Out in the open

Not-for-profit hospitals' charity spending revealed, but finding a standard measure may not be so simple

Hospitals that receive hefty tax breaks to provide community aid spend a small fraction of their budgets on free and discounted medical care for those who cannot afford to pay.

A Modern Healthcare analysis of new federal data on the sector's spending found subsidized medical care accounted for 1.52% or less of total expenses for about half of hospitals operated by more than 1,800 not-for-profits. Two out of three hospitals spent less than 2%. The median profit margin was 3.13%.

Such figures have eluded Congress, state lawmakers and consumer advocates throughout what has been a lengthy and charged national debate over how not-for-profit hospitals earn their tax breaks.

Now, the most comprehensive public disclosure of charitable spending by hospitals is under way. Modern Healthcare, with data provided by the not-for-profit GuideStar, analyzed hospital operations, free medical care and other community aid reported for the first time to the Internal Revenue Service for the tax year 2009 and gradually made public during the past year. Modern Healthcare previously published a look at 20 of the largest not-for-profit health systems based on the first publicly reported data (March 21).

And so, for the first time, regulators and the public can scrutinize—and sometimes compare—how local hospitals benefit their communities.

That scrutiny, health policy experts say, will raise pointed questions about a sector that has enjoyed exemptions from property, sales and income taxes with almost no oversight of what not-for-profit hospitals provide in return.

“It gets to the whole issue: Why are some hospitals tax-exempt and others are not?” said Nancy Kane, a management professor at Harvard University's School of Public Health who studies hospital tax exemptions and charitable spending.

The first national disclosure of hospital aid to communities comes as a weak economic recovery from the Great Recession has forced every level of government to scour budgets for ways to eliminate deficits. Meanwhile, the unemployment rate that soared as the economy plunged has increased demand for free medical care from uninsured patients and struggling households that cannot afford to pay.

Kane said communities, armed with new disclosures on charity care and community benefits, will be better prepared to decide for themselves whether local hospitals provide enough charity. “I suspect there will be some changes in federal or state or local or all three levels about what's expected in return for tax exemption.”

Attempts to estimate the value of hospital tax exemptions have yielded varying figures and most calculations are dated. But the $66 million property tax bill recently sent to an Illinois hospital that was denied tax exemption—for providing too little charity and for its for-profit operations—underscores the financial advantage hospitals gain from tax breaks and the sizable revenue lost to federal, state and local coffers.

Northwestern Memorial Hospital's spending on free care for poor patients, which totaled 1.85% of patient revenue, was one factor the Illinois Department of Revenue considered when it denied tax exemption for Northwestern's newly constructed Prentice Women's Hospital.

For federal and state officials who have already challenged hospitals' tax exemptions, including Sen. Chuck Grassley (R-Iowa), new numbers mean a long-awaited look at the sector's operations.

“Whether it's a big non-profit health system or individual tax-exempt hospitals, the amount of charitable activity, whether charitable patient care or community benefit activities, is still very little,” Grassley said in a written statement in response to a summary of Modern Healthcare's results.

“These organizations need to do a lot more in exchange for the generous tax breaks they receive,” he said.

Circumstances vary

Richard Umbdenstock, president and CEO of the American Hospital Association, declined to comment on Grassley's critical assessment of the sector's performance. Hospital executives and the leaders of their trade groups, including Umbdenstock, say a narrow focus on free care is unfair to hospitals, which tailor community aid budgets to meet local needs.

In states with high unemployment, hospitals may see greater demand for free care than those in states where fewer are out of work, they say. Or states with more generous Medicaid programs may alleviate some need for free medical care from hospitals.

“It's just going to vary by community and circumstance,” Umbdenstock said. The trade group supports disclosure and reporting separately the various ways that hospitals subsidize community benefits, he said.

New disclosure forms include eight categories of community benefits, including free care. The categories are the first national standard definition of what counts toward charity care, and reporting marks the first time hospitals must disclose spending using a uniform definition.

But Umbdenstock also called for “the totaling of those elements” for a complete picture of hospital subsidies. “I would caution everyone to deal with all of the elements of community benefit,” he said.

