The IRS' re­vised Form 990 cap­tures true char­ity-care costs, gives law­mak­ers tool to prod hos­pi­tals to do more

Modern Healthcare - - FRONT PAGE - Melanie Evans and Joe Carl­son

Hos­pi­tals that re­ceive hefty tax breaks to pro­vide com­mu­nity aid spend a small frac­tion of their bud­gets on free and dis­counted med­i­cal care for those who can­not af­ford to pay. A Modern Health­care anal­y­sis of new fed­eral data on the sec­tor’s spend­ing found sub­si­dized med­i­cal care ac­counted for 1.52% or less of to­tal ex­penses for about half of hos­pi­tals op­er­ated by more than 1,800 not-for-prof­its. Two out of three hos­pi­tals spent less than 2%. The me­dian profit mar­gin was 3.13%.

Such fig­ures have eluded Congress, state law­mak­ers and consumer ad­vo­cates through­out what has been a lengthy and charged national de­bate over how not-for-profit hos­pi­tals earn their tax breaks.

Now, the most com­pre­hen­sive pub­lic dis­clo­sure of char­i­ta­ble spend­ing by hos­pi­tals is un­der way. Modern Health­care, with data pro­vided by the not-for-profit Guidestar, an­a­lyzed hos­pi­tal op­er­a­tions, free med­i­cal care and other com­mu­nity aid re­ported for the first time to the In­ter­nal Rev­enue Ser­vice for the tax year 2009 and grad­u­ally made pub­lic dur­ing the past year. Modern Health­care pre­vi­ously pub­lished a look at 20 of the largest not-for-profit health sys­tems based on the first pub­licly re­ported data (March 21, p. 6).

And so, for the first time, reg­u­la­tors and the pub­lic can scru­ti­nize—and some­times com­pare—how lo­cal hos­pi­tals ben­e­fit their com­mu­ni­ties.

That scrutiny, health pol­icy ex­perts say, will raise pointed ques­tions about a sec­tor that has en­joyed ex­emp­tions from prop­erty, sales and in­come taxes with al­most no over­sight of what not-for-profit hos­pi­tals pro­vide in re­turn.

“It gets to the whole is­sue: Why are some hos­pi­tals tax-ex­empt and oth­ers are not?” said Nancy Kane, a man­age­ment pro­fes­sor at Har­vard Univer­sity’s School of Pub­lic Health who stud­ies hos­pi­tal tax ex­emp­tions and char­i­ta­ble spend­ing.

The first national dis­clo­sure of hos­pi­tal aid to com­mu­ni­ties comes as a weak eco­nomic re­cov­ery from the Great Re­ces­sion has forced ev­ery level of govern­ment to scour bud­gets for ways to elim­i­nate deficits. Mean­while, the un­em­ploy­ment rate that soared as the econ­omy plunged has in­creased de­mand for free med­i­cal care from unin­sured pa­tients and strug­gling house­holds that can­not af­ford to pay.

Kane said com­mu­ni­ties, armed with new dis­clo­sures on char­ity care and com­mu­nity ben­e­fits, will be bet­ter pre­pared to de­cide for them­selves whether lo­cal hos­pi­tals pro­vide enough char­ity. “I sus­pect there will be some changes in fed­eral or state or lo­cal or all three lev­els about what’s ex­pected in re­turn for tax ex­emp­tion.”

At­tempts to es­ti­mate the value of hos­pi­tal tax ex­emp­tions have yielded vary­ing fig­ures and most cal­cu­la­tions are dated. But the $66 mil­lion prop­erty tax bill re­cently sent to

an Illi­nois hos­pi­tal that was de­nied tax ex­emp­tion—for pro­vid­ing too lit­tle char­ity and for its for-profit op­er­a­tions—un­der­scores the fi­nan­cial ad­van­tage hos­pi­tals gain from tax breaks and the siz­able rev­enue lost to fed­eral, state and lo­cal cof­fers.

North­west­ern Me­mo­rial Hos­pi­tal’s spend­ing on free care for poor pa­tients, which to­taled 1.85% of pa­tient rev­enue, was one fac­tor the Illi­nois Depart­ment of Rev­enue con­sid­ered when it de­nied tax ex­emp­tion for North­west­ern’s newly con­structed Pren­tice Women’s Hos­pi­tal.

