Rich or poor, not-for-profit hos­pi­tals of­ten pro­vide sim­i­lar lev­els of free care

Modern Healthcare - - FRONT PAGE - Me­lanie Evans

In 2010, Me­mo­rial Med­i­cal Cen­ter, a small hospi­tal in ru­ral San Au­gus­tine, Texas, saw its fi­nan­cial losses grow along with de­mand from pa­tients who could not af­ford to pay. The hospi­tal’s sub­si­dies for free med­i­cal care to low-in­come pa­tients swal­lowed 4.5% of its bud­get by the end of the year.

One of Ok­la­homa’s largest hos­pi­tals spent a sim­i­lar share of its fis­cal 2010 bud­get—roughly 5%—to cover the cost of med­i­cal care for pa­tients who were un­able to pay. But St. John’s Med­i­cal Cen­ter in Tulsa did so with one en­vi­able dif­fer­ence: The hospi­tal fin­ished 2010 solidly in the black with a mar­gin of 10.8%.

Both are among the roughly 60% of pri­vate U.S. hos­pi­tals that re­ceive lo­cal, state and fed­eral tax breaks in ex­change for op­er­a­tions that ben­e­fit the com­mu­nity.

The two hos­pi­tals’ largely sim­i­lar spend­ing to sub­si­dize med­i­cal care de­spite a yawn­ing gap in their mar­gins is not un­usual. The in­come gulf be­tween the na­tion’s wealth­i­est hos­pi­tals and those with ra­zor-thin or neg­a­tive mar­gins is wide. When it comes to spend­ing on free med­i­cal care and other sub­si­dized ser­vices, the dif­fer­ence largely dis­ap­pears.

Mod­ern Health­care found no cor­re­la­tion be­tween mar­gins and spend­ing on free care in an anal­y­sis of roughly 2,500 tax records for or­ga­ni­za­tions that op­er­ate tax-ex­empt hos­pi­tals.

The re­sults sug­gest that prof­its do not de­ter­mine what hos­pi­tals spend on free and dis­counted care and other sub­si­dized ser­vices to ben­e­fit the com­mu­nity, ex­perts said.

“The first thing that it sug­gests is that the com­mu­nity ben­e­fit ex­pen­di­tures de­pends upon fac­tors other than how well they’re do­ing eco­nom­i­cally,” said Brad­ford Gray, a se­nior fel­low with the Ur­ban In­sti­tute, who stud­ies not-for­profit hospi­tal op­er­a­tions. Vary­ing needs for free med­i­cal care or other sub­si­dized ser­vices could in­flu­ence what hos­pi­tals spend, he said. So might the pri­or­i­ties of the gov­ern­ing board. “Hospi­tal boards have the abil­ity to say we aren’t do­ing enough on char­ity and we should be do­ing more,” he said.

Cap­i­tal plans that prompt hos­pi­tals to seek to build re­serves to in­vest may also in­flu­ence what hos­pi­tals spend on com­mu­nity ben­e­fits, he said.

The same held true in an anal­y­sis of spend­ing on a broader group of hospi­tal ac­tiv­i­ties the In­ter­nal Rev­enue Ser­vice counts as “com­mu­nity ben­e­fits,” such as com­mu­nity health ser­vices, do­na­tions, med­i­cal ed­u­ca­tion and re­search.

Data an­a­lyzed by Mod­ern Health­care, pro­vided by the not-for-profit char­ity watch­dog GuideS­tar, in­cludes 2009 and 2010 fig­ures re­ported un­der new dis­clo­sure rules in­tended to yield a clearer ac­count­ing of the pub­lic ben­e­fits that tax-ex­empt hos­pi­tals pro­vide.

The ag­gre­gate in­come for the set of hos­pi­tals im­proved to $37.4 bil­lion in 2010 from $26.5 bil­lion in 2009, a 41% jump. The over­all in­creases in char­ity care and com­mu­nity ben­e­fits were less than 1%.

