Category Archives: Community Benefit

State Protections Against Medical Debt: A Look at Policies Across the U.S.

Posted on by • Posted in Affordability, Bankruptcy, Community Benefit, Consumer Financial Protection Bureau, Fair Credit Reporting Act, Federal Debt Collection Practices Act, Federal Trade Commission (FTC), Health System, High Deductible Health Plans, Hospital, Hospital Industry, Medical Debt, Medical Debt Financing, Rev Cycle Management, Revenue Cycle, Underinsured, Uninsured • Leave a comment
https://www.commonwealthfund.org/publications/fund-reports/2023/sep/state-protections-medical-debt-policies-across-us?utm_campaign=Controlling%20Health%20Care%20Costs&utm_medium=email&_hsmi=273390498&_hsenc=p2ANqtz-_GvewDO7oUUI_AgyC_0aCCFmHn7qQI24sUA2ruC6txDzqbNNsdcT7PB3NE2MhyB0fKRsLKiG4w9EzXla4ZCPrhs-B27A&utm_source=alert

Abstract

  • Issue: Medical debt negatively affects many Americans, especially people of color, women, and low-income families. Federal and state governments have set some standards to protect patients from medical debt.
  • Goal: To evaluate the current landscape of medical debt protections at the federal and state levels and identify where they fall short.
  • Methods: Analysis of federal and state laws, as well as discussions with state experts in medical debt law and policy. We focus on laws and regulations governing hospitals and debt collectors.
  • Key Findings and Conclusion: Federal medical debt protection standards are vague and rarely enforced. Patient protections at the state level help address key gaps in federal protections. Twenty states have their own financial assistance standards, and 27 have community benefit standards. However, the strength of these standards varies widely. Relatively few states regulate billing and collections practices or limit the legal remedies available to creditors. Only five states have reporting requirements that are robust enough to identify noncompliance with state law and trends of discriminatory practices. Future patient protections could improve access to financial assistance, ensure that nonprofit hospitals are earning their tax exemption, and limit aggressive billing and collections practices.

Introduction

Medical debt, or personal debt incurred from unpaid medical bills, is a leading cause of bankruptcy in the United States. As many as 40 percent of U.S. adults, or about 100 million people, are currently in debt because of medical or dental bills. This debt can take many forms, including:

  • past-due payments directly owed to a health care provider
  • ongoing payment plans
  • money owed to a bank or collections agency that has been assigned or sold the medical debt
  • credit card debt from medical bills
  • money borrowed from family or friends to pay for medical bills.

This report discusses findings from our review of federal and state laws that regulate hospitals and debt collectors to protect patients from medical debt and its negative consequences. First, we briefly discuss the impact and causes of medical debt. Then, we present federal medical debt protections and discuss gaps in standards as well as enforcement. Then, we provide an overview of what states are doing to:

  • strengthen requirements for financial assistance and community benefits
  • regulate hospitals’ and debt collectors’ billing and collections activities
  • limit home liens, foreclosures, and wage garnishment
  • develop reporting systems to ensure all hospitals are adhering to standards and not disproportionately targeting people of color and low-income communities.

(See the appendix for an overview of medical debt protections in all 50 states and the District of Columbia.)

Impact of Medical Debt

More than half of people in medical and dental debt owe less than $2,500, but because most Americans cannot cover even minor emergency expenses, this debt disrupts their lives in serious ways. Fear of incurring medical debt also deters many Americans from seeking medical care. About 60 percent of adults who have incurred medical debt say they have had to cut back on basic necessities like food or clothing, and more than half the adults from low-income households (less than $40,000) report that they have used up their savings to pay for their medical debt.

A significant amount of medical debt is either sold or assigned to third-party debt-collecting agencies, who often engage in aggressive efforts to collect on the debt, creating stress for patients. Both hospitals and debt collectors have won judgments against patients, allowing them to take money directly from a patient’s paycheck or place liens on a patient’s home. In some cases, patients have also lost their homes. Medical debt can also have a negative impact on a patient’s credit score.

Key Terms Related to Medical Debt

  • Financial assistance policy: A hospital’s policy to provide free or discounted care to certain eligible patients. Eligibility for financial assistance can depend on income, insurance status, and/or residency status. A hospital may be required by law to have a financial assistance policy, or it may choose to implement one voluntarily. Financial assistance is frequently referred to as “charity care.”
  • Bad debt: Patient bills that a hospital has tried to collect on and failed. Typically, hospitals are not supposed to pursue collections for bills that qualify for financial assistance or charity care, so bad debt refers to debt owed by patients ineligible for financial assistance.
  • Community benefit requirements: Nonprofit hospitals are required by federal law and some state laws to provide community benefits, such as financial assistance and other investments targeting community need, in exchange for a tax exemption.
  • Debt collectors or collections agencies: Entities whose business model primarily relies on collecting unpaid debt. They can either collect on behalf of a hospital (while the hospital still technically holds the debt) or buy the debt from a hospital.
  • Sale of medical debt: Hospitals sometimes sell the debt patients owe them to third-party debt buyers, who can be aggressive in seeking repayment of the debt.
  • Creditor: A party that is owed the medical debt and often wants to collect on the medical debt. This can be a hospital, a debt collector acting on behalf of a hospital, or a third-party debt buyer.
  • Debtor: A patient who owes medical debt over unpaid medical bills.
  • Wage garnishment: The ability of a creditor to get a court order that would allow them to deduct a portion of a debtor-patient’s paycheck before it reaches the patient. Federal law limits how much can be withheld from a debtor’s paycheck, and some states exceed this federal protection.
  • Placing a lien: A legal claim that a creditor can place on a patient’s home, prohibiting the patient from selling, transferring, or refinancing their home without first paying off the creditor. Most states require creditors to get a court order before placing a lien on a home.
  • Foreclosure or forced sale: A creditor can repossess and sell a patient’s home to pay off their medical debt. Often, creditors are required to obtain a court order to do so.

Perhaps what is most troubling is that the burden of medical debt is not borne equally: Black and Hispanic/Latino adults and women are much more likely to incur medical debt. Black adults also tend to be sued more often as a result. Uninsured patients, those from low-income households, adults with disabilities, and young families with children are all at a heightened risk of being saddled with medical debt.

Causes of Medical Debt

Most people — 72 percent, according to one estimate — attribute their medical debt to bills from acute care, such as a single hospital stay or treatment for an accident. Nearly 30 percent of adults who owe medical debt owe it entirely for hospital bills.

Although uninsured patients are more likely to owe medical debt than insured patients, having insurance does not fully shield patients from medical debt and all its consequences. More than 40 percent of insured adults report incurring medical debt, likely because they either had a gap in their coverage or were enrolled in insurance with inadequate coverage. High deductibles and cost sharing can leave many exposed to unexpected medical expenses.

The problem of medical debt is further exacerbated by hospitals charging increasingly high prices for medical care and failing to provide adequate financial assistance to uninsured and underinsured patients with low income.

Key Findings

Federal Medical Debt Protections Have Many Gaps

At the federal level, the tax code, enforced by the Internal Revenue Service (IRS), requires nonprofit hospitals to broadly address medical debt. However, these requirements do not extend to for-profit hospitals (which make up about a quarter of U.S. hospitals) and have other limitations.

Further, the IRS does not have a strong track record of enforcing these requirements. In the past 10 years, the IRS has not revoked any hospital’s nonprofit status for noncompliance with these standards.

The Consumer Financial Protection Bureau and the Federal Trade Commission have additional oversight authority over credit reporting and debt collectors. The Fair Credit Reporting Act regulates credit reporting agencies and those that provide information to them (debt collectors and hospitals). Consumers have the right to dispute any incomplete or inaccurate information and remove any outdated, negative information. In some cases, patients can directly sue hospitals or debt collectors for inaccurately reporting medical debt to credit reporting agencies. In addition, the Federal Debt Collection Practices Act limits how aggressive debt collectors can be by restricting the ways and times in which they can contact debtors, requiring certain disclosures and notifications, and prohibiting unfair or deceptive practices. Patients can directly sue debt collectors in violation of the law. This law, however, does not limit or prohibit the use of certain legal remedies, like wage garnishment or foreclosure, to collect on a debt.

