Cherry-picking patients: It might be business as usual for many hospitals

When the CEO of Mayo Clinic said the world-renowned, not-for-profit health system would prioritize caring for privately insured patients over publicly insured ones, it triggered an inquiry from the Minnesota Health Department and dismay and criticism from researchers and ethicists.

“We're asking ... if the patient has commercial insurance, or they're Medicaid or Medicare patients and they're equal, that we prioritize the commercial insured patients enough so ... we can be financially strong at the end of the year to continue to advance, advance our mission,” CEO Dr. John Noseworthy told staff during a speech late last year, according to a transcript obtained by the Minneapolis Star Tribune.

It's unclear whether Noseworthy's statements represent an explicit change in policy for the health system or if Mayo, acting on that statement, would violate any laws, including federal civil rights statutes, legal experts said. But whatever the outcome, the faux pas reflects—to a significant degree—business as usual for not-for-profit hospitals, which make up more than three-quarters of the nation's hospitals.

Even if Mayo is picking and choosing its patients based on insurance, it may not be significantly different from the policies and practices of many other hospitals, said Mary Crossley, a law professor at the University of Pittsburgh's School of Law whose research focuses on inequality in healthcare delivery.

“It's part of a system where we ration healthcare based on who can pay. When you have a system like that, you have hospitals and other providers making these kinds of choices,” Crossley said, suggesting that other hospitals simply manage to be more subtle than Mayo's CEO recently was. “I certainly don't commend the practice.”

In a subsequent statement, Noseworthy said that medical need would always be the “primary factor” in making appointments. “In an internal discussion I used the word 'prioritized' and I regret this has caused concerns that the Mayo Clinic will not serve patients with government insurance,” he said. “Nothing could be further from the truth.”

Not-for-profit hospitals are exempt from federal, state and local taxes that, by one estimate, added up to $24.6 billion in 2011. They receive these exemptions in return for providing benefits to the community, at the core of which is caring for the publicly insured, uninsured or indigent. But the extent to which hospitals actually offer community benefits varies substantially, and their status as tax-exempt has come under scrutiny in recent years.

The Internal Revenue Service does not set a minimum level of community benefits that hospitals must provide to gain tax exemptions. In 2013, a study published in the New England Journal of Medicine found that not-for-profit hospitals in 2009 spent on average 7.5% of their operating costs on community benefits and charity care.

A 2009 IRS study of not-for-profit hospitals shed light on imbalances within the sector, showing that community benefit spending was concentrated in a relatively small number of hospitals. About 9% of the hospitals accounted for 60% of the aggregate community benefit expenditures, it found using data from 2006.

Meanwhile, not-for-profit hospitals with annual revenue in excess of $500 million—36 hospitals, or 7% of those surveyed—saw much higher proportions of privately insured patients than did hospitals with revenue of less than $25 million—85 hospitals, or 17% of those surveyed—the IRS found.

Noseworthy's remarks, made before staff at the end of last year but broken to the public in mid-March, offer more ammunition to those who question whether not-for-profit hospitals deserve the tax breaks they've long received, especially when their community contributions appear paltry by comparison.

“Tax-exempt hospitals, tax-exempt organizations, are perceived by the public to have this higher social standard. They're expected to behave in ways that are not profit-driven,” said Gary Young, director of the Center for Health Policy and Healthcare Research at Northeastern University in Boston, the lead author of the 2013 NEJM study.

Those expectations often conflict with reality. “We look at not-for-profit hospitals and say, 'Wow, these are major corporations.' They have revenues that are in the billions, in some cases, and they have highly paid executives,” Young said.

Mayo Clinic's net operating income in 2016 was $475 million on revenue of $11 billion, giving it an operating margin of 4.3%, the system reported. It provided care worth $629.7 million to “people in need,” including $83.3 million in charity care and $546.4 million in Medicaid shortfalls or unpaid portions of other indigent-care programs.

In 2015, Noseworthy took home a base salary of $1.96 million plus $481,459 in other compensation, $59,031 in retirement and other deferred compensation, and $20,103 in nontaxable benefits, for a total of more than $2.5 million, tax records show.

