Across the board
Affordable Care Act prompting hospital trustees to pay closer attention to policies on patient billing, collection and bad debt
Most U.S. hospitals will face new rules for how hospitals collect money from patients under health reform, prompting some hospital governing boards to reconsider how their facilities identify and help those who cannot afford to pay.
The Patient Protection and Affordable Care Act laid out new billing, collection and financial aid requirements for private, not-for-profit hospitals, which account for six of every 10 hospitals across the country. The new rules—which are in effect but have yet to be finalized—would require governing boards to approve mandatory financial aid and debt collection policies and set new limits on collection efforts. Collection practices at some hospitals have provoked public outrage and regulatory scrutiny, such as liens or other legal actions.
Under the ACA, hospitals must make reasonable efforts to identify low-income patients eligible for financial aid before using legal action to collect debt. The same restrictions apply for reporting debt to consumer credit bureaus or selling unpaid bills to debt-collection companies.
The stakes are high for hospitals that fail to comply. Under proposed rules, the Internal Revenue Service may strip tax breaks from notfor-profit hospitals if violations are willful and egregious. Not-for-profit hospitals also would lose access to tax-exempt bond markets, where the cost of borrowing has been historically cheaper than taxable debt.
“You’ve got to be even more sure that someone doesn’t qualify for charity before they end up in bad debt or the collection process,” says Keith Hearle, president of Verite Healthcare Consulting in Alexandria, Va.
The new rules underscore the heightened expectation from policymakers and the public that not-for-profit hospitals do more to identify and address community needs in exchange for their tax breaks. That pressure follows several inquiries in recent years by Congress, regulators and state attorneys general into how hospitals bill and collect, particularly from vulnerable patients and those least able to pay.
The scrutiny has not stopped scandals. Last year, an inquiry into efforts to collect from emergency room patients prompted Minnesota’s attorney general to temporarily ban one collection company from the state.
Most low-income patients will significantly benefit from the ACA rules, says Jessica Curtis, director of the hospital accountability project for Community Catalyst, a consumer advocacy group. The onus previously fell on patients to be aware of financial aid and negotiate bills they could afford. The health reform law shifts the responsibility to hospitals to promote financial aid and help patients to enroll, she said.
Directors and trustees should—and in some cases already are—closely examining or revising policies to meet the new requirements, according to experts in tax-exempt healthcare. Proposed regulations for the ACA’s new not-for-profit hospital rules would require governing boards to adopt written billing, collection and financial aid policies. It’s unlikely, however, that hospital board members will be held legally liable for failure to comply with the ACA rules, legal experts say.
Industry financial guidance also underscores the need for board oversight on policies related to unpaid bills. Guidance on disclosure of hospitals’ charity care and bad debt from the Healthcare Financial Management Association calls for governing boards to approve policies for both.
“Ultimately, the buck stops with the board,” says Michael Fine, a healthcare and tax attorney with McDermott, Will and Emery who jointly
chairs the firm’s tax exemption group.
Increasingly, hospitals are using new screening tools or public records to enroll patients in financial aid without waiting for patients to apply for relief. Hearle says the practice has grown more widespread and also noted a push by states to require so-called presumptive enrollment.
But public reporting by hospitals to the IRS in recent years shows some have continued to bill patients who likely cannot afford to pay.
Since 2009, not-for-profit hospitals’ yearly tax records have disclosed the total amount of unpaid medical bills, known as bad debt. Such bills may go unpaid because patients cannot afford care but fail to enroll for financial aid, or because patients who are able to pay choose not to.
Bad debt is distinct from the cost of medical care that hospitals write off for patients who received financial aid, also called charity care. Hospitals report that amount separately.
Yet the tax forms also ask hospitals to estimate the amount of bad debt that probably was attributable to patients who could have received financial aid but did not. The IRS did not issue guidelines for how hospitals should estimate the figure. Amounts reported by hospitals vary significantly. Some hospitals report no potentially needy patients among their uncollected medical bills, which experts say is unlikely.
But others say nearly all the unpaid bills are related to patients who could receive free care but do not. That should be a warning, particularly under the new ACA rules, experts say. “For me, that is a system failure,” Fine says. “It’s time to revamp the way you go about addressing financial assistance.”
That likely means adopting new policies, which is the responsibility of the board of directors, he says. “The same old boiler-plate, cookiecutter policies won’t work” under new rules.
Hospitals have a self interest in improving and touting their financial aid programs, because that can improve their standing and market position in their communities. Those that don’t are “missing an opportunity to tell their story in a more beneficial way,” Fine says.
The American Hospital Association lobbied the IRS to include bad debt on tax reporting forms as an unrecognized source of subsidized care and community benefit. Tax officials agreed to reporting requirements, but excluded bad debt from a list of subsidized services that provide a benefit to communities.