Many states have taken steps to fill the gaps in federal standards. Within a state, several agencies may play a role in enforcing medical debt protections. Generally speaking:

  • state departments of health are the primary regulators of hospitals and set standards for them
  • state departments of taxation are responsible for ensuring nonprofit hospitals are earning their exemption from state taxes
  • state attorneys general protect consumers from unfair and deceptive business practices by hospitals and debt collectors.

Fewer Than Half of States Exceed Federal Requirements for Financial Assistance, Protections Vary Widely

Federal law requires nonprofit hospitals to establish and publicize a written financial assistance policy, but these standards leave out for-profit hospitals and lack any minimum eligibility requirements. As the primary regulators of hospitals, states have the ability to fill these gaps and require hospitals to provide financial assistance to low-income residents. Twenty states require hospitals to provide financial assistance and set certain minimum standards that exceed the federal standard.

All but three of these 20 states extend their financial assistance requirements to for-profit hospitals. Of these 20 states, four states — Connecticut, Georgia, Nevada, and New York — apply their financial assistance requirements only to certain types of hospitals.

Policies also vary among the 31 states that do not have statutory or regulatory financial assistance requirements for hospitals. For example, the Minnesota attorney general has an agreement in place with nearly every hospital in the state to adhere to certain patient protections, though it falls short of requiring hospitals to provide financial assistance. Massachusetts operates a state-run financial assistance program partly funded through hospital assessments. Other states use far less prescriptive mechanisms to try to ensure that patients have access to financial assistance, such as placing the onus of treating low-income patients on individual counties or requiring hospitals to have a plan for treating low-income and/or uninsured patients without setting any specific requirements.

Enforcement of state financial assistance standards.

The only way to enforce the federal financial assistance requirement is to threaten a hospital’s nonprofit status, and the IRS has been reluctant to use this authority. Among the 20 states that have their own state financial assistance standards, 10 require compliance as a condition of licensure or as a legal mandate. These mandates are often coupled with administrative penalties, but some states have established additional consequences. For example, Maine allows patients to sue noncompliant hospitals.

Six states make compliance with their financial assistance standards a condition of receiving funding from the state. Two other states use their certificate-of-need process (which requires hospitals to seek the state’s approval before establishing new facilities or expanding an existing facility’s services) to impose their financial assistance mandates.

Setting eligibility requirements for financial assistance.

The federal financial assistance standard sets no minimum eligibility requirements for hospitals to follow. However, the 20 states with financial assistance standards define which residents are eligible for aid.

One way for states to ensure that financial assistance is available to those most in need is to prevent hospitals from discriminating against undocumented immigrants. Four states explicitly prohibit such discrimination in statute and regulation. Most states, however, are less explicit. Thirteen states define eligibility broadly, basing it most frequently on income, insurance status, and state residency. However, it is unclear how hospitals are interpreting this requirement when it comes to patients’ immigration status. In contrast, three states explicitly exclude undocumented immigrants from eligibility.

States also vary widely in terms of which income brackets are eligible for financial assistance and how much financial assistance they may receive.

At least three of the 20 states with financial assistance standards allow certain patients with heavy out-of-pocket medical expenses from catastrophic illness or prior medical debt to access financial assistance. Many states also require hospitals to consider a patient’s insurance status when making financial assistance determinations. At least six states make financial assistance available for uninsured patients only, while at least eight others also make financial assistance available to underinsured patients.

Standardizing the application process.

Cumbersome applications can discourage many patients from applying for financial assistance. Five states have developed a uniform application form, while three others have set minimum standards for financial assistance applications. Eleven states require hospitals to give patients the right to appeal a denial of financial assistance.

States Split in Requiring Nonprofit Hospitals to Invest in Community Benefits

Federal and state policymakers also can require nonprofit hospitals to invest in community benefits in return for tax exemptions. Federal law requires nonprofit hospitals to produce a community health needs assessment every three years and have an implementation strategy. Almost all states exempt nonprofit hospitals from a host of state taxes, including income, property, and/or sales taxes. However, only 27 impose community benefit requirements on nonprofit hospitals.

Community benefits frequently include financial assistance but also investments that address issues like lack of access to food and housing. In the long run, these investments can reduce medical debt burden by improving population health and the financial stability of a community. Most states that require nonprofit hospitals to provide community benefits allow nonprofit hospitals to choose how they invest their community benefit dollars. This hands-off approach has given rise to concerns about the lack of transparency in community benefit spending as well as questions about whether hospitals are investing this money in ways that are most helpful to the community, such as in providing financial assistance.

Applicability of community benefit standards.

Nineteen states impose community benefit requirements on all nonprofit hospitals in the state, but three states further limit these requirements to hospitals of a certain size. At least six states have extended these requirements to for-profit hospitals as well. Of these six, the District of Columbia, South Carolina, and Virginia have incorporated community benefit requirements into their certificate-of-need laws instead of their tax laws. As a result, any hospital seeking to expand in these states becomes subject to their community benefit requirement.

Interaction between financial assistance and community benefits.

The federal standard allows nonprofit hospitals to report financial assistance as part of their community benefit spending. Most states with community benefit requirements also allow hospitals to do this. However, only seven states require hospitals to provide financial assistance to satisfy their community benefit obligations.

Setting quantitative standards for community benefit spending.

Only seven states set minimum spending thresholds that hospitals must meet or exceed to satisfy state community benefit standards. For example, Illinois and Utah require nonprofit hospitals’ community benefit contributions to equal what their property tax liability would have been. Unique among states, Pennsylvania gives taxing districts the right to sue nonprofit hospitals for not holding up their end of the bargain, which has proven to be a strong enforcement mechanism.

Fewer Than Half the States Exceed Federal Standards for Billing and Collections

Hospital billing and collections practices can significantly increase the burden of medical debt on patients. However, the current federal standard does not regulate these practices beyond imposing waiting periods and prior notification requirements for certain extraordinary collections actions (ECAs), such as garnishing wages or selling the debt to a third party.

Requiring hospitals to provide payment plans.

Federal standards do not require hospitals to make payment plans available. However, a few states do require hospitals to offer payment plans, particularly for low-income and/or uninsured patients. For example, Colorado requires hospitals to provide a payment plan and limit monthly payments to 4 percent of a patient’s monthly gross income and to discharge the debt once the patient has made 36 payments.

Limiting interest on medical debt.

Federal law does not limit the amount of interest that can be charged on medical debt. However, eight states have laws prohibiting or limiting interest for medical debt. Some states like Arizona have set a ceiling for interest on all medical debt. Others like Connecticut further prohibit charging interest to patients who are at or below 250 percent of the federal poverty level and are ineligible for public insurance programs.

Though many states do not have specific laws prohibiting or limiting interest that hospitals or debt collectors can charge on medical debt, all states do have usury laws, which limit the amount of interest than can be charged on any oral or written agreement. Usury limits are set state-by-state and can range anywhere from 5 percent to more than 20 percent, but most limits fall well below the average interest rate for a credit card (around 24%). At least one state, Minnesota, has sued a health system for charging interest rates on medical debt that exceeded the allowed limit in the state’s usury laws.

Interactions between hospitals, third-party debt collectors, and patients.

Unlike hospitals, debt collectors do not have a relationship with patients and can be more aggressive when collecting on the debt. Federal law neither limits when a hospital can send a bill to collections, nor does it require hospitals to oversee the debt collectors it uses. Most states (37) also do not regulate when a hospital can send a bill to collections, although some states have developed more protective approaches.

For example, Connecticut prohibits hospitals from sending the bills of certain low-income patients to collections, and Illinois requires hospitals to offer a reasonable payment plan first. Additionally, five states require hospitals to oversee their debt collectors.

Sale of medical debt to third-party debt buyers.

Hospitals sometimes sell old unpaid debt to third-party debt buyers for pennies on the dollar. Debt buyers can be aggressive in their efforts to collect, and sometimes even try to collect on debt that was never owed. Federal law considers the sale of medical debt an ECA and requires nonprofit hospitals to follow certain notice and waiting requirements before initiating the sale. Most states (44) do not exceed this federal standard.