For fed­eral and state of­fi­cials who have al­ready chal­lenged hos­pi­tals’ tax ex­emp­tions, in­clud­ing Sen. Chuck Grass­ley (R-iowa), new numbers mean a long-awaited look at the sec­tor’s op­er­a­tions.

“Whether it’s a big non-profit health sys­tem or in­di­vid­ual tax-ex­empt hos­pi­tals, the amount of char­i­ta­ble ac­tiv­ity, whether char­i­ta­ble pa­tient care or com­mu­nity ben­e­fit ac­tiv­i­ties, is still very lit­tle,” Grass­ley said in a writ­ten state­ment in re­sponse to a summary of Modern Health­care’s re­sults.

“These or­ga­ni­za­tions need to do a lot more in ex­change for the gen­er­ous tax breaks they re­ceive,” he said.

Cir­cum­stances vary

Richard Umb­den­stock, pres­i­dent and CEO of the Amer­i­can Hos­pi­tal As­so­ci­a­tion, de­clined to com­ment on Grass­ley’s crit­i­cal as­sess­ment of the sec­tor’s per­for­mance. Hos­pi­tal ex­ec­u­tives and the lead­ers of their trade groups, in­clud­ing Umb­den­stock, say a nar­row fo­cus on free care is un­fair to hos­pi­tals, which tai­lor com­mu­nity aid bud­gets to meet lo­cal needs.

In states with high un­em­ploy­ment, hos­pi­tals may see greater de­mand for free care than those in states where fewer are out of work, they say. Or states with more gen­er­ous Med­i­caid pro­grams may al­le­vi­ate some need for free med­i­cal care from hos­pi­tals.

“It’s just go­ing to vary by com­mu­nity and cir­cum­stance,” Umb­den­stock said. The trade group sup­ports dis­clo­sure and reporting sep­a­rately the var­i­ous ways that hos­pi­tals sub­si­dize com­mu­nity ben­e­fits, he said.

New dis­clo­sure forms in­clude eight cat­e­gories of com­mu­nity ben­e­fits, in­clud­ing free care. The cat­e­gories are the first national stan­dard def­i­ni­tion of what counts to­ward char­ity care, and reporting marks the first time hos­pi­tals must dis­close spend­ing us­ing a uni­form def­i­ni­tion.

But Umb­den­stock also called for “the to­tal­ing of those el­e­ments” for a com­plete pic­ture of hos­pi­tal sub­si­dies. “I would cau­tion ev­ery­one to deal with all of the el­e­ments of com­mu­nity ben­e­fit,” he said.

Tal­ly­ing these numbers, as Umb­den­stock sug­gested, the me­dian hos­pi­tal puts 5.87% of its ex­penses to­ward more broadly de­fined com­mu­nity ben­e­fit. Ba­sic char­ity care ac­counted for one of ev­ery five of those dol­lars. The rest in­cludes sub­si­dies for med­i­cal re­search, train­ing doc­tors, com­mu­nity health pro­grams, grants and losses when Med­i­caid does not pay enough to meet costs of car­ing for pa­tients en­rolled in the safety net in­surer. Med­i­caid ac­counted for hos­pi­tals’ sin­gle-largest sub­sidy. The me­dian hos­pi­tal re­ported 3.02% of ex­penses cov­ered losses when Med­i­caid did not pay enough to cover pa­tients’ costs.

As the IRS col­lected its first round of ac­count­ing of the com­mu­nity ben­e­fits tax­ex­empt hos­pi­tals pro­vide, the AHA con­ducted its own anal­y­sis of hos­pi­tal com­mu­nity aid with ac­count­ing firm Ernst & Young.

How­ever, the AHA in­cluded ex­penses that fed­eral tax of­fi­cials re­jected as ben­e­fits to the com­mu­nity, although they were in­cluded sep­a­rately on the dis­clo­sure form. The AHA sur­vey added the amount of un­paid bills sent to pa­tients who likely could not af­ford to pay; losses on Medi­care pa­tients; and money spent to­ward com­mu­nity aid that is not di­rectly re­lated to pro­vid­ing health­care, such as work­force and eco­nomic de­vel­op­ment and hous­ing as­sis­tance. The sur­vey in­cluded 600 dis­clo­sure forms and cal­cu­lated the av­er­age com­mu­nity ben­e­fit spend­ing for hos­pi­tals by size and spe­cialty. Small hos­pi­tals had the low­est av­er­age at 9.9% of to­tal ex­penses. Chil­dren’s hos­pi­tals had the high­est av­er­age at 15.2%.

