Short of the mark

A crush of new information about hospital finance is finally starting to roll in and the results suggest that some highly profitable hospitals are skimping on subsidized care to the needy while others with narrower margins appear more generous.

After more than a decade of discussion and preparation, the most comprehensive public disclosure of what not-for-profit hospitals do to earn significant tax breaks has begun, with more disclosures to follow in coming months. Even if healthcare reform succeeds in shrinking the ranks of the uninsured and fewer people need what's now referred to as charity care, the results are destined to be parsed and analyzed for years to come.

A Modern Healthcare analysis found widely uneven distribution in the levels of charity care given to the poor by various hospitals. Many of the charitable healthcare providers also acknowledged billing patients who, in retrospect, probably should have qualified for free care.

“Hospitals, if they're not-for-profits, should act like a charity,” said Sen. Chuck Grassley, one of the most vocal critics in the debate about whether tax-exempt hospitals do enough for their communities. “I expect nonprofit hospitals to fulfill their not-for-profit status by providing whatever charity care is needed.”

However, the Iowa Republican was quick to add that he finds the early results of the tax forms encouraging, and that the forms appear to prove that outlays of charity care ought not to be the only factor by which not-for-profits are judged because different communities have different needs, and because setting minimum levels can discourage those who can do more.

A majority of U.S. hospitals operate as private charities, a status that affords significant federal, state and local tax breaks worth an estimated $12 billion annually by one widely cited, but dated, estimate produced by Congress' Joint Committee on Taxation in 2002.

The nation's roughly 2,900 not-for-profit hospitals that operate in communities rich and poor, populous and remote, have received the financial and competitive advantage of tax breaks. The trade-off was that hospitals give back to communities through vaguely defined “community benefit” activities, including subsidies for low-income patients, but also money-losing endeavors such as research and physician training.

But limited oversight and poor disclosure of those community benefits sparked congressional hearings, inquiries and sharp criticism as reports emerged during the past decade of aggressive billing and collection practices for the uninsured.

Enter the Internal Revenue Service. In 2009, for the first time, hospitals were forced to file a form called the Schedule H with their annual Form 990 tax disclosures as a way to finally quantify community benefit activities.

And it turns out that some hospitals and systems do significantly more than others, according to an analysis by Modern Healthcare of 156 Form 990s and Schedule Hs from 20 large health systems that were among the first to face a filing deadline. The analysis looks at tax year 2009 because hospitals have up to 11½ months to file their taxes with extensions.

On average, the results show, each hospital devoted 2.5% of all its expenses to providing charity care—an estimate based on the cost of providing the care, not the marked-up retail price billed to patients. Once losses on Medicaid and subsidies for other services were included, the figure rose to 8.3%.

The analysis found that nine out of 10 respondents in the survey failed to provide enough free and discounted care to earn tax breaks under a proposal from Grassley that would have forced the hospitals to devote 5% of their expenditures to giving out subsidized care for the poor.

Grassley, in an interview about the Modern Healthcare results, backed away from the 5% proposal. Yet despite the industry's position that the threshold would threaten the financial stability of many hospitals, all 15 hospitals in the sample that met the 5% threshold ended the year with a profit.

In another closely watched section of the tax forms, hospitals had the option to quantify how much of their unpaid bills could be attributed to patients who probably would have qualified for financial assistance. Some within the industry argue such losses should be recognized as subsidized care, but consumer researchers and advocates say the findings suggest troubling hospital collection policies with significant consequences for those already financially vulnerable.

“It's not OK to try using commercial collection practices and get credit for that as charity care,” said Melissa Jacoby, a law professor at the University of North Carolina at Chapel Hill, who studies medical bills and consumer bankruptcy. Jacoby said the new disclosure raises questions about how aggressively hospitals sought to collect unpaid bills from low-income patients.

Results of the analysis are not representative of all tax-exempt hospitals but do offer a comparison of community benefits at some of the nation's largest health systems. For Congress and policymakers, new disclosure provides previously unavailable information that will allow the closest scrutiny to date of the benefit tax-exempt hospitals provide to nearby communities.

“There's all these unfair social problems that the health system is grappling with,” said Nancy Kane, a professor of management at the Harvard School of Public Health, who has testified before Congress on the value of hospitals' tax exemption.

