors flexibility in meeting the demands of patient care, medical research, and health-care education.

Matthew G. Wright

Matthew G. Wright is an attorney in Central Texas.