The initial results of Texas' historic hospital charity-care law reveal that the law is more about creative arithmetic than taking care of the state's poor.
On the surface, Texas' not-for-profit hospitals appear to have dramatically increased their spending on charity care after the state began requiring them to provide a specific level of care to the poor. An exclusive analysis by MODERN HEALTHCARE*of charity-care figures for Texas' 146 private, tax-exempt hospitals shows that the facilities increased their charity-care charges by 51% between 1992 and 1994 to $566.4 million. The data are drawn from reports filed by the hospitals with the Texas health department.
Texas hospitals report charity-care charges-what they expect to collect from payers-instead of charity-care costs, or what they actually spend to provide care.
However, many hospital executives say the considerable increase doesn't necessarily reflect true growth in dollars. Instead, executives say they're keeping better track of charity-care spending. If they don't, the hospital's tax-exempt status may be jeopardized.
"Definitely, it's the tracking," said Libby Dotson, director of community development for All Saints Hospital, Fort Worth. The system showed a 361% increase in its charity charges between 1992 and 1994 for its downtown hospital and a 547% increase at its suburban facility. "We have centralized that effort (tracking charity patients) and are trying to identify patients coming through the door," Dotson added.
Even so, she acknowledged that the law's passage coincided with a "resurgence in community development" for the tax-exempt system. For example, All Saints has developed several programs, such as transportation of medically and financially indigent patients, at an annual cost of $120,000, and spending $100,000 on prescription medications for poor cancer patients.
Whether the sole threat of the law prompted hospitals like All Saints to pay more attention to the poor is hazy. No one interviewed by MODERN HEALTHCARE said hospitals weren't spending enough on charity care prior to the law's passage in 1993. Instead, all the hospital executives interviewed said they simply weren't as astute about tracking it.
"We're tracking things that we never tracked before," said Sally Rawlings, vice president at Methodist Hospital in Houston. "That's a real positive of the law; it raised the consciousness of what we're doing." Methodist's charity charges increased 123% to $13.8 million, the state reported.
Texas' charity-care trends put a face on a confusing and yet incendiary aspect of healthcare. Debates about the reporting of charity-care figures nearly always draw charges of manipulation or misinterpretation. MODERN HEALTHCARE's analysis was no exception: Those interviewed were quick to point out problems with the data.
Yet misinterpretation is an understandable byproduct because of individual hospitals' different takes on what is considered charity care.
"What's charity in one hospital isn't necessarily charity in another," said Ann Henry, director of data development and management in the state health department.
As part of the state law, not-for-profit hospitals must develop charity-care policies. Although the state tells hospitals they must spend a certain amount on charity care, it's up to the hospital to determine how to reach that level.
For example, the new law creates an incentive for not-for-profit hospitals to classify all uncompensated care as charity care rather than separating true charity care from bad debt.
Texas' experience is unique because it's the only state that requires hospitals to provide a certain level of care for the poor to retain their tax-exempt status. That status provides not-for-profit hospitals with millions of dollars in benefits through lower borrowing rates, philanthropic donations and the lack of tax payments.
Even though Texas is the only state to require such charity-care levels, most observers agree that the thresholds are fairly easy to meet. The law took effect for most hospitals in 1994, and the restrictions eased up even more in 1995.
Most onerous is the requirement that hospitals devote 4% of their patient-care expenditures to the poor.
However, last year the Legislature changed the law to allow multihospital systems to consolidate their charity-care spending figures and then average them for all hospitals in the system. That helps hospitals in high-income areas that report lower charity-care spending. Their numbers can be mixed in with the figures from other hospitals in the system.
The data analyzed by MODERN HEALTHCARE*reflect a key period for charity care in Texas. In 1992, Methodist Hospital in Houston was in the throes of a lawsuit with the state of Texas over its level of charity care. In an unusually antagonistic stand, the state attorney general alleged that Methodist, a financial powerhouse, wasn't providing enough care to the poor to justify its tax breaks as a tax-exempt organization.
Methodist argued that it wasn't legally obligated to provide any care to the poor. A state court agreed with Methodist and said the state attorney general had no legal right to sue the hospital.
The case heightened concern over the issue of charity care by tax-exempt hospitals and prompted the Legislature to pass the current statute.
Although the law was passed to prompt not-for-profit hospitals to carry more of the charity burden, the MODERN HEALTHCARE*analysis shows that public hospitals still shoulder an overwhelming portion. Of the 450 hospitals that report to the state, 10 collectively had $1.1 billion in charity-care charges, or more than half the charity care in Texas in 1994, according to the analysis. Of those, all but one were tax-supported, county- or state-owned institutions. The lone private, not-for-profit facility was Hermann Hospital in Houston (See related story, right).
Of the top 10 private, not-for-profit hospitals in Texas, Hermann was the leading charity provider, according to the analysis of state figures. Next in line was Baylor University Medical Center, Dallas, with $27.5 million in charity-care charges.
The data are drawn from a report all hospitals make annually to the state on their charity-care charges, bad debt and revenues.