Only three states prohibit the sale of medical debt. Two other states — California and Colorado — regulate debt buyers instead. For example, California prohibits debt buyers from charging interest or fees, and Colorado prohibits them from foreclosing on a patient’s home.

Reporting medical debt to credit reporting agencies.

Federal law considers reporting medical debt to a credit reporting agency to be an ECA and requires nonprofit hospitals to follow certain notice and waiting requirements beforehand. Most states (41) do not exceed this federal standard.

Of the 10 states that do go beyond the federal standard, a few like Minnesota fully prohibit hospitals from reporting medical debt. Most others require hospitals, debt collectors, and/or debt buyers to wait a certain amount of time before reporting the debt to credit agencies (Exhibit 8). Two states directly regulate credit agencies: Colorado prohibits them from reporting on any medical debt under $726,200, while Maine requires them to wait at least 180 days from the date of first delinquency before reporting that debt.

States Vary Widely on Patient Protections from Medical Debt Lawsuits

Federal law considers initiating legal action to collect on unpaid medical bills to be an extraordinary collections action and also limits how much of a debtor’s paycheck can be garnished to pay a debt.

In most states, hospitals and debt buyers can sue patients to collect on unpaid medical bills. Three states limit when hospitals and/or collections agencies can initiate legal action. Illinois prohibits lawsuits against uninsured patients who demonstrate an inability to pay. Minnesota prohibits hospitals from giving “blanket approval” to collections agencies to pursue legal action, and Idaho prohibits the initiation of lawsuits until 90 days after the insurer adjudicates the claim, all appeals are exhausted, and the patient receives notice of the outstanding balance.

Liens and foreclosures.

Most states (32) do not limit hospitals, collections agencies, or debt buyers from placing a lien or foreclosing on a patient’s home to recover on unpaid medical bills. However, almost all states provide a homestead exemption, which protects some equity in a debtor’s home from being seized by creditors during bankruptcy. The amount of homestead exemption available to debtors varies from state to state, ranging from just $5,000 to the entire value of the home. Seven states have unlimited homestead exemptions, allowing debtors to fully shield their primary homes from creditors during bankruptcy. Additionally, Louisiana offers an unlimited homestead exemption for certain uninsured, low-income patients with at least $10,000 in medical bills.

Ten states prohibit or set limits on liens or foreclosures for medical debt. For example, New York and Maryland fully prohibit both liens and foreclosures because of medical debt, while California and New Mexico only prohibit them for certain low-income populations.

Wage garnishment.

Under federal law, the amount of wages garnished weekly may not exceed the lesser of: 25 percent of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage. Twenty-one states exceed the federal ceiling for wage garnishment. Only a few states go further to prohibit wage garnishment for all or some patients. For example, New York fully prohibits wage garnishment to recover on medical debt for all patients, yet California only extends this protection for certain low-income populations. While New Hampshire does not prohibit wage garnishment, it requires the creditor to keep going back to court every pay period to garnish wages, which significantly limits creditors’ ability to garnish wages in practice.

Many States Have Hospital Reporting Requirements, But Few Are Robust

Federal law requires all nonprofit hospitals to submit an annual tax form including total dollar amounts spent on financial assistance and written off as bad debt. However, these reporting requirements do not extend to for-profit hospitals and lack granularity. States, as the primary regulators of hospitals, would likely benefit from more robust data collection processes to better understand the impact of medical debt and guide their oversight and enforcement efforts.

Currently, 32 states collect some of the following:

  • financial data, including the total dollar amounts spent on financial assistance and/or bad debt
  • financial assistance program data, including the numbers of applications received, approved, denied, and appealed
  • demographic data on the populations most affected by medical debt
  • information on the number of lawsuits and types of judgments sought by hospitals against patients.

Fifteen states explicitly require hospitals to report total dollar amounts spent on financial assistance and/or bad debt, while 11 states also require hospitals to report certain data related to their financial assistance programs. Most of these 11 states limit the data they collect to the numbers of applications received, approved, denied, and appealed. However, a handful of them go further and ask hospitals to report on the amount of financial assistance provided per patient, number of financial assistance applicants approved and denied by zip code, number of payment plans created and completed, and number of accounts sent to collections.

Five states require hospitals to further break down their financial assistance data by race, ethnicity, gender, and/or preferred or primary language. For example, Maryland requires hospitals to break down the following data by race, ethnicity, and gender: the bills hospitals write off as bad debt and the number of patients against whom the hospital or the debt collector has filed a lawsuit.

Only Oregon asks hospitals to report on the number of patient accounts they refer for collections and extraordinary collections actions.

Discussion and Policy Implications

In 2022, the federal government announced administrative measures targeting the medical debt problem, which included launching a study of hospital billing practices and prohibiting federal government lenders from considering medical debt when making decisions on loan and mortgage applications. Although these measures will help some, only federal legislation and enhanced oversight will likely address current gaps in federal standards.

States can also fill the gaps in federal patient protections by improving access to financial assistance, ensuring that nonprofit hospitals are earning their tax exemption, and protecting patients against aggressive billing and collections practices. States also can leverage underutilized usury laws to protect their residents from medical debt.

Finding the most effective ways to enforce these standards at the state level could also protect patients. Absent oversight and enforcement, patients from underserved communities continue to face harm from medical debt, even when states require hospitals to provide financial assistance and prohibit them from engaging in aggressive collections practices. Bolstering reporting requirements alone would not likely ensure compliance, but states could protect patients by strengthening their penalties, providing patients with the right to sue noncompliant hospitals, and devoting funding to increase oversight by state agency officials.

To develop a comprehensive medical debt protection framework, states could also bring together state agencies like their departments of health, insurance, and taxation, as well as their state attorney general’s office. Creating an interagency office dedicated to medical debt protection would allow for greater efficiency and help the state build expertise to take on the well-resourced debt collection and hospital industries.

Still, these measures only address the symptoms of the bigger problem: the unaffordability of health care in the United States. Federal and state policymakers who want to have a meaningful impact on the medical debt problem could consider the protections discussed in this report as part of a broader plan to reduce health care costs and improve coverage.

Not for Profit Hospitals: Are they the Problem?

Posted on by • Posted in CEO, Community Benefit, Elevance Health Policy Institute, Executive Compensation, Health Insurance Industry, Health Policy, Health System, High Deductible Health Plans, Hospital, Hospital Industry, Lobbyist, Market Consolidation, Market Power, Medical Debt, Non-Profit Healthcare Industry, Out of Pocket Expenses, Pharmaceutical Industry, Public Perception, Tax Exempt Status • Leave a comment
Not for Profit Hospitals: Are they the Problem?

Last Monday, four U.S. Senators took aim at the tax exemption enjoyed by not-for-profit (NFP) hospitals in a letter to the IRS demanding detailed accounting for community benefits and increased agency oversight of NFP hospitals that fall short.

Last Tuesday, the Elevance Health Policy Institute released a study concluding that the consolidation of hospitals into multi-hospital systems (for-profit/not-for-profit) results in higher prices without commensurate improvement in patient care quality. “

Friday, Kaiser Health News Editor in Chief Elizabeth Rosenthal took aim at Ballad Health which operates in TN and VA “…which has generously contributed to performing arts and athletic centers as well as school bands. But…skimped on health care — closing intensive care units and reducing the number of nurses per ward — and demanded higher prices from insurers and patients.”

And also last week, the Pharmaceuticals’ Manufacturers Association released its annual study of hospital mark-ups for the top 20 prescription drugs used on hospitals asserting a direct connection between hospital mark-ups (which ranged from 234% to 724%) and increasing medical debt hitting households.

(Excerpts from these are included in the “Quotables” section that follows).

It was not a good week for hospitals, especially not-for-profit hospitals.

In reality, the storm cloud that has gathered over not-for-profit health hospitals in recent months has been buoyed in large measure by well-funded critiques by Arnold Ventures, Lown Institute, West Health, Patient Rights Advocate and others. Providence, Ascension, Bon Secours and now Ballad have been criticized for inadequate community benefits, excessive CEO compensation, aggressive patient debt collection policies and price gauging attributed to hospital consolidation.