A cor­re­la­tion, were there one, would likely emerge be­tween hos­pi­tals with smaller mar­gins and greater spend­ing on char­ity care be­cause the char­i­ta­ble ex­pense low­ers mar­gins, said Nancy Kane, a pro­fes­sor of man­age­ment with the Har­vard Univer­sity School of Pub­lic Health. How­ever, Kane said, it’s largely ir­rel­e­vant to the broader pub­lic de­bate about how much of a fi­nan­cial boost hos­pi­tals re­ceive from their tax breaks and whether they spend at least as much on free care and other sub­si­dized ser­vices.

In that de­bate, the value of tax breaks, not in­come, is what mat­ters, she said. That fig­ure—the fi­nan­cial boon from tax breaks—is es­ti­mated be­tween 3% to 5% of hospi­tal pa­tient rev­enues, Kane said, based on re­search and a dated es­ti­mate from the Con­gres­sional Joint Com­mit­tee on Tax­a­tion.

Hos­pi­tals’ tax breaks amounted to $12 bil­lion, the con­gres­sional com­mit­tee es­ti­mated in 2002. Iowa hos­pi­tals re­ceived an es­ti­mated $58 mil­lion in tax breaks, the Des Moines Reg­is­ter re­ported in De­cem­ber 2011. Mean­while, that state’s not-for-profit hos­pi­tals re­ported com­bined in­come of $295 mil­lion, the news­pa­per’s anal­y­sis found.

Hos­pi­tals are not held to any fed­eral thresh­old for spend­ing on com­mu­nity ben­e­fits or char­ity care, and un­til re­cently, were not re­quired to report such data. Tax-ex­empt hos­pi­tals have op­er­ated for decades with only loose stan­dards and lim­ited or vol­un­tary pub­lic ac­count­ing for how they earn those tax breaks.

De­mand from pa­tient ad­vo­cates, states and

Congress for greater trans­parency led at the end of the past decade to new fed­eral dis­clo­sure rules. And last year, hos­pi­tals re­leased for the first time an item­ized, stan­dard list of sub­si­dies for med­i­cal care and other ser­vices that more broadly ben­e­fit the pub­lic, such as train­ing for doc­tors and re­search.

One pro­posal to cre­ate such as stan­dard, put for­ward by the Se­nate Fi­nance Com­mit­tee in 2007, called for at least 5% of hos­pi­tals’ bud­gets to be spent on free and dis­counted care. By that mea­sure, roughly nine out of 10 tax-ex­empt hospi­tal or­ga­ni­za­tions that re­ported char­ity care as a per­cent­age of ex­penses in 2010 would fall short.

Texas re­quires hos­pi­tals to meet one of three stan­dards to earn tax breaks, in­clud­ing one that re­quires spend­ing on sub­si­dies for re­search, ed­u­ca­tion and health­care to to­tal 5% of pa­tient rev­enue.

Of that, Texas re­quires that 4% must be spend­ing on free and dis­counted care or losses for pa­tients en­rolled in pub­lic safety net in­surance, such as Med­i­caid. Slightly more than onethird of the na­tion’s hos­pi­tals would fail to meet that re­quire­ment, based on an anal­y­sis of spend­ing on char­ity care and Med­i­caid short­falls and rev­enue that ex­cluded in­vest­ment in­come.

San Au­gus­tine’s Me­mo­rial Med­i­cal Cen­ter spent 9.58% of its rev­enue on free care and Med­i­caid losses. Me­mo­rial Health Sys­tem of East Texas, which in­cludes the hospi­tal, sub­si­dizes its losses, said Kristi Gay, chief fi­nan­cial of­fi­cer for the sys­tem.

Na­tion­ally, free and dis­counted care as a per­cent­age of ex­penses in­creased in 2010. The me­dian hospi­tal re­ported 1.7% of to­tal ex­penses went to­ward char­ity care, from 1.5% the prior year. The me­dian to­tal amount also in­creased to $1.3 mil­lion from $1.2 mil­lion the prior year.

Mod­ern Health­care in­cluded only those hos­pi­tals with data for both years, which ex­cluded roughly 100 or­ga­ni­za­tions for which 2010 data was avail­able, but 2009 fig­ures were not.