Although all Texas hospitals report bad debt and charity care, only private, not-for-profit facilities are required to file a separate form on charity-care spending. From those forms, the state decides whether the hospital has met its 4% standard or one of three other standards (See related story, p. 42).
The first-year hospitals had to comply was 1994. However, even hospitals that didn't meet the threshold in 1994 had a one-year grace period to make up the difference. Whether any hospitals are in violation of the state law hasn't been determined because the 1995 forms still are being filed, state officials said.
For example, Cozby-Germany Hospital, a not-for-profit facility in Grand Saline, reported providing no charity care in 1994. Obviously, that would seem to violate the 4% standard.
"I came in July 1994, and before that they lumped everything into bad debt," explained William Rowton, Cozby-Germany's chief executive officer, who said the hospital is now meeting its charity-care obligations.
In 1994, the 26-bed hospital reported $425,000 in bad debt. The state law has prompted Rowton to work with his admitting office employees so they qualify patients as charity cases.
The blurring between charity care and bad debt is a frequent argument because both categories constitute uncompensated care.
However, accountants say bad debt and charity are not the same, and the difference lies in intent. Charity is care given with no expectation of payment. Bad debt results when care is given with expectation of payment but no payment is made.
"The bad debts are those where you undertake a collection effort," said Martha Garner, a partner in the Dallas office of Price Waterhouse.
Bad debt may not be indigent. In fact, in some cases, the hospital may be lax about collections.
"In the past, they were called self-pay, and we didn't spend lot of effort to find out as much about them because we knew we weren't going to collect a lot of money," said Ron Anderson, M.D., president and CEO of Parkland Memorial Hospital in Dallas, in a hospital newsletter.
However, by concentrating on this population, Parkland has demonstrated that many bad-debt cases can pay their bills. Collections have doubled in the past five years to $200 million.
By pursuing bad debts from those who can pay, charity-care spending will go to those who really deserve it, said Liza Manziel, a Dallas-based attorney whose work focuses mostly on recovering healthcare bills.
She sees cases in which private not-for-profits change the way they pursue bad debt after being purchased by a for-profit chain. That's because not-for-profits have "the attorney general breathing down their throats," which gives them an incentive not to pursue some bad-debt cases to meet charity-care levels, she said.
"There's so many instances where a hospital could beef up its practices" to recover bad debt, she added.
The fact that bad debt includes bills that hospitals are simply lax about collecting explodes the notion that they should be included in any calculation of charity care.
Most hospitals use income as a gauge of who qualifies for charity. For example, to qualify for charity care at All Saints a patient's income can't be more than 200% above federal poverty guidelines. For an individual, that amounts to $13,940. For an individual supporting a family of four, it would be $28,700.
Hermann uses 185% above federal poverty guidelines as a threshold for financially indigent patients. However, for those who are medically indigent-meaning they exhaust their insurance coverage or funds because of their hospitalization-the threshold is much higher, 375% above poverty guidelines.
In addition, anyone who qualifies for Medicaid also qualifies for the hospital's charity-care program.
In Texas' charity-care reporting, bad debt is not included as a category.
However, medically indigent is included, and for some hospitals that calculation is thrown into bad debt. Medically indigent patients may be able to pay when they are admitted to the hospital, but they subsequently exhaust their health insurance or other financial resources.
In many cases, hospitals bill medically indigent patients, then find out they can't pay and write the bill off as bad debt or charity care.
Another variable is the cost-vs.-charges debate. Texas gathers figures on charity-care charges, which usually are easier for hospitals to collect.
However, costs are a better measure of what a hospital is spending to be charitable, and they are a better yardstick with which to compare hospitals.
For example, Hermann Hospital-one of the state's leading charity providers-reported charity-care charges of $80.9 million in 1994. However, its actual charity-care costs are just 48% of that, or about $38.6 million.
If Hermann's charge-to-cost ratio held true for other hospitals across the state, the amount of charity care provided by private, not-for-profit hospitals in Texas would drop to $271.9 million from $566.4 million.
At that level, many hospitals might have trouble meeting their charity-care obligations just on the basis of inpatient care.
That's why many facilities augment their charity care with programs outside the walls of the hospital.
A good example is Methodist, whose charity-care policies led to the state law. In 1994, Methodist spent $5.8 million on grants to several community organizations, including a dental clinic for AIDS patients and a homeless shelter. It also gave $1.6 million to Houston's public hospital, Harris County Hospital District.
"We knew we couldn't address all the community needs with just the people who came here for treatment," said Methodist's Rawlings.
By battling the state over charity care, Methodist heightened its profile as a not-for-profit hospital. Now, in addition to making community grants, it also tells the community about what it's doing.
Beginning in 1994, the hospital distributed a booklet about its community-benefits spending; 4,000 copies were distributed that year.
However, Methodist also set up a process for charity cases to receive treatment. Fred McCahon, who owns a barbecue restaurant in Houston, is a testament to how the process can work well to serve the needy.