This cloud has drawn attention from lawmakers: in NC, the State Treasurer Dale Folwell has called out the state’s 8 major NFP systems for inadequate community benefit and excess CEO compensation.

In Indiana, State Senator Travis Holdman is accusing the state’s NFP hospitals of “hoarding cash” and threatening that “if not-for-profit hospitals aren’t willing to use their tax-exempt status for the benefit of our communities, public policy on this matter can always be changed.” And now an influential quartet of U.S. Senators is pledging action to complement with anti-hospital consolidation efforts in the FTC leveraging its a team of 40 hospital deal investigators.

In response last week, the American Hospital Association called out health insurer consolidation as a major contributor to high prices and,

in a US News and World Report Op Ed August 8, challenged that “Health insurance should be a bridge to medical care, not a barrier.

Yet too many commercial health insurance policies often delay, disrupt and deny medically necessary care to patients,” noting that consumer medical debt is directly linked to insurer’ benefits that increase consumer exposure to out of pocket costs.

My take:

It’s clear that not-for-profit hospitals pose a unique target for detractors: they operate more than half of all U.S. hospitals and directly employ more than a third of U.S. physicians.

But ownership status (private not-for-profit, for-profit investor owned or government-owned) per se seems to matter less than the availability of facilities and services when they’re needed.

And the public’s opinion about the business of running hospitals is relatively uninformed beyond their anecdotal use experiences that shape their perceptions. Thus, claims by not-for-profit hospital officials that their finances are teetering on insolvency fall on deaf ears, especially in communities where cranes hover above their patient towers and their brands are ubiquitous.

Demand for hospital services is increasing and shifting, wage and supply costs (including prescription drugs) are soaring, and resources are limited for most.

The size, scale and CEO compensation for the biggest not-for-profit health systems pale in comparison to their counterparts in health insurance and prescription drug manufacturing or even the biggest investor-owned health system, HCA…but that’s not the point.

NFPs are being challenged to demonstrate they merit the tax-exempt treatment they enjoy unlike their investor-owned and public hospital competitors and that’s been a moving target.

In 2009, the Internal Revenue Service (IRS) updated the Form 990 Schedule H to require more detailed reporting of community benefit expenditures across seven different categories including charity care, unreimbursed costs from means-tested government programs, community health spending, research, and others. The Affordable Care Act added requirements that non-profit hospitals complete community health needs assessments (CHNAs) every three years to identify the most pressing community health priorities and create detailed implementation strategies explaining how the identified needs will be addressed.

But currently, there are no federal community benefit requirements that ensure hospitals use the most accurate accounting standards for charity care and unreimbursed Medicaid services; set a minimum level of community benefit spending; require hospitals to spend on community benefit dollars on identified needs; or describe in detail the type of activities that quality as community benefit spending.

Thus, the methodology for consistently defining and accounting for community benefits needs attention. That would be a good start but alone it will not solve the more fundamental issue: what’s the future for the U.S. health system, what role do players including hospitals and others need to play, and how should it be structured and funded?

The issues facing the U.S. health industry are complex. The role hospitals will play is also uncertain. If, as polls indicate, the majority of Americans prefer a private health system that features competition, transparency, affordability and equitable access, the remedy will require input from every major healthcare sector including employers, public health, private capital and regulators alongside others.

It will require less from DC policy wonks and sanctimonious talking heads and more from frontline efforts and privately-backed innovators in communities, companies and in not-for-profit health systems that take community benefit seriously.

No sector owns the franchise for certainty about the future of U.S. healthcare nor its moral high ground. That includes not-for-profit hospitals.

The darkening cloud that hovers over not-for-profit health systems needs attention, but not alone, despite efforts to suggest otherwise.

Clarifying the community-benefit standard is a start, but not enough.

Are NFP hospitals a problem? Some are, most aren’t but all are impacted by the darkening cloud.

Community With High Medical Debt Questions Its Hospitals’ Charity Spending

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Community With High Medical Debt Questions Its Hospitals’ Charity Spending

As 41% of American adults face medical debt, residents of this southern Colorado city contend their local nonprofit hospitals aren’t providing enough charity care to justify the millions in tax breaks they receive.

The two hospitals in Pueblo, Parkview Medical Center and Centura St. Mary-Corwin, do not pay most federal or state taxes. In exchange for the tax break, they are required to spend money to improve the health of their communities, including providing free care to those who can’t afford their medical bills. Although the hospitals report tens of millions in annual community benefit spending, the vast majority of that is not spent on the types of things advocates and researchers contend actually create community benefits, such as charity care.

And this month, four U.S. senators called on the Treasury’s inspector general for tax administration and the Internal Revenue Service to evaluate nonprofit hospitals’ compliance with tax-exempt requirements and provide information on oversight efforts.

The average hospital in the U.S. spends 1.9% of its operating expenses on charity care, according to an analysis of 2021 data by Johns Hopkins University health policy professor Ge Bai. Last year, Parkview provided 0.75% of its operating expenses, about $4.2 million, in free care.

Centura Health, a chain of 20 tax-exempt hospitals, reports its community benefit spending to the federal government in aggregate and does not break out specific numbers for individual hospitals. But St. Mary-Corwin reported $2.3 million in charity care in fiscal year 2022, according to its state filing. The filing does not specify the hospital’s operating expenses.

The low levels of charity care have translated into more debt for low-income residents.

About 15% of people in Pueblo County have medical debt in collections, compared with 11% statewide and 13% nationwide, according to 2022 data from the Urban Institute. Those Puebloans have median medical debt of $975, about 40% higher than in Colorado and the U.S. as a whole. And all of those numbers are worse for people of color.

“How far into debt do people have to go to get any kind of relief?” said Theresa Trujillo, co-executive director at the Center for Health Progress’ Pueblo office. “Once you understand that there are tens of millions of dollars every single year that hospitals are extracting from our communities that are meant to be reinvested in our communities, you can’t go back from that without saying, ‘Oh my gosh, that is a thread we need to pull on.’”

Trujillo is organizing a group of fed-up residents to engage both hospitals on their community benefit spending. The group of at least a dozen residents believe the hospitals are ignoring the needs identified by the community — things like housing, addiction treatment, behavioral health care, and youth activities — and instead spending those dollars on things that mainly benefit the hospitals and their staffs.

For the fiscal year ending June 2022, with total revenue of $593 million, Parkview reported $100 million in community benefit spending. But most of that — more than $77 million — represented the difference between the hospital’s cost of providing care and what Medicaid paid for it.

IRS guidelines allow hospitals to claim Medicaid shortfall as a community benefit, but many academics and health policy experts argue such balance sheet shifts aren’t the same as providing charity care to patients.

Parkview also reported $4.7 million for educating its medical staff and $143,000 in incentives to recruit health professionals as community benefit. The hospital spent only $44,000 on community health improvement projects, which appear to have consisted mainly of launching a new mobile app to streamline appointments and referrals.

Meanwhile, the hospital recently spent $58 million on a new orthopedic facility and $43 million on a new cancer center. Parkview also wrote off $39 million in bad debt in fiscal 2022, although that is different from charity care. The bad debt is money the hospitals tried to collect from patients and ultimately decided they’d never get. But by that time, those patients would likely have been sent to collections and potentially had their credit damaged. And outstanding debt often keeps patients from seeking other needed care.

There is a disconnect between what the community said its biggest health needs were and where Parkview directed its spending. The hospital’s community needs assessment pegged access to care as the top concern, and the hospital said it launched the phone app in response.

The second-largest perceived health need was addressing alcohol and drug use. Yet, the only initiative Parkview cited in response was posting preventive health videos online, including some on alcohol and drug use. Meanwhile, the hospital shut down its inpatient psychiatric unit.

Parkview declined to answer questions about its charity care spending, but hospital spokesperson Todd Seip emailed a statement saying the hospital system “has been committed to providing extensive charity care to our community.”