Tallying these numbers, as Umbdenstock suggested, the median hospital puts 5.87% of its expenses toward more broadly defined community benefit. Basic charity care accounted for one of every five of those dollars. The rest includes subsidies for medical research, training doctors, community health programs, grants and losses when Medicaid does not pay enough to meet costs of caring for patients enrolled in the safety net insurer. Medicaid accounted for hospitals' single-largest subsidy. The median hospital reported 3.02% of expenses covered losses when Medicaid did not pay enough to cover patients' costs.

As the IRS collected its first round of accounting of the community benefits tax-exempt hospitals provide, the AHA conducted its own analysis of hospital community aid with accounting firm Ernst & Young.

However, the AHA included expenses that federal tax officials rejected as benefits to the community, although they were included separately on the disclosure form. The AHA survey added the amount of unpaid bills sent to patients who likely could not afford to pay; losses on Medicare patients; and money spent toward community aid that is not directly related to providing healthcare, such as workforce and economic development and housing assistance. The survey included 600 disclosure forms and calculated the average community benefit spending for hospitals by size and specialty. Small hospitals had the lowest average at 9.9% of total expenses, preliminary results show. Children's hospitals had the highest average at 15.2%.

Julie Trocchio, the Catholic Health Association's senior director for community benefits and continuing care, said total spending “has value but it doesn't tell the whole story” of how hospitals provide aid. For example, hospitals may operate an effective but low-budget outreach effort, she said.

More valuable information will be available under the Patient Protection and Affordable Care Act, which requires hospitals to survey community needs, create plans to address them and then publicly report on their efforts, Trocchio said. “We do think that numbers aren't the best yardsticks to know if an organization is true to its mission.”

Trocchio said two competing trends have affected how much free care hospitals provide. More patients cannot afford to pay, which drives up free-care spending, but hospitals also have moved aggressively to care for patients in lower-cost clinics outside the hospital, which would drag down free-care spending, she said.

Bradford Gray, a senior fellow at the Urban Institute who studies not-for-profit reporting on community benefits, said community need isn't the only factor that contributes to differences between hospitals in spending on charity care and other benefits. Some hospitals have greater resources that allow for greater spending toward subsidized medical care and other services, he said.

Gray said for these reasons he would not support legislation to set a threshold for how much hospitals spend on charity care. In Texas, hospitals must spend a minimum of 4% of revenue on free medical care and to offset losses from Medicaid. One proposal in Congress in recent years, proposed by Grassley, would have required charity care total 5% of expenses.

Although many hospitals might fall short of such measures, Modern Healthcare found that 7% of the hospital disclosures submitted to the IRS reported charity care of 5% or more of expenses. Among those is the Regional Medical Center at Memphis (Tenn.), a safety net hospital that reported charity care accounted for 23.5% of expenses for the year that ended June 30, 2010.

Rick Wagers, senior executive vice president and chief financial officer for the hospital, said commercial insurers pay the 348-bed hospital somewhat higher rates to offset losses from Regional Medical Center's high percentage of patients who cannot pay. The not-for-profit hospital also receives roughly $30 million from the surrounding county, which owns and leases the hospital building, to provide care for needy residents.

But a string of recent operating losses have threatened the hospital's future, said Wagers, who arrived as CFO roughly 18 months ago after turnaround consultants made deep spending cuts to prevent closure. Free and discounted care contributed to those losses, he said.

To maintain a positive operating margin and Regional Medical Center's access to charity care, the hospital must expand profitable services that attract more patients with commercial insurance, such as orthopedics, Wagers said. “We're not doing anything to reduce the number of indigent patients that we have,” he said. Instead, “our goal is to become a hospital of choice.”

Hospitals reporting the most significant charity-care programs were those operated by the Shriners Hospitals for Children, Tampa, Fla., where charity care totaled 82.5% to 91.9% of total expenses.

More typical is Swedish Medical Center in Seattle, which reported charity care of 1.52%, the median figure in Modern Healthcare's analysis, and a profit margin of 4.08%, slightly higher than the median 3.13%.

Dan Dixon, vice president for external affairs at Swedish Health Services, said he doesn't believe the government should set a threshold—“because all hospitals or healthcare providers are not alike”—but could support a requirement that hospitals give enough back to the community to make up for the value of their tax exemptions.

The cost of Swedish's community benefits, which includes research community health activities, medical education, Medicaid losses and free and discounted care, totaled $112 million for 2010 compared with the hospital's projected tax break of $39.4 million, according to the system.