McCahon filled out a 11/2-page application to be a charity patient at the hospital this year. The 48-year-old lacked insurance but needed heart valve surgery.
"It worked great," McCahon said. Of course, hospital care isn't worth much if an indigent patient can't find a doctor to treat him. When McCahon had that problem, Methodist officials "put me in touch with one."
Neither the doctor nor Methodist sent McCahon a bill. "They treated me real nice," he said.
Despite Methodist's higher spending on charity care, the hospital remains hugely successful from a financial standpoint.
Among acute-care hospitals, it has accumulated the nation's largest store of cash reserves: $788 million (Oct. 23, 1995, p. 40).
That type of accumulation also raises questions about how much charity care is enough for a tax-exempt hospital. Some fear the Texas law's charity-care floor may become a ceiling, allowing some hospitals to cut back on care to the poor without penalty.
Clearly, unless private, not-for-profit hospitals in Texas show a charitable initiative, most won't be unwillingly overloaded with indigent care. That's because urban public hospitals pick up so much of the charity care through their trauma centers, which are a magnet for uninsured patients.
In addition, Medicaid disproportionate-share funding is fairly generous to Texas hospitals. When that's not available, hospitals can bill an indigent patient's county government. Counties must set aside 10% of their budgets for indigent-care payments.
The figures show Texas' border hospitals, which typically are portrayed as suffering under the financial weight of indigent care, aren't that bad off. MODERN HEALTHCARE's analysis of the state data showed that the 22 hospitals on the Texas-Mexico border had $96.5 million in charity-care charges in 1994, or 6% of their net patient revenues. However, the numbers are skewed by R.E. Thomason General Hospital, a tax-supported facility in El Paso, where charity-care charges account for 40% of net patient revenues.
When Thomason is eliminated from the calculation, the 21 border hospitals provided $58 million, or 4% of revenues, in charity-care charges. Assuming their costs are much less than their charges, that figure probably would drop below the 4% threshold in the new state law.
Yet one would think that if any area in Texas would have hospitals that meet the 4% requirement, it would be the border region.
Curtis Haley, controller at Knapp Medical Center, explained that only a small part of the population isn't covered by some type of payment program. Knapp is located in Weslaco, Texas, which is along the Mexican border.
"The population on the border has a lot of younger and older people," he said. "A lot of the young qualify for Medicaid and the old qualify for Medicare. There's not that big of a population that falls in the middle."
Knapp's charity-care charges rose 385% between 1992 and 1994, one of the highest increases among Texas hospitals. In 1994, the hospital provided $1.9 million in charity care, which amounted to 3% of net patient revenues. On the other hand, the 180-bed hospital reported $5.1 million in bad debt, which amounts to nearly 10% of revenues by itself.
Haley said the increase didn't necessarily mean the hospital was providing more charity care. "We've always had an open-door policy," he added. Like many other hospital executives, he said the increase was merely a change in accounting and identifying charity-care patients.
"I don't know what (legislators) expected from the law except a better accounting of it," Haley said.
Interestingly, the Catholic hospital with the highest percentage of charity charges is a border facility. Mercy Regional Medical Center,
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Charity Continued from p. 42
Laredo, reported charity charges of $10.1 million in 1994, or 11% of net patient revenues.
However, it was far above total charity charges for the other 25 Catholic facilities in the state. They showed a total of $114.9 million in charity charges in 1994, or 6% of total patient revenues, according to MODERN HEALTHCARE's analysis.
In another interesting twist, the analysis showed 63 hospitals reported no charity care. Most of those were investor-owned, which means they have no legal requirement to provide charity care.
The analysis revealed that of the largest hospitals that provide no charity care, the top four are owned by Tenet Healthcare Corp., Santa Monica, Calif. The largest hospitals were ranked in terms of annual revenues (See chart, p. 40).
However, Tenet officials said they do provide charity care, they just account for it differently.
Jim Biltz, vice president of operations for Tenet's Texas region, explained that most Tenet hospitals report charity care as bad debt. Unlike the private not-for-profit hospitals that have an incentive to report uncompensated care, "we're not required to report charity care. Most of it lands in bad debt," he added.
Tenet Park Plaza Hospital in Houston reported $8 million in bad debt, which would mean it had 7% of its revenues in uncompensated care. That "far exceeds the state's charity-care requirements of non-profit hospitals," said hospital spokeswoman Linda Singleton.
In addition to $8 million in uncompensated care, the hospital listed $79 million in Medicare and Medicaid shortfalls and $175,000 in charitable contributions to Houston-area organizations, such as an AIDS support center and United Way.
"I'm not sure there's enough hours in the day to manually split that out," Biltz said about requiring Tenet's hospitals to go through the process of dividing charity care from bad debt.
That seems to be the case with Columbia/HCA Healthcare Corp. as well. For example, Bayshore Medical Center in Pasadena, Texas, is close in size to Park Plaza. Yet instead of reporting no charity care to the state, it said the information was "not available." Officials said the hospital doesn't split out the charity care from the bad debt.