Hospitals and health systems reporting a high percentage of bad debt that was attributable to low-income patients ranged from solo hospitals in major metropolitan areas to subsidiaries of large U.S. health systems, according to a review of 2010 data, the most recent publicly available for all not-for-profits.
Loyola University Medical Center, Maywood, Ill., ranked among those that said low-income patients accounted for nearly all—95%—the hospital’s bad debt. The 535-bed hospital estimated $16.7 million of its $17.7 million in bad debt was attributable to bills charged to patients who probably were eligible for free or discounted care for the fiscal year ended June 30, 2011. The medical center declined requests for interviews with board members. It was acquired in 2011 by Novi, Mich.-based Trinity Health, and there was turnover on the board after the acquisition.
In a statement in response to Modern Health-
“Ultimately, the buck stops with the board.”
—Michael Fine McDermott, Will and Emery
care’s inquiry, the medical center said the 2011 estimate “may be too high and we are in the process of correcting it.” During 2012, the medical center said patients eligible for financial aid accounted for $4.3 million of the hospital’s $14.3 million in bad debt, a significantly lower 30% of total bad debt.
St. Louis-based BJC HealthCare, which operates 13 hospitals in Illinois and Missouri, reported that patients who likely would have qualified for financial aid accounted for $82.7 million of the health system’s $88.1 million in bad debt for the year that ended in December 2010. That’s 94% of the BJC’s unpaid bills. In 2011, the figure was 93%.
“Patients do not always participate in this financial-assistance process for a variety of reasons, and we have an additional safety net in place for them through our presumptive charitycare process,” says Kim Kitson, a BJC spokeswoman. “This process is based on a formula and implemented through a third-party provider to screen for patients who have a financial need but were not identified during the initial encounter.”
Under the ACA, hospitals must wait at least four months after sending the first bill to begin more aggressive collection efforts for patients who don’t apply for financial aid. The law describes these efforts as “extraordinary.” Extraordinary collection actions include legal efforts to collect a debt, sale of debt to collection vendors and reporting to credit bureaus, under proposed rules. The law also requires hospitals to accept financial aid applications for roughly eight months after patients receive their first bill.
Verite’s Hearle says the law has spurred hospitals to develop “presumptive eligibility” strategies to identify and enroll patients in financial aid without their having to apply.
That strategy has won endorsement from finance experts with the Healthcare Financial Management Association. Since 2006, HFMA guidelines have urged hospitals to adopt improved policies on incomplete financial aid applications. That can include use of credit reports to determine patients’ financial status. Four years ago, the HFMA released a model financial aid policy for hospitals that included criteria to identify patients in need of financial aid, such as those already enrolled in Medicaid and safety net programs for food or housing.
At least one state will require hospitals to establish presumptive eligibility policies for financial aid. Illinois soon will mandate hospitals to try to enroll patients for financial aid using public data when possible. Later this month, state officials will release final rules on what types of records may be used to identify lowincome patients. Criteria proposed in March included patients who receive rental, heating or food assistance, and homeless or mentally ill patients who have no advocate.
These shortcuts have support from the state’s hospitals. Sandy Kraiss, a senior director at the Illinois Hospital Association, says the new rule and others enacted last year will simplify and standardize patient access to financial assistance. That includes mandatory free care for the uninsured with incomes of less than 200% of the federal poverty guideline for urban hospitals. The threshold for rural or critical-access hospitals is 125% of the poverty guidelines.
Hospitals in other states have voluntarily moved to identify and enroll patients for financial aid and free medical care. Froedtert Health in Milwaukee saw its charity-care spending jump nearly 60% in one year, to $34.6 million from $21.7 million, after the health system waived the requirement for patients to present tax returns or other supporting documents as part of financial aid applications.
Missing documents were the main reason the system’s low-income patients failed to qualify for subsidized care, says Jon Neikirk, Froedtert’s assistant vice president for revenue cycle. Patients still must file an application, but now it can be done over the phone.
In another change, Froedtert, which includes three hospitals and a medical group, now relies on commercial credit-reporting software to verify patients are eligible for financial aid. One of the system’s hospitals began screening and automatic enrollment began in 2009, Neikirk says.
Froedtert Health directors were not involved in approving the change because management simply adopted a new operational strategy for enrollment; it did not change policy. Nonetheless, the board was informed of the new strategy, he says.
For patients who clearly couldn’t afford to pay their hospital bills, he says, “we’ve helped to increase patient satisfaction.”
Froedtert Health’s safety net services include a clinic in Menomonee Falls, Wis., for patients with limited or no insurance. About three years ago, the Milwaukee-based system also began to use new screening tools to identify patients who may be eligible for free or subsidized care.