Some California hospitals seek to cut charity care by more than half

Not long after California's attorney general was sworn in at the beginning of this year, hospitals got to work renewing pleas his predecessor had shot down to more than halve their charity-care obligations.

The California Hospital Association said it's in talks with Attorney General Xavier Becerra's office on behalf of a handful of not-for-profit hospitals that need his permission to cut charity care. Kamala Harris, who preceded Becerra, denied four such requests before leaving her post to serve in the U.S. Senate. This fall, requests from the same four hospitals trickled back in, but the CHA says it knows of roughly 15 that want to make the change.

"It's a new attorney general, it's a new set of eyes and a new willingness to work with us," said Anne McLeod, the CHA's senior vice president of health policy and innovation.

The hospitals' requests illustrate charity care's questionable role following the Affordable Care Act, which turned the typical payer mix on its head. Now, hospitals say so many patients have insurance either through Medicaid—known in California as Medi-Cal—or subsidized plans, far fewer patients meet the requirements for free or reduced price care. In California alone, the uninsured rate dropped by nearly half from 2014 to 2015: from 16% to 9%.

Only a small subset of not-for-profit hospitals need the attorney's general approval to reduce charity care, based on conditions the state imposed to allow sales or mergers. Those requirements can last from six to 11 years.

Meanwhile, their counterparts already provide a fraction of the charity care they once did. Statewide, total charity-care spending plummeted from 2011 to 2016, from $6 billion, or 7.9% of operating revenue, to $2.5 billion, or 2.4% of operating revenue, according to data from the state's Office of Statewide Health Planning and Development.

The same trend is happening nationally. Hospitals' uncompensated care, which includes charity care and bad debt—care they expected to be paid for but were not—fell to a 25-year low of 4.2% of hospitals' total expenses in 2015, according to the American Hospital Association. That year, uncompensated care cost hospitals $35.7 billion, down 23% compared with a high of $46.4 billion in 2013.

"If the need for charity care has diminished and the hospitals have picked up additional obligations through increased Medi-Cal enrollment, that creates a financial burden," said James Schwartz, a former deputy attorney general in California and partner with the Los Angeles-based law firm Manatt, Phelps & Phillips. "It would seem to me that that's something that would fairly be looked at."

Becerra's office, which declined a request for comment, has 90 days from when the requests were filed to respond.

Under most of the attorney general office's conditional approval requirements, if the hospitals provide less charity care than is required, they must disperse the remaining money to not-for-profit organizations that provide healthcare services to residents in their service areas.

Harris last year made St. Agnes Medical Center give its $2 million charity-care spending deficit to local not-for-profit organizations, despite the Fresno hospital's request to lower its obligation.

The CHA's McLeod thinks that was a bad idea, as the money didn't need to be used for specific purposes.

"It was a big windfall," she said, "and it didn't feel like it was the right way to ensure that the community was getting the care that they need."

St. Agnes is among the hospitals renewing its request. Since the first one, its charity-care deficit doubled to $4 million in 2016, hospital spokeswoman Kelley Sanchez said. The hospital went from 2.5% of patients being uninsured in fiscal 2013 to 0.4% in fiscal 2017. During that time, Medicaid patients went from 29% to nearly 36%. Commercially insured patients, who provide the highest level of reimbursement, shrank from 22% to 18%.

"The financial burden is even greater now than it was before," Sanchez said, since Medicaid rates are so much lower than commercial payers.

Not everyone agrees with the hospitals' logic. Anthony Galace, director of health policy for the Greenlining Institute, an Oakland-based racial and economic justice advocacy group, said if hospitals don't hit their required charity-care levels, they should direct the rest of the money toward interventions like health education programs, he said.

"We believe they should redirect the savings they've experienced through charity care to other investments that the Attorney General still has purview over and that address the needs of low-income patients," Galace said. "One way or the other, we want the attorney general to maintain the spirit of the agreement and hold these hospitals accountable to their obligation to low-income patients."

The Greenlining Institute was among four organizations that sent Harris a letter to that effect in July 2016. He said the groups plan to write another one to address the recent requests.

In their requests, all four hospitals describe the same equation they prefer be used to determine their charity-care costs going forward: calculate the percentage reduction in charity-care costs between 2013 and 2016 for all hospitals in the communities they serve and apply that to their obligated amounts. Doing so would at least halve each of their requirements.

For Emanuel Medical Center, a 209-bed acute-care hospital in Turlock, that math would cut its obligation more than four-fold, from $3.2 million to less than $700,000 annually. That's because hospitals in the Turlock area lowered their charity-care costs by a collective 79% between 2013 and 2016, according to the hospital's request.

Emanuel, which was purchased by Doctors Medical Center of Modesto in 2014, is required under its contract with the attorney general to provide at least $3.2 million in charity care—the five-year average of the hospital's charity-care costs between 2008 and 2012—annually for six years. In 2013, the hospital provided $10 million in charity care, but that fell to $1.4 million in 2016.

Susan Micheletti, the hospital's CEO, attributed the decline to a "drastic" increase in Medicaid coverage among its patients in her Nov. 17 request to lower charity care.

"The tectonic shift in how patients are classified, resulting from the intended, but unknown consequences of the implementation of the ACA, has made it impossible for the hospital to deliver the same amount of charity care as currently defined by Condition VII," Micheletti wrote.

For PIH Health Hospital—Downey the equation would bring its required annual charity-care obligation from nearly $1.3 million to about $600,000. James R. West, the hospital's president and CEO, wrote in an October letter explaining the request that PIH Health bought the hospital after it started bankruptcy proceedings in 2009 and poured money into improving its campus and maintaining services.

"Imposing further financial burdens upon the hospital in its precarious financial position serves no purpose in assuring the continuation of general acute-care hospital services in the greater Downey, Calif., service area," West wrote.

The uncertainty surrounding the ACA's future, however, gives attorney Schwartz pause. If a repeal effort succeeds and the uninsured rate slides back up, that could also return charity-care needs to their previous levels.

"That would, I think, make a regulatory agency be careful in that regard," he said.