Julie Troc­chio, the Catholic Health As­so­ci­a­tion’s se­nior di­rec­tor for com­mu­nity ben­e­fits and con­tin­u­ing care, said to­tal spend­ing “has value but it doesn’t tell the whole story” of how hos­pi­tals pro­vide aid. For ex­am­ple, hos­pi­tals may oper­ate an ef­fec­tive but low-bud­get outreach ef­fort, she said.

More valu­able in­for­ma­tion will be avail­able un­der the Pa­tient Pro­tec­tion and Af­ford­able Care Act, which re­quires hos­pi­tals to sur­vey com­mu­nity needs, cre­ate plans to ad­dress them and then pub­licly re­port on their ef­forts, Troc­chio said. “We do think that numbers aren’t the best yard­sticks to know if an or­ga­ni­za­tion is true to its mis­sion.”

Troc­chio said two com­pet­ing trends have af­fected how much free care hos­pi­tals pro­vide. More pa­tients can­not af­ford to pay, which drives up free-care spend­ing, but hos­pi­tals also have moved ag­gres­sively to care for pa­tients in low­er­cost clin­ics out­side the hos­pi­tal, which would drag down free-care spend­ing, she said.

Brad­ford Gray, a se­nior fel­low at the Ur­ban In­sti­tute who stud­ies not-for-profit reporting on com­mu­nity ben­e­fits, said com­mu­nity need isn’t the only fac­tor that con­trib­utes to dif­fer­ences be­tween hos­pi­tals in spend­ing on char­ity care and other ben­e­fits. Some hos­pi­tals have greater re­sources that al­low for greater spend­ing to­ward sub­si­dized med­i­cal care and other ser­vices, he said.

Gray said for these rea­sons he would not sup­port leg­is­la­tion to set a thresh­old for how much hos­pi­tals spend on char­ity care. In Texas, hos­pi­tals must spend a min­i­mum of 4% of rev­enue on free med­i­cal care and to off­set losses from Med­i­caid. One pro­posal in Congress in re­cent years, pro­posed by Grass­ley, would have re­quired char­ity care to­tal

5% of ex­penses.

Although many hos­pi­tals might fall short of such mea­sures, Modern Health­care found that 7% of the hos­pi­tal dis­clo­sures sub­mit­ted to the IRS re­ported char­ity care of 5% or more of ex­penses. Among those is the Re­gional Med­i­cal Cen­ter at Mem­phis (Tenn.), a safety net hos­pi­tal that re­ported char­ity care ac­counted for 23.5% of ex­penses for the year that ended June 30, 2010.

Rick Wa­gers, se­nior ex­ec­u­tive vice pres­i­dent and chief fi­nan­cial of­fi­cer for the hos­pi­tal, said com­mer­cial in­sur­ers pay the 348-bed hos­pi­tal some­what higher rates to off­set losses from Re­gional Med­i­cal Cen­ter’s high per­cent­age of pa­tients who can­not pay. The not-for­profit hos­pi­tal also re­ceives roughly $30 mil­lion from the sur­round­ing county, which owns and leases the hos­pi­tal build­ing, to pro­vide care for needy res­i­dents.

But a string of re­cent op­er­at­ing losses have threat­ened the hos­pi­tal’s fu­ture, said Wa­gers, who ar­rived as CFO roughly 18 months ago af­ter turn­around con­sul­tants made deep spend­ing cuts to pre­vent clo­sure. Free and dis­counted care con­trib­uted to those losses, he said.

To main­tain a pos­i­tive op­er­at­ing mar­gin and Re­gional Med­i­cal Cen­ter’s ac­cess to char­ity care, the hos­pi­tal must ex­pand prof­itable ser­vices that at­tract more pa­tients with com­mer­cial in­sur­ance, such as or­tho­pe­dics, Wa­gers said. “We’re not do­ing any­thing to re­duce the num­ber of indi­gent pa­tients that we have,” he said. In­stead, “our goal is to be­come a hos­pi­tal of choice.”

