Checking in on charity care calculations

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 notfor-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.

How it could be done

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%.

Representatives of the top charity care providers as a per- centage of revenue—not-for-profits Adventist Health System and Baylor Scott & White Health—both pointed to the lack of Medicaid expansion in their states as part of the reason their levels are so high.

Alamonte Springs, Fla.-based Adventist, a not-for-profit system with 45 hospital campuses in nine states, is the top nonpublic charity care provider as a percentage of operating revenue. Adventist provided $316 million in charity care in fiscal 2016, 3.3% of its $9.7 billion in operating revenue. That was relatively unchanged from its 2015 charity care spending.

Mike Griffin, Adventist’s vice president of advocacy and public policy, attributed the system’s standing to the fact that Florida, where 26 of the system’s hospitals are located, has one of the country’s highest uninsured rates because Medicaid wasn’t expanded.

Next is Dallas-based Baylor Scott & White Health, which provided about $242 million in charity care in fiscal 2016, or 3.2% of its $8 billion in revenue. Julie Smith, a spokeswoman for the system, wrote in an email that Texas also did not expand Medicaid and thus has some of the largest uninsured populations in the country. “We remain committed to meeting the needs of the communities we serve including providing access to care for both financially and medically indigent patients,” she said.

The top charity care provider, at 6.32% of operating revenue, was New York City Health & Hospitals, whose unique public operational structure naturally triggers higher charity care levels. Unlike most private hospitals, NYC Health & Hospitals receives funding from the city and state to care for low-income patients.

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.