In 2014, the estimated market value of the Mayo's properties in Minnesota's Olmsted County was approximately $820 million. The $16.6 million it paid in property taxes that year covered about half of the value of its properties.

Mayo Clinic's mission, according to its website, is “to inspire hope and contribute to health and well-being by providing the best care to every patient through integrated clinical practice, education and research.” It adds, “The needs of the patient come first.”

But Noseworthy's comments strike some as a stark contrast to that mission. “I have never seen in modern times anything like this,” said Sara Rosenbaum, a professor health policy at the George Washington University in Washington, D.C. “Where a hospital of the status and wealth of Mayo simply comes out and says that it's going to start rationing care to poor people on Medicaid—it really made me sit up and take notice.”

If Mayo were to prioritize commercially insured over publicly insured patients, it could potentially violate several state and federal laws. Possible repercussions remain unclear, but rarely have hospitals had their federal tax-exempt status revoked for failing to provide sufficient community benefits, although that has happened occasionally at the municipal level, experts said.

In 2011, Illinois stripped three hospitals of their property tax exemptions for failing to provide adequate charity care. And in 2013, the city of Pittsburgh demanded that UPMC compensate it for six years of property taxes for spending less than 2% of its revenue on charity care.

After reading about Noseworthy's comments in the Star Tribune, Emily Piper, commissioner of the Minnesota Department of Human Services, sent a letter, dated March 16, to Noseworthy. She said the department was reviewing its managed care, fee-for-service and ACO contracts with Mayo.

In a follow-up letter, assistant commissioner Nathan Moracco asked specific questions about how Mayo would meet the obligations of those agreements and those of state and federal law, and asked the clinic to respond within two weeks.

He pointed out that in 2015, Mayo had signed an agreement with Minnesota Health Care Programs, publicly subsidized programs that include Medicaid as well as coverage for immigrants and refugees. Per that agreement, Mayo promised to “render to recipients services of the same scope and quality as would be provided to the general public.” The agreement also required providers to comply with Title VI of the 1964 Civil Rights Act, which bars discrimination.

Minnesota's population is 82% white, 6% black, 5% Hispanic, 3% Asian and 2% American Indian/Alaska Native, according to the U.S. Census Bureau. Nonwhites are disproportionately on public insurance or are uninsured. Of those on Medicaid in 2015, 67% were white and 18% were black.

Of the nonelderly uninsured, 44% were white, 17% Hispanic, and 25% “other,” defined as Asian, Native Hawaiian and Pacific Islander, American Indian, Aleutian, Eskimo or multiracial.

Overall, 7% of Minnesotans do not have insurance, according to an analysis by the Kaiser Family Foundation. But only 4% of whites were uninsured, while 20% of Hispanics and 24% of people categorized as “other” lacked coverage.

Minnesota does not explicitly require not-for-profit hospitals to offer a minimum of community benefits, although state law does require them to report every year the benefits it does provide.

If Mayo did cut back on care to Medicaid or Medicare patients or others who are not commercially insured, “minorities would be disproportionately affected,” Rosenbaum said.

Because it receives federal funding by participating in Medicare and Medicaid, Mayo is prohibited from discriminating by race. Title VI bans not just overt discrimination but also the adoption of policies that might appear neutral but in reality disproportionately affect certain racial groups. How this could play out for Mayo Clinic remains to be seen.

Ultimately, even at not-for-profit hospitals, revenue has to exceed operating expenses, said Crossley, the University of Pittsburgh law professor.

“It's not unusual to hear about hospital management trying to adjust patient mix by adjusting the services they offer, to maximize revenue,” Crossley added. They might try to figure out which services have the best profit margins, for instance, and lure patients to those more lucrative units while closing down services that attract Medicaid patients and cause the hospital to lose money.

Young, who saw Noseworthy's comments as market-level and not patient-specific, said that although the remarks were in poor taste, the sentiments behind them were “commonplace.”

“We've asked them to compete,” Young said of not-for-profit hospitals. “They do think about how they have to market their services, and how they want to focus on the commercial population versus government.”