Swedish pays business, sales and property tax in Washington, so the hospital's projected tax benefit includes only federal tax exemptions. “It's a pretty darn good return on investment,” Dixon said. For Swedish, community benefit spending is “where we want to be and where we push ourselves to be.”

Swedish officials overhauled community benefit spending in recent years from an ad-hoc approach that could be influenced by internal politics to a system based on a community needs assessment, Dixon said.

Similarly, as the CHA's Trocchio pointed out, hospitals must assess community needs every three years under the Patient Protection and Affordable Care Act, which expanded regulation of not-for-profit hospitals as the IRS disclosures increased transparency. Combined, the measures seek to address billing and collection practices for low-income patients that drew sharp criticism from lawmakers, state attorneys general and patients during the past decade.

New disclosures include more than spending tallies for community benefits. The IRS also wants to know the basic eligibility criteria for free and discounted care.

In North Dakota, Jacobson Memorial Hospital Care Center offers low-income patients up to 90% off medical bills under the 21-bed hospital's charity-care policy. Jacobson reported spending only $107, or less than 1% of its overall expenses, on discounted care for the year that ended June 30, 2010. The rural hospital operates in the remote, sparsely populated and graying town of Elgin, where the median age is 57. Medicare and Medicaid cover many of the hospital's patients.

James Opdahl, the hospital's administrator, said the hospital does have discretion to waive bills entirely, but the policy requires all patients to pay at least some share of their bills, even if they need years to do so. Patients who fail to make payments no longer receive a discount, he said.

Opdahl said many choose not to pay hospital bills they can afford. Meanwhile, the hospital has lost money on operations 10 years out of the past 11, he said. For the year ended June 30, 2010, the hospital reported a net profit of $151,778, or a margin of 3.05%.

The hospital budget includes $20,000 for free and discounted care for the year, Opdahl said. Of the 14 applications for free care filed within the past 18 months, all were approved for discounts of 90%.

‘A business is a business'

Whether hospitals spend more or less than the median 1.52% of expenses on charity care, they were equally likely to earn a profit or report a loss.

In fact, hospitals reported similar losses whether they were among the half that spent less on charity (where the median loss was

a negative 2.86%) or the half that spent more (where the median loss was a negative 2.75%). Profits were higher among hospitals that spent more on charity care (a median of 5.26%) than those that did not (4.69%).

John Colombo, a not-for-profit tax law professor at the University of Illinois in Urbana, questioned how hospitals spend those margins. Profits among hospitals in Modern Healthcare's analysis were double what hospitals spent on charity care, he noted.

Colombo acknowledged hospitals need to reserve some profit. “Every organization needs to put money away for a rainy day and capital cost replacement,” he said. But “when you start looking at these organizations, it becomes clear that many of them can do more than they already do.”

Hospitals do not rely on donations to survive as other charities do, Colombo said. Meanwhile, many for-profit corporations donate to benefit communities as hospitals do. Policymakers may do better to try tax deductions rather than offering tax breaks for hospitals that provide charity, he said. The alternative—trying to draw a line at where businesses end and charities start—“seems to me like the wrong way to go about it,” he said. “A business is a business.”

Harvard's Kane said she was not surprised by hospitals' spending on charity care, but she believes many will be.

“Frankly, I don't think people understand how little” hospitals spend toward free and discounted care, she said.

That amount matters to patient advocates and policymakers, she said, because of the painful financial and personal consequences when someone cannot get care because of cost. “That is the first question we ask about community benefit and tax exemption,” Kane said. Charity-care spending also matters in the marketplace, she said.

New disclosures will reveal to policymakers which hospitals shoulder too little burden for low-income patients and have a financial advantage over those that do more.

Holly Lang, director of the Hospital Accountability Project in Atlanta, said she believes aid from hospitals should not be limited to charity care and, as hospitals work to address unmet needs of uninsured and underinsured patients, charity care may decline as patients are treated before conditions grow acute in less costly locations such as clinics.

The project, operated by the consumer group Georgia Watch, has surveyed state hospitals on access to charity-care policies and works with those who struggle to find care because of cost. Nonetheless, access to medical care for those who cannot afford it remains essential, Lang said. “We feel it's the starting point for any community benefits program.”



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