Health pol­icy ex­perts and in­dus­try ex­ec­u­tives say com­par­isons of char­ity care spend­ing do not cap­ture the dy­nam­ics of in­surance cov­er­age in mar­kets where hos­pi­tals op­er­ate. A highly in­sured, af­flu­ent com­mu­nity will need less free med­i­cal care but could ben­e­fit from other sub­si­dized ser­vices. Hos­pi­tals in states with more gen­er­ous Med­i­caid el­i­gi­bil­ity may also see fewer unin­sured pa­tients.

Nearly two-thirds of pa­tients of San­ford Health of North­ern Min­nesota, which op­er­ates the San­ford Bemidji (Minn.) Med­i­cal Cen­ter, are cov­ered by Medi­care and Med­i­caid, a fact that re­flects the com­mu­nity’s age and low in­comes, said Joy John­son, the or­ga­ni­za­tion’s chief op­er­at­ing of­fi­cer.

San­ford Health of North­ern Min­nesota, a sub­sidiary of Sioux Falls, S.D.-based San­ford Health, closed the year that ended in Septem­ber 2011 with a net mar­gin of roughly 15%. Free and dis­counted care to­taled $405,519 that year, but the or­ga­ni­za­tion did not report losses on Med­i­caid.

Hospi­tal of­fi­cials also say an ex­clu­sive fo­cus on sub­si­dies for free care un­fairly ex­cludes other sub­si­dized ser­vices that meet un­met needs and ben­e­fit com­mu­ni­ties. Com­mu­nity ben­e­fit spend­ing at the me­dian hospi­tal in 2010 ac­counted for 7.1% of to­tal ex­penses. The me­dian hospi­tal spent $5.6 mil­lion on all com­mu­nity ben­e­fits that year.

Tim Loch, chief fi­nan­cial of­fi­cer for Ex­cela Health, which owns three Penn­syl­va­nia hos­pi­tals, said the sys­tem’s trustees mon­i­tor to­tal spend­ing on ben­e­fits to the com­mu­nity and in­creased such spend­ing in 2010 af­ter an out­side con­sul­tant said the amount should to­tal more than 5% of ex­penses.

Ex­cela Health’s spend­ing solely on free care was among the low­est in the na­tion in 2010, by per­cent­age of ex­penses, at 0.23% or $893,308. But to­tal com­mu­nity ben­e­fit spend­ing ac­counted for 6.25% of its bud­get, which in­cludes res­i­dency pro­grams, be­hav­ioral health­care and other com­mu­nity pro­grams. “We’re com­fort­able” with that fig­ure, Loch said.

At Poudre Val­ley Health Sys­tem in Colorado, ef­forts un­der way since 2009 to ex­pand low-in­come pa­tients’ ac­cess to pri­mary care and ur­gent care has sharply in­creased spend­ing on sub­si­dized health­care to $26.1 mil­lion in 2010 from $8.8 mil­lion in 2009, said Ru­lon Stacey, pres­i­dent of the Univer­sity of Colorado Health, which in­cludes Poudre Val­ley Health Sys­tem and the Univer­sity of Colorado Hos­pi­tals.

That fig­ure in­cludes free and dis­counted care for low-in­come pa­tients not re­flected in char­ity care, which only cap­tures aid for hospi­tal pa­tients. Sub­si­dized care such as clin­ics and ur­gent-care cen­ters ac­counted for 7.4% of Poudre Val­ley Health Sys­tem’s 2010 ex­penses. Free and dis­counted care for hospi­tal pa­tients ac­counted for 0.71% of ex­penses that year.

And as hos­pi­tals seek to im­prove med­i­cal care to pre­vent avoid­able hospi­tal vis­its and trips to the emer­gency room, the shift to­ward greater sub­si­dies out­side the hospi­tal will ac­cel­er­ate, he said. “To­day, it’s all changed,” Stacey said.


Mar­gins don’t ap­pear to af­fect how much tax-ex­empt hos­pi­tals spend on free and dis­counted care or other com­mu­nity ben­e­fits.

Me­mo­rial Med­i­cal Cen­ter fin­ished the year with losses of $1.3 mil­lion and spent a greater share of ex­penses on char­ity care than any of the na­tion’s most prof­itable hos­pi­tals.

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