Seip noted that 80% of Parkview’s patients are covered by Medicare or Medicaid, which pay lower rates than commercial insurance. The hospital posted a net loss of $6.7 million in the 2022 fiscal year, although its charity care wasn’t appreciably higher in previous years in which it posted a net gain.

Centura St. Mary-Corwin reported $16 million in Medicaid shortfall and $2 million in medical staff education in 2022, according to its state filing. The hospital spent about $38,000 for its community health improvement projects, primarily on emergency medical services outreach programs in rural areas. The hospital provided another $96,000 in services, mainly to promote covid-19 vaccination.

Centura also declined to answer questions about its charity care spending. Hospital spokesperson Lindsay Radford emailed a statement saying St. Mary-Corwin was aligning its community health needs assessment process with the Pueblo Department of Public Health and Environment “to develop shared implementation strategies for our community benefit funds, ensuring the resources are targeting the highest needs.”

Trujillo questioned how the hospital has conducted its community health assessments, relying on a social media poll to identify needs. After community members identified 12 concerns, she said, hospital leaders chose their priorities from the list.

“They talk about a community garden like they’re feeding the whole south side of the community,” Trujillo said. The hospital established a community garden in 2021, with 20 beds that could be adopted by residents to grow vegetables. Trujillo did praise the hospital for converting part of its building into dorms for a community college nursing program.

Trujillo’s group has spent much of the summer researching hospital charity spending and showing up at public meetings to have their views heard. They are working to gain seats on hospital and other state boards that influence how community benefit dollars are spent, and are urging hospitals to reconfigure their boards to better represent the demographics of their communities.

“We’ve made folks now aware that we want to be a part of those processes,” Trujillo said. “We’re willing to help them reach deeper into the community.”

Tax-exempt hospitals have been under increased state scrutiny for their charitable spending, especially after the Affordable Care Act and Medicaid expansion drove down the uninsured rate. That in turn cut the amount of care hospitals had to provide without being paid, potentially freeing up money to help more people without insurance or with high-deductible plans.

In Colorado, hospitals’ charity care spending and bad debt write-offs dropped from an average of $680 million a year in the five years prior to the ACA being fully implemented in 2014 to an average of $337 million in the years after, according to the Colorado Healthcare Affordability and Sustainability Enterprise Board, a state advisory group.

In states like Colorado, which used federal funding to expand the number of people covered by Medicaid, hospitals shifted more of their community benefit spending to cover Medicaid reimbursement shortfalls.

A January report from Colorado’s Department of Health Care Policy & Financing concluded that payments from public and private health plans help the state’s hospitals make more than enough money to offset lower Medicaid rates and still turn a profit while providing more true charity care.

Colorado has enacted two bills in the past five years to increase the transparency of hospitals’ charitable efforts with new reporting requirements.

“I think overall, we’re pleased with the amount of money that hospitals are reporting they spent,” said Kim Bimestefer, the executive director of the Department of Health Care Policy & Financing. “Is that money being expended in meaningful ways, ways that improve health and well-being of the community? Our reports right now can’t determine that.”

Citing lax enforcement, senators ramp up scrutiny of nonprofit hospitals’ tax exemptions

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https://www.fiercehealthcare.com/providers/citing-lax-enforcement-senators-ramp-scrutiny-nonprofit-hospitals-tax-exemptions

A bipartisan quartet of influential senators is tapping tax regulators within the U.S. Treasury for detailed information on nonprofit hospitals’ reported charity care and community investments, the latest in legislators’ increasing scrutiny of tax-exempt hospitals’ business practices.

In a pair of letters (PDF) sent Monday, Sens. Elizabeth Warren, D-Massachusetts, Raphael Warnock, D-Georgia, Bill Cassidy, M.D., R-Louisiana, and Chuck Grassley, R-Iowa, wrote they “are alarmed by reports that despite their tax-exempt status, certain nonprofit hospitals may be taking advantage of this overly broad definition of ‘community benefit’ and engaging in practices that are not in the best interest of the patient.”

The missives referenced a bevy of news reports as well as an investigation conducted by Grassley’s office detailing tax-exempt hospitals and health systems’ aggressive debt collection practices.

They also outlined studies from academic and policy groups highlighting that the tax-exempt status of the nation’s nonprofit hospitals collectively was worth about $28 billion in 2020 and how this tally paled in comparison to the charity care most of those hospitals had provided during that same period.  

Such studies have been quickly contested by the hospital lobby, which highlights that charity care is just one component of the broader activities that constitute a nonprofit hospital’s community benefit spending.

However, that ambiguity was squarely in the crosshairs of the legislators who said the long-standing community benefit standard “is arguably insufficient in its current form to guarantee protection and services to the communities hosting these hospitals.”

They cited a 2020 report from the Government Accountability Office that found oversight of nonprofit hospitals’ tax exemptions was “challenging” due to the vague definition of community benefit.

Though the IRS implemented several of the office’s recommendations from the report, “more is required to ensure nonprofit hospitals’ community benefit information is standardized, consistent and easily identifiable.” Included here could be additional updates to Form 990’s Schedule H, where nonprofits detail their community benefits and related activities.

To get a better handle on the agencies’ current oversight, the legislators requested from the IRS and the Treasury’s Tax Exempt & Government Entities Division a laundry list of information related to nonprofits’ tax filings from the last several years, including “a list of the most commonly reported community benefit activities that qualified a nonprofit hospital for tax exemptions in FY2021 and FY2022.”

They also sought lists of the nonprofit hospitals that were flagged, penalized or had their tax-exempt status revoked for violating community benefit standard requirements.

In another letter to the Treasury’s inspector general for tax administration, they asked the auditor to update their upcoming reviews to evaluate existing standards for financial assistance policy and other “practices that reduce unnecessary medical debt from patients who qualify for free or discounted care.”

The lawmakers also asked the inspector general to explore how often nonprofit hospitals bill patients with “gross charges” and to make sure the IRS is doing enough to ensure hospitals are making “’reasonable efforts’ to determine whether individuals are eligible for financial assistance before initiating extraordinary collection actions.”

Both letters from the senators gave the tax regulators 60 days to provide the requested information.

RELATED

As nonprofit hospitals reap big tax breaks, states scrutinize their required charity spending

Allina Health not alone in refusing treatment for indebted patients, Lown Institute says

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https://www.beckershospitalreview.com/finance/allina-health-not-alone-in-refusing-treatment-for-indebted-patients-lown-institute-says.html

Minneapolis-based Allina Health System’s move to turn away patients with outstanding debt is a cost-saving measure is not uncommon, according to the Lown Institute.

Allina provides emergency care to indebted patients, but they can be cut off for other services if they have a certain amount of unpaid debt, The New York Times found. A spokesperson for Allina confirmed to the Times that it cut off patients only if they have at least $1,500 of unpaid debt three separate times. 

A 2022 investigation from KFF Health News found 55 hospitals allow denials of nonemergency care for patients with medical debt, and 22 said the practice is allowed but not current practice. 

Allina’s refusal of care for indebted patients could contribute to medical debt, the Lown Institute said in a June 2 report. Allina is a nonprofit hospital and is required to offer financial assistance to patients who cannot afford services. However, there are no federal regulations regarding how much hospitals have to spend on financial assistance or who can be eligible. When groups refuse care, it can make it harder for patients to get help.

According to the Lown Institute, Allina skirted $266 million in taxes in 2020 from its nonprofit status and spent $57 million on financial assistance and community investment. It could have spent $209 million more to reach its tax exemption value.

Headwinds facing Not for Profit Hospital Systems are Mounting: What’s Next?

Posted on by • Posted in Affordability, Board, Community Benefit, Financial Distress, Financial Performance, Financial Stewardship, Financial Transparency, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Leadership, Leadership Vision, Market Consolidation, Market Power, Market Trends, Price Transparency, Strategic Change, Tax Exempt Status • Leave a comment
Headwinds facing Not for Profit Hospital Systems are Mounting: What’s Next? (Corrected Edition)

Correction: An earlier version incorrectly referenced a Texas deal between Houston Methodist and Baylor Scott and White.  News about deals is sensitive and unnecessarily disruptive to reputable organizations like these. I sourced this news from a reputable deal advisor: it was inaccurate. My apology!

