Charity care spending flat among top hospitals

The yearslong decline in free or discounted care that hospitals provide to patients may have reached its floor.

The 20 largest U.S. health systems dedicated 1.4% of their collective operating revenue in fiscal 2016 to charity care—about the same as the previous year, a Modern Healthcare analysis of financial data shows. That's noteworthy considering the significant declines in charity care spending that followed the 2014 implementation of the Affordable Care Act, a law credited with insuring nearly 24 million people through expanded Medicaid eligibility and subsidized commercial plans. Total uncompensated care fell to a 25-year low in 2015 and held steady in 2016, according to the American Hospital Association.

But the ACA did more than change the patient mix. It ushered in an era of heightened federal pressure on not-for-profit health systems to prove that they deserve their tax-exempt status. The IRS last year took the rare step of revoking tax-exempt status for two hospitals after it determined one hadn't fully implemented or publicized a required community needs assessment and the other was being operated by a for-profit company. Congress also threatened to end tax-exempt financing.

And the ongoing tension between managing bad debt, charity care and overall community benefits may be worsening with the dilution of the ACA. Congress' elimination of the health insurance tax penalty last month could cause the uninsured rate to creep back up, which could result in more patients being unable to pay their bills.

"We're in an environment now where uncompensated care, which had been going down, is likely to be going up," said Steve Burrill, U.S. healthcare providers leader and vice chairman for Deloitte Consulting.

All that has some experts wondering whether not-for-profit health systems are finding ways to inflate their charity care levels, given that charity care spending stopped falling so abruptly between 2015 and 2016.

"I'm sure there is a lot of playing around with the numbers," said Cynthia Woodcock, executive director of the Hilltop Institute, a nonpartisan health research organization at the University of Maryland.

The federal government doesn't require not-for-profit hospitals to provide a certain amount of free or discounted care. They have since 2009, however, had to report community benefit spending to the IRS, broken down by charity care, the cost of unreimbursed Medicaid care and community improvement programs. The IRS doesn't consider bad debt—unpaid bills hospitals anticipate they won't collect on—a community benefit. Both for- and not-for-profit hospitals incur bad debt.

Experts say some not-for-profit hospitals may now be classifying a portion of bills that previously would have been bad debt as charity care, a maneuver that merely entails not pursuing payment on bills. That lets hospitals report more charity care while simultaneously lowering bad debt. A high level of bad debt can hurt a system's credit rating.

"Hospitals are better off not trying to recover any of the debt that they would have tried to recover before and not make a deal," said Jill Horwitz, a University of California at Los Angeles law professor and associate director of UCLA's Center for Law and Economics.

Hospitals are seeing a significant number of patients enrolled in high-deductible health plans who are unable to pay their portion of the bills, which could also explain why uncompensated care is no longer declining, said Ashley Thompson, the AHA's senior vice president for policy analysis.

Whether a state expanded Medicaid eligibility under the ACA also has a big effect on how much charity care its hospitals provide. Medicaid reimburses at below commercial rates, so hospitals tend to lose money on Medicaid patients. A recent AcademyHealth study of 1,700 hospitals found that while uncompensated care post-ACA declined by 25%, Medicaid shortfalls increased by 15%.

Sen. Chuck Grassley (R-Iowa) has been an outspoken critic of the standards for not-for-profit hospitals' to qualify for tax-exempt status. In a September 2017 op-ed in STAT News, he said the IRS has reviewed the tax-exempt status of 968 hospitals and referred 363 for further examination, as was required under the 2009 law that enhanced community benefit reporting. "For the provisions to have the positive effects that Congress intended, hospitals need to know that consequences exist for failing to comply," he wrote.

Given the leeway hospitals have in how they classify, provide and report on charity care, it's unclear whether hospitals ranking low on the list provided less care than others or perhaps were more accurate with their data.

Woodcock, of the Hilltop Institute, said some systems, such as HCA, use their gross charges, which are higher than the cost of delivering care, to report on tax forms how much they lost treating Medicaid patients.

Some experts, herself included, question how real those numbers are. "It's almost like it's artificial spending," she said. "They're not really putting real dollars out in the community for community health improvement or population health, as some of us would like to see, but instead they're just on paper showing, 'Oh, we have more Medicaid shortfall.'"