Hos­pi­tals reporting the most sig­nif­i­cant char­ity-care pro­grams were those op­er­ated by the Shriners Hos­pi­tals for Chil­dren, Tampa, Fla., where char­ity care to­taled 82.5% to 91.9% of to­tal ex­penses.

More typ­i­cal is Swedish Med­i­cal Cen­ter in Seat­tle, which re­ported char­ity care of 1.52%, the me­dian fig­ure in Modern Health­care’s anal­y­sis, and a profit mar­gin of 4.08%, slightly higher than the me­dian 3.13%.

Dan Dixon, vice pres­i­dent for ex­ter­nal

af­fairs at Swedish Health Ser­vices, said he doesn’t be­lieve the govern­ment should set a thresh­old—“be­cause all hos­pi­tals or health­care providers are not alike”—but could sup­port a re­quire­ment that hos­pi­tals give enough back to the com­mu­nity to make up for the value of their tax ex­emp­tions.

The cost of Swedish’s com­mu­nity ben­e­fits, which in­cludes re­search com­mu­nity health ac­tiv­i­ties, med­i­cal ed­u­ca­tion, Med­i­caid losses and free and dis­counted care, to­taled $112 mil­lion for 2010 com­pared with the hos­pi­tal’s pro­jected tax break of $39.4 mil­lion, ac­cord­ing to the sys­tem.

Swedish pays busi­ness, sales and prop­erty tax in Washington, so the hos­pi­tal’s pro­jected tax ben­e­fit in­cludes only fed­eral tax ex­emp­tions. “It’s a pretty darn good re­turn on in­vest­ment,” Dixon said. For Swedish, com­mu­nity ben­e­fit spend­ing is “where we want to be and where we push our­selves to be.”

Swedish of­fi­cials over­hauled com­mu­nity ben­e­fit spend­ing in re­cent years from an ad­hoc ap­proach that could be in­flu­enced by in­ter­nal pol­i­tics to a sys­tem based on a com­mu­nity needs as­sess­ment, Dixon said.

Sim­i­larly, as the CHA’S Troc­chio pointed out, hos­pi­tals must as­sess com­mu­nity needs ev­ery three years un­der the Pa­tient Pro­tec­tion and Af­ford­able Care Act, which ex­panded reg­u­la­tion of not-for-profit hos­pi­tals as the IRS dis­clo­sures in­creased trans­parency. Com­bined, the mea­sures seek to ad­dress billing and col­lec­tion prac­tices for low-in­come pa­tients that drew sharp crit­i­cism from law­mak­ers, state at­tor­neys gen­eral and pa­tients dur­ing the past decade.

New dis­clo­sures in­clude more than spend­ing tal­lies for com­mu­nity ben­e­fits. The IRS also wants to know the ba­sic el­i­gi­bil­ity cri­te­ria for free and dis­counted care.

In North Dakota, Ja­cob­son Me­mo­rial Hos­pi­tal Care Cen­ter of­fers low-in­come pa­tients up to 90% off med­i­cal bills un­der the 21-bed hos­pi­tal’s char­ity-care pol­icy. Ja­cob­son re­ported spend­ing only $107, or less than 1% of its over­all ex­penses, on dis­counted care for the year that ended June 30, 2010. The ru­ral hos­pi­tal op­er­ates in the re­mote, sparsely pop­u­lated and gray­ing town of El­gin, where the me­dian age is 57. Medi­care and Med­i­caid cover many of the hos­pi­tal’s pa­tients.

James Op­dahl, the hos­pi­tal’s ad­min­is­tra­tor, said the hos­pi­tal does have dis­cre­tion to waive bills en­tirely, but the pol­icy re­quires all pa­tients to pay at least some share of their bills, even if they need years to do so. Pa­tients who fail to make pay­ments no longer re­ceive a dis­count, he said.

Op­dahl said many choose not to pay hos­pi­tal bills they can af­ford. Mean­while, the hos­pi­tal has lost money on op­er­a­tions 10 years out of the past 11, he said. For the year ended June 30, 2010, the hos­pi­tal re­ported a net profit of $151,778, or a mar­gin of 3.05%.