Congressional Republicans and the White House spared Main Street USA the pain of defaulting on the national debt last week. No surprise.

Also not surprising: another not-for-profit-mega deal was announced:

  • St. Louis, MO-based BJC HealthCare and Kansas City, MO-based Saint Luke’s Health System announced their plan to form a $9.5B revenue, 28-hospital system with facilities in Missouri, Kansas, and Illinois.

This follows recent announcements by four other NFP systems seeking the benefits of larger scale:

  • Gundersen Health System & Bellin Health (Nov 2022): 11 hospitals, combined ’22 revenue of $2.425B
  • Froedtert Health & ThedaCare (Apr 2023 LOI): 18 hospitals, combined ’22 revenues of $4.6B

And all these moves are happening in an increasingly dicey environment for large, not-for-profit hospital system operators:

  • Increased negative media attention to not-for-profit business practices that, to critics, appear inconsistent with a “NFP” organization’s mission and an inadequate trade for tax exemptions each receives.
  • Decreased demand for inpatient services—the core business for most NFP hospital operations. Though respected sources (Strata, Kaufman Hall, Deloitte, IBIS et al) disagree somewhat on the magnitude and pace of the decline, all forecast decreased demand for traditional hospital inpatient services even after accounting for an increasingly aging population, a declining birthrate, higher acuity in certain inpatient populations (i.e. behavioral health, ortho-neuro et al) and hospital-at-home services.
  • Increased hostility between national insurers and hospitals over price transparency and operating costs.
  • Increased employer, regulator and consumer concern about the inadequacy of hospital responsiveness to affordability in healthcare.
  • And heightened antitrust scrutiny by the FTC which has targeted hospital consolidation as a root cause of higher health costs and fewer choices for consumers. This view is shared by the majorities of both parties in the House of Representatives.

In response, Boards and management in these organizations assert…

  • Health Insurers—especially investor-owned national plans—enjoy unfettered access to capital to fund opportunistic encroachment into the delivery of care vis a vis employment of physicians, expansion of outpatient services and more.
  • Private equity funds enjoy unfettered opportunities to invest for short-term profits for their limited partners while planning exits from local communities in 6 years or less.
  • The payment system for hospitals is fundamentally flawed: it allows for underpayments by Medicaid and Medicare to be offset by secret deals between health insurers and hospitals. It perpetuates firewalls between social services and care delivery systems, physical and behavioral health and others despite evidence of value otherwise. It requires hospitals to be the social safety net in every community regardless of local, state or federal funding to offset these costs.

These reactions are understandable. But self-reflection is also necessary. To those outside the hospital world, lack of hospital price transparency is an excuse. Every hospital bill is a surprise medical bill. Supporting the community safety net is an insignificant but manageable obligation for those with tax exemption status.  Advocacy efforts to protect against 340B cuts and site-neutral payment policies are about grabbing/keeping extra revenue for the hospital. What is means to be a “not-for-profit” anything in healthcare is misleading since moneyball is what all seem to play. And short of government-run hospitals, many think price controls might be the answer.

My take:

The headwinds facing large not-for-profit hospitals systems are strong. They cannot be countered by contrarian messaging alone.

What’s next for most is a new wave of operating cost reductions even as pre-pandemic volumes are restored because the future is not a repeat of the past. Being bigger without operating smarter and differently is a recipe for failure.

What’s necessary is a reset for the entire US health system in which not-for-profit systems play a vital role. That discussion should be led by leaders of the largest NFP systems with the full endorsements of their boards and support of large employers, physicians and public health leaders in their communities.

Everything must be on the table: funding, community benefits, tax exemption, executive compensation, governance, administrative costs, affordability, social services, coverage et al. And mechanisms for inaction and delays disallowed.

It’s a unique opportunity for not-for-profit hospitals. It can’t wait.

Should some clinical services be considered a public good? 

Posted on by • Posted in Community Benefit, Health Policy, Master Planning, Public Funding, Public Good, Public Health, Regional Master Planning, Tax Exempt Status • Leave a comment

https://mailchi.mp/73102bc1514d/the-weekly-gist-may-19-2023?e=d1e747d2d8

We caught up recently with a healthcare leader who had spent time in Atlanta in a previous role, and the conversation turned to last year’s closure of Atlanta Medical Center.

One major impact: the closure immediately left the Atlanta metro region, home to over 6M people, with only one Level 1 trauma center (a second Level 1 center opened an hour north of the city in February). “It’s devastating for the community to lose those services,” he shared, “but I also get why the health system made that choice, given how hard the economy has hit hospitals.” When all health systems are feeling the worst margin pressures in more than a decade, most would be reticent to step in and launch a new trauma program, which despite bringing prestige, is often a money-loser. 


The conversation got us thinking about whether healthcare needs a new approach to securing essential services needed by the community which aren’t well supported by the payment system. 

Our current model largely relies on nonprofit systems to meet the community need as a tenet of that status. But as one CMO shared, “If there’s more than one system in the market, we toss the responsibility back and forth like a hot potato.”

His solution: there needs to be top-down redesign of urgently needed critical services like trauma and behavioral health, as well as highly specialized services like transplant and pediatric subspecialty care, which he considered oversupplied in his market, with multiple subscale programs.

His hope was that health systems could cross competitive lines and collaborate to think about a rational approach to “regional healthcare master planning”, along with a new funding model.

It’s a tall order, he continued, but if health systems can’t find a solution on their own, they leave themselves open to government intervention that might mandate a solution—or further questions of the value communities are receiving from supporting nonprofit status. 

Healthcare’s Wicked Problems

Posted on by • Posted in Community Benefit, Duty of Care, Financial Stewardship, Health System, Hospital, Hospital Industry, Leadership, Mission, Outcomes, Problem Definition, Problem Solving, Problems, Quality of Care, Stakeholder, Thought Leaders, Wicked Problems • Leave a comment
https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/healthcares-wicked-problems?utm_source=mkto&utm_campaign=ken-weekly-blog&utm_medium=em&utm_term=230426&mkt_tok=NjU0LUNOWS0yMjQAAAGLXNf0jezUHKiOFojVqOfO6SN744Y4YtsQEQDJL_0_V5jFywF5LpZGlJrKPINabw9GtFbGjn3d1VuDXNrLnDwh-6J2WJx7KMCYWvzGn7ljjwjU

One of the great things about my job is getting the opportunity to talk with healthcare CEOs around the country on a regular basis.

Lately, every CEO I talk with tells me how hard it is to run a healthcare organization in 2023.

These are people with long experience, people who over time have pushed the right buttons and pulled the right levers to make their organizations successful and to give their communities the care they need.

Hearing these recent comments from CEOs takes us back to the concept of “wicked problems,” which we’ve referred to in the past, and suggests that the current hospital operating environment is overwhelmed by wicked problems.

As a reminder, the wicked problem concept was developed in 1973 by social scientists Horst Rittel and Melvin Webber.

Unlike math problems, wicked problems have no single, correct solution. In fact, a solution that improves one aspect of a wicked problem usually makes another aspect of the problem worse.

Poverty is a common example of a wicked problem.

According to Rittel and Webber, all wicked problems have these five characteristics:

  1. They are hard to define.
  2. It’s hard to know when they are solved.
  3. Potential solutions are not right or wrong, only better or worse.
  4. There is no end to the number of solutions or approaches to a wicked problem.
  5. There is no way to test the solution to a wicked problem—once implemented, solutions are not easily reversable, and those solutions affect many people in profound ways.

Healthcare is one of our nation’s critical wicked problems, and the broad and persistent effects of COVID have made that problem worse.

Like all wicked problems, the wicked problem of healthcare can be defined in many different ways and from many different perspectives.

If we were to frame the wicked problem of healthcare just in the context of hospitals and health systems coming off of their worst financial year in memory, it could look something like this:

Hospitals and health systems need to make a margin in order to carry out their “duty of care”—that is, their responsibility to improve health for communities, which increasingly include public health undertakings.