She said the Schedule H will help lawmakers write better policies “to make sure that those that have a high social burden aren't getting competitively disadvantaged by it.”

While meeting the social burden didn't appear to distress the hospitals in the Modern Healthcare sample that reported above-average levels of charity care, a majority of profitable hospitals did provide less free care than the average.

The most common type of hospital in the profit-charity analysis were those that posted a net profit and gave out lower-than-average levels of charity care. And of the 61 hospitals that gave out above-average levels of charity care, 75% of them turned a profit.

Take Mercy Hospital Clermont. The 111-bed acute-care hospital lies on the outskirts of Cincinnati, in Batavia, Ohio, where a Ford Motor Co. factory, Batavia Transmission, closed in 2008 and contributed to high levels of unemployment and lack of insurance coverage in the region.

The system offers free care to residents who earn less than two times the federal poverty level, and discounted care for those up to 400% of poverty—including patients with insurance. That cost the hospital more than $4.1 million, or 5.7% of its total expenditures, in 2009.

“What we like to say is, the mission of caring for the poor and underserved is as vibrant today as it was 150 years ago, when the Sisters of Mercy and the Franciscan Sisters came over from Ireland and Germany in wooden boats,” James May, president and CEO of Mercy Health Partners of Southwest Ohio, said in reference to the regional system's original religious sponsors.

Yet Mercy Hospital Clermont, which is part of Catholic Health Partners, still posted a 6.5% profit margin in 2009.

The Schedule H required expanded disclosure of hospitals' billing and collection efforts. The IRS asked hospitals to estimate for the first time how much they billed to patients who were unable to pay under guidelines for free and discounted care.

Among those reviewed by Modern Healthcare, 83 reported no unpaid bills attributable to patients eligible for subsidized care.

At Sacramento, Calif.-based Sutter Health, which owns or operates 22 hospitals in Northern California and one in Hawaii, hospitals did not credit any of $73.7 million in reported bad debt to patients who qualified for charity care. “If we know it's eligible, it wouldn't be bad debt,” Bill Gleeson, a spokesman for the system, said in an e-mail.

Other hospitals and systems, however, estimated needy patients accounted for a significant share of unpaid bills—including a dozen that said bills sent to those considered eligible for subsidized care made up at least half of bad debt costs.

St. Peter's Hospital, a 487-bed Albany, N.Y., hospital owned by Catholic Health East, estimated needy patients accounted for $2.6 million, or 82%, of its $3.2 million in bad debt. Elmer Streeter, a St. Peter's spokesman, said the hospital is dedicated to finding patients coverage and has an active program to promote its financial aid.

BJC HealthCare reported that 81% of its unpaid bills in 2009—amounting to $63 million—were sent to households without the income to pay for some or all of the debt.

Comparing these numbers across systems is complicated by the fact the IRS did not specify how to come up with the number. Modern Healthcare's analysis found that the methods, which also are reported on the Schedule H, varied widely.

The BJC estimate was calculated using commercial databases to analyze income by ZIP code and address for the system's unpaid bills, said Tracy Mahler, BJC's director of tax services. The unpaid bills stem primarily from its St. Louis hospitals that serve poorer neighborhoods, she said, and other hospitals or systems may not serve similarly low-income communities.

Dave Aplington, deputy general counsel for BJC, said the system has sought to more aggressively identify those who qualify for financial assistance and has an interest in conserving resources that would be wasted trying to collect money that cannot be collected.

Consumer debt researchers and patient advocates say reported billing of low-income patients is worrying.

Outstanding bills can mean financial and emotional stress for low-income households, and damage to credit scores can be costly, said Mark Rukavina, executive director of the Access Project, a healthcare advocacy not-for-profit. “The misery factor there is significant.”

Hospitals increasingly seek to independently verify whether patients qualify for financial aid, and charity-care policies should identify information that allow hospitals to “presumptively” write off patients' bills, said Keith Hearle, president of Verite Healthcare Consulting. That can include enrollment in other social services for low-income households.

Melinda Hatton, senior vice president and general counsel of the American Hospital Association, disagreed that the blame for the issue rests with the hospitals.

“I don't think that those high numbers reflect a lack of diligence on the part of hospitals, but just that there are many reasons why someone who is eligible for financial assistance might not apply,” she said. “It's not always the fault of a hospital.”