The hos­pi­tal bud­get in­cludes $20,000 for free and dis­counted care for the year, Op­dahl said. Of the 14 ap­pli­ca­tions for free care filed within the past 18 months, all were ap­proved for dis­counts of 90%.

‘A busi­ness is a busi­ness’

Whether hos­pi­tals spend more or less than the me­dian 1.52% of ex­penses on char­ity care, they were equally likely to earn a profit or re­port a loss.

In fact, hos­pi­tals re­ported sim­i­lar losses whether they were among the half that spent less on char­ity (where the me­dian loss was a neg­a­tive 2.86%) or the half that spent more (where the me­dian loss was a neg­a­tive 2.75%). Prof­its were higher among hos­pi­tals that spent more on char­ity care (a me­dian of 5.26%) than those that did not (4.69%).

John Colombo, a not-for-profit tax law pro­fes­sor at the Univer­sity of Illi­nois in Ur­bana, ques­tioned how hos­pi­tals spend those mar­gins. Prof­its among hos­pi­tals in Modern Health­care’s anal­y­sis were dou­ble what hos­pi­tals spent on char­ity care, he noted.

Colombo ac­knowl­edged hos­pi­tals need to re­serve some profit. “Ev­ery or­ga­ni­za­tion needs to put money away for a rainy day and cap­i­tal cost re­place­ment,” he said. But “when you start look­ing at these or­ga­ni­za­tions, it be­comes clear that many of them can do more than they al­ready do.”

Hos­pi­tals do not rely on do­na­tions to sur­vive as other char­i­ties do, Colombo said. Mean­while, many for-profit cor­po­ra­tions do­nate to ben­e­fit com­mu­ni­ties as hos­pi­tals do. Pol­i­cy­mak­ers may do bet­ter to try tax de­duc­tions rather than of­fer­ing tax breaks for hos­pi­tals that pro­vide char­ity, he said. The al­ter­na­tive—try­ing to draw a line at where busi­nesses end and char­i­ties start—“seems to me like the wrong way to go about it,” he said. “A busi­ness is a busi­ness.”

Har­vard’s Kane said she was not sur­prised by hos­pi­tals’ spend­ing on char­ity care, but she be­lieves many will be.

“Frankly, I don’t think peo­ple un­der­stand how lit­tle” hos­pi­tals spend to­ward free and dis­counted care, she said.

That amount mat­ters to pa­tient ad­vo­cates and pol­i­cy­mak­ers, she said, be­cause of the painful fi­nan­cial and per­sonal con­se­quences when some­one can­not get care be­cause of cost. “That is the first ques­tion we ask about com­mu­nity ben­e­fit and tax ex­emp­tion,” Kane said. Char­ity-care spend­ing also mat­ters in the mar­ket­place, she said.

New dis­clo­sures will re­veal to pol­i­cy­mak­ers which hos­pi­tals shoul­der too lit­tle bur­den for low-in­come pa­tients and have a fi­nan­cial ad­van­tage over those that do more.

Holly Lang, di­rec­tor of the Hos­pi­tal Ac­count­abil­ity Project in At­lanta, said she be­lieves aid from hos­pi­tals should not be lim­ited to char­ity care and, as hos­pi­tals work to ad­dress un­met needs of unin­sured and un­der­in­sured pa­tients, char­ity care may de­cline as pa­tients are treated be­fore con­di­tions grow acute in less costly lo­ca­tions such as clin­ics.

The project, op­er­ated by the consumer group Ge­or­gia Watch, has sur­veyed state hos­pi­tals on ac­cess to char­ity-care poli­cies and works with those who strug­gle to find care be­cause of cost. None­the­less, ac­cess to med­i­cal care for those who can­not af­ford it re­mains es­sen­tial, Lang said. “We feel it’s the start­ing point for any com­mu­nity ben­e­fits pro­gram.”

A com­mu­nity needs as­sess­ment led Seat­tle’s Swedish Med­i­cal Cen­ter to put more re­sources into the Swedish Com­mu­nity Spe­cialty Clinic, where hand sur­geon Dr. John Miyano works with a pa­tient.

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