However, in 2022, more than half of hospitals in America had negative margins due largely to macroeconomic factors related to labor, inflation, utilization, and insufficient revenue growth.

The actions then needed to improve financial performance likely involve reducing labor costs and eliminating unprofitable services.

But these solutions in the hospital world are seen as another wicked problem, and actions taken to improve financial and clinical operations are often cautiously approached in order to protect the organization’s duty of care.

As you can see, the very actions to solve the wicked problem of provider healthcare may likely make aspects of the strategic problem worse.

Everyone reading this blog is dedicated to solving these and other wicked problems related to health and healthcare and the provision of sufficient care to the American community.

Solutions to healthcare’s wicked problems are never clear, and those solutions are not easily tested and eventually can affect many.

And in the wicked problem lexicon, once uncertain solutions have been implemented they are very hard to undo.

And healthcare’s many and varied dissatisfied stakeholders demand rapid solutions and then complain loudly when those solutions fall short, as any one solution inevitably will when the problem is as wicked as the current healthcare environment.

This is the new role of healthcare leaders: solvers of wicked problems.

Not for Profit Health Systems are Soft Targets: Here’s Why

Posted on by • Posted in Charity Care, Community Benefit, Competition, Health Policy, Health System, Healthcare Reform, Hospital, Hospital Industry, Market Consolidation, Non-Profit Healthcare Industry, Ownership, Private Equity, Tax-Exempt Status • Leave a comment
Not for Profit Health Systems are Soft Targets: Here’s Why

Large, not-for-profit hospitals/health systems are getting a disproportionate share of unflattering attention these days. Last week was no exception: Here’s a smattering of their coverage:

Approximate Savings from Lowering Indiana Not-for-Profit Commercial Hospital Facility Prices to 260% of Medicare March 20, 2023 https://employersforumindiana.org/media/resources/Savings-from-Lowering-Indiana-Not-for-profit-Commercial-Hospital-Facility-Prices.

Jiang et al “Factors Associated with Hospital Commercial Negotiated Price for Magnetic Resonance Imaging of Brain” JAMA Network Open March 21. 2023;6(3):e233875. doi:10.1001/jamanetworkopen.2023.3875

Not-for-profit benefits top charity care levels for hospitals: report Bond Buyer March 22, 2023 www.bondbuyer.com/news/not-for-profit-benefits-top-charity-care-levels-for-hospitals-report

What’s Behind Losses At Large Nonprofit Health Systems? Health Affairs March 24, 2023 www.healthaffairs.org/content/forefront/s-behind-losses-large-nonprofit-health-systems

Whaley et al What’s Behind Losses At Large Nonprofit Health Systems? Health Affairs March 24, 2023 10.1377/forefront.20230322.44474

A Pa. hospital’s revoked property tax exemption is a ‘warning shot’ to other nonprofits, expert says KYW Radio Philadelphia March 24, 2023 ww.msn.com/en-us/news/us/a-pa-hospital-s-revoked-property-tax-exemption-is-a-warning-shot-to-other-nonprofits-expert-says

These hospitals are ‘not for profit’ but very wealthy — should the state get more of their cash? News Sentinel March 26, 2023 www.news-sentinel.com/news/local-news/2019/09/26/kevin-leininger-these-hospitals-are-not-for-profit-but-very-wealthy-should-the-state-get-more-of-their-cash

These come on the heals of the Medicare Advisory Commission’s (MedPAC) March 2023 Report to Congress advising that all but safety-net hospitals are in reasonably good shape financially (contrary to industry assertions) and increased lawmaker scrutiny of “ill-gotten gains” in healthcare i.e., Moderna’s vaccine windfall, Medicare Advantage overpayments and employer activism about hospital price-gauging in several states.

Like every sector in healthcare, hospitals enter budget battles with good stories to tell about cost-reductions and progress in price transparency compliance. But in the current political and economic environment, large, not-for-profit hospitals and health systems seem to be targets of more adverse coverage than others as illustrated above. Like many NFP institutions in society (higher education, organized religion, government), erosion of trust is palpable. Not-for-profit hospitals and health systems are no exception.

The themes emerging from last week’s coverage are familiar:

  • ‘Not-for-profit hospitals/health systems, do not provide value commensurate with the tax exemptions they get.’
  • ‘Not for profit hospitals & health systems take advantage of their markets and regulations to create strong brands and generate big profits.’.
  • ‘Not for profit hospitals & health systems charge more than investor-owned hospitals: the victims are employers and consumers who pay higher-than-necessary prices for their services.’
  • ‘NFP operators invest in risky ventures: when the capital market slumps, they are ill-prepared to manage. Risky investments, not workforce and supply chain issues, are the root causes of NFP financial stress. They’re misleading the public purposely.’
  • ‘Executives in NFP systems are overpaid and patient collection policies are more aggressive than for-profits. NFP boards are ineffective.’

The stimulants for this negative attention are equally familiar:

  • Proprietary studies by think tanks, trade associations, labor unions and consultancies designed to “prove a point” for/against not-for-profit hospitals/health systems.
  • Government reports about hospital spending, waste, fraud, workforce issues, patient safety, concentration and compliance with transparency rules.
  • Aggressive national/local reporting by journalists inclined to discount NFP messaging.
  • Public opinion polls about declining trust in the system and growing concern about price transparency, affordability and equitable access.
  • Politicians who use soundbites and dog whistles about NFP hospitals to draw attention to themselves.

The cumulative effect of these is confusion, frustration and distrust of not-for-profit hospitals and health systems. Most believe not-for-profit hospitals/health systems do not own the moral high ground they affirm to regulators and their communities (though religiously-affiliated systems have an edge). Most are unaware that more than half of all hospitals (54%) are not-for-profit and distinctions between safety net, rural, DSH, teaching and other forms of NFP ownership are non-specific to their performance.

What’s clear to the majority is that hospitals are expensive and essential. They’re soft targets representing 31.1% of the health system’s total spend ($4.3 trillion in 2021) increasing 4.9% annually in the last decade while inflation and GDP growth were less.

So why are not-for-profit systems bearing the brunt of hospital criticism?

Simply put: many NFP systems act more like Big Business than shepherds of community health. In fact, 4 of the top 10 multi-hospital system operators is investor owned: HCA (184), CHS (84), LifePoint (84), Tenet (65). In addition, 3 others are in the top 50: Ardent (30), UHS (26), Quorum (22). So, corporatization of hospital care using private capital and public markets for growth is firmly entrenched in the sector exposing not-for-profit operators to competition that’s better funded and more nimble.  And, per industry studies, not-for-profits tend to stay in markets longer and operate unprofitable services more frequently than their investor-owned competitors. But does this matter to insurers, community leaders, legislators, employers, hospital employees and physicians? Some but not much.

My take:

There are no easy answers for not-for-profit hospitals/heath systems. The issue is about more than messaging and PR. It’s about more than Medicare reimbursement (7.5% below cost), protecting programs like 340B, keeping tax exemptions and maintaining barriers against physician-owned hospitals. The issue is NOT about operating income vs. investment income: in every business, both are essential and in each, economic cycles impact gains/losses. Each of these is important but only band-aids on an open wound in U.S. healthcare.

Near-term (the next 2 years), opportunities for not-for-profit hospitals involve administrative simplification to reduce costs and improve the efficiencies and effectiveness of the workforce. Clinical documentation using ChatGPT/Bard-like tools can have a massive positive impact—that’s just a start. Advocacy, public education and Board preparedness require bigger investments of time and resources. But that’s true for every hospital, regardless of ownership. These are table stakes to stay afloat.

The longer-term issue for NFPs is bigger:

It’s about defining the future of the U.S. health system in 2030 and beyond—the roles to be played and resources necessary for it to skate to where the puck is going. It’s about defining the role played by private employers and whether they’ll pay 220% more than Medicare pays to keep providers and insurers solvent. It’s about how underserved and unhealthy people are managed. It’s about defining systemness in healthcare and standardizing processes. It’s about defining sources of funding and optimal use of resources. Not-for-profit systems should drive these discussions in the communities they serve and at a national level.

MedPAC’s 17 member Commission will play a vital role, but equally important to this design process are inputs from employers, consumers and thought leaders who bring fresh insight. Until then, not-for-profit health systems will be soft targets for unflattering media because protecting the status quo is paramount to insiders who benefit from its dysfunction. Incrementalism defined as innovation is a recipe for failure.

It’s time to begin a discussion about the future of the U.S. health system—all of it, not just high-profile sectors like not-for-profit hospitals/health systems who are currently its soft target.

The Estimated Value of Tax Exemption for Nonprofit Hospitals Was About $28 Billion in 2020

Posted on by • Posted in American Hospital Association (AHA), Charity Care, Community Benefit, Health Policy, Health System, Hospital, Hospital Industry, Internal Revenue Service (IRS), Non-Profit Healthcare Industry, Tax Exempt Status • Leave a comment
The Estimated Value of Tax Exemption for Nonprofit Hospitals Was About $28 Billion in 2020

Over the years, some policymakers have questioned whether nonprofit hospitals—which account for nearly three-fifths (58%) of community hospitals—provide sufficient benefit to their communities to justify their exemption from federal, state, and local taxes.

This issue has been the subject of renewed interest in light of reports of nonprofit hospitals taking aggressive steps to collect unpaid medical bills, including suing patients over unpaid medical debt, including patients who are likely eligible for financial assistance. Further, recent research indicates that nonprofit hospitals devote a similar or smaller share of their operating expenses to charity care in comparison to for-profit hospitals. In light of these concerns, several policy ideas have been floated to better align the level of community benefits provided by nonprofit hospitals with the value of their tax exemption.

This data note provides an estimate of the value of tax exemption for nonprofit facilities based on hospital cost reports, filings with the Internal Revenue Service (IRS), and American Hospital Association (AHA) survey data (see Methods for additional details). We define the value of tax exemption as the benefit of not having to pay federal and state corporate income taxes, typically not having to pay state and local sales taxes and local property taxes, and any increases in charitable contributions and decreases in bond interest rate payments that might arise due to receiving tax-exempt status.

Results

The total estimated value of tax exemption for nonprofit hospitals was about $28 billion in 2020 (Figure 1). This represented over two-fifths (44%) of net income (i.e., revenues minus expenses) earned by nonprofit facilities in that year. To put the value of tax exemption in perspective, our estimate is similar to the total value of Medicare and Medicaid disproportionate share hospital (DSH) payments in the same year ($31.9 billion in fiscal year 2020) (i.e., supplemental payments to hospitals that care for a disproportionate share of low-income patients which are intended, in part, to offset the costs of charity care and other uncompensated care).

https://datawrapper.dwcdn.net/MAZAW

The estimated value of federal tax-exempt status was $14.4 billion in 2020, which represents about half (51%) of the total value of tax exemption. This is primarily due to the estimated value of not having to pay federal corporate income taxes ($10.3 billion). In addition, we assumed that individuals contribute more to tax-exempt hospitals because they can deduct donations from their income tax base ($2.5 billion) and issue bonds at lower interest rates because the interest is not taxed ($1.6 billion). Our estimates of changes in charitable contributions and interest rates on bonds only account for federal tax rates for simplicity and may therefore understate the total value of tax exemption because they do not account for the effects of state taxes.

The total estimated value of state and local tax-exempt status was $13.7 billion in 2020, which represents about half (49%) of the total value of tax exemption. This amount includes the estimated value of not having to pay state or local sales taxes ($5.7 billion), local property taxes ($5.0 billion) or state corporate income taxes ($3.0 billion).

The total estimated value of tax exemption (about $28 billion) exceeded total estimated charity care costs ($16 billion) among nonprofit hospitals in 2020 (Figure 2), though charity care represents only a portion of the community benefits reported by these facilities. Hospital charity care programs provide free or discounted services to eligible patients who are unable to afford their care and represent one of several different types of community benefits reported by hospitals.

The Internal Revenue Service (IRS) also defines community benefits to include unreimbursed Medicaid expenses, unreimbursed health professions education, and subsidized health services that are not means-tested, among other activities. One study estimated that the value of tax exemption exceeded the value of community benefits broadly for about one-fifth (19%) of nonprofit hospitals during 2011-2018 or about two-fifths (39%) when considering the incremental value of community benefits provided relative to for-profit facilities. Other research suggests that nonprofit hospitals devote a similar or smaller share of their operating expenses to charity care and unreimbursed Medicaid costs—which accounted for most of the value of community benefits in 2017—when compared to for-profit hospitals.

https://datawrapper.dwcdn.net/JxC4B

The value of tax exemption grew from about $19 billion in 2011 to about $28 billion in 2020, representing a 45 percent increase (Figure 3). The value of tax exemption increased in most of the years (7 out of 9) in our analysis, though there was a notable decrease of $5.8 billion in 2018. The largest single-year increase was $4.1 billion in 2020. The large decrease in the value of tax exemption in 2018 coincided with the implementation of the Tax Cuts and Jobs Act of 2017, which permanently reduced the federal corporate income tax rate from 35 to 21 percent and therefore decreased the value of being exempt from federal income taxes.

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The large increase in the value of tax exemption in 2020 overlapped with the start of the COVID-19 pandemic. This increase primarily reflects a large increase in aggregate net income for nonprofit hospitals in 2020. Although there were disruptions in hospital operations in 2020, hospitals received substantial amounts of government relief, and it is possible that other sources of revenue, such as from investment income, may have also increased. Increases in net income in turn increased the value of not having to pay federal and state income taxes.

Increases in the estimated value of tax exemption over time also reflect net income growth that preceded the pandemic as well as increases in estimated property values, supply expenses, and charitable contributions, each of which would carry tax implications if hospitals lost their tax-exempt status (e.g., with some supply expenses being subject to sales taxes). Even when setting aside the strong financial performance of nonprofit hospitals in 2020 as a potential outlier, total net income among nonprofit facilities increased substantially in the preceding years, before increasing further in 2020. Although we are not able to directly observe the value of the real estate owned by hospitals, the estimated value of exemption from local property taxes—which is based on our analysis of property taxes paid by for-profit hospitals—increased by 63 percent from 2011 to 2019. Finally, the supply expenses in our analysis increased by 44 percent and charitable contributions increased by 49 percent from 2011 to 2019.

Discussion

The estimated value of tax exemption for nonprofit hospitals increased from about $19 billion in 2011 to about $28 billion in 2020. The rising value of tax exemption means that federal, state, and local governments have been forgoing increasing amounts of revenue over time to provide tax benefits to nonprofit hospitals, crowding out other uses of those funds. This has raised questions about whether nonprofit facilities provide sufficient benefit to their communities to justify this tax benefit. Federal regulations require, among other things, that nonprofit hospitals provide some level of charity care and other community benefits as a condition of receiving tax-exempt status. However, a 2020 Government Accountability Office (GAO) report raised questions about whether the government has adequately enforced this requirement. Further, some argue that the federal definition of “community benefits” is too broad—e.g., by including medical training and research that could benefit hospitals directly—though others believe that the definition is too narrow. Most states have additional community benefit requirements for nonprofit or broader groups of hospitals—such as providing charity care to patients below a specified income threshold—though there is little information about the effectiveness of these regulations or the extent to which they are enforced.

Several policy ideas have been floated at the federal and state level that would increase the regulation of community benefits spending among nonprofit hospitals or among hospitals more generally. These include proposals to create or expand state requirements that hospitals provide charity care to patients below a specified income threshold, mandate that nonprofit hospitals provide a minimum amount of community benefits, establish a floor-and-trade system where hospitals would be required to either provide a minimum amount of charity care or subsidize other hospitals that do so, create mechanisms to increase the uptake of charity care, expand oversight and enforcement of community benefit requirements, replace current tax benefits with a subsidy that is tied to the value of community benefits provided, and introduce reforms intended to better align community benefits with local or regional needs.

These policy options would inevitably involve tradeoffs. While they may expand the provision of certain community benefits, hospitals would incur new costs as a result, which could in turn have implications for what services they offer, how much they charge commercially insured patients, and how much they invest in the quality of care.