This article first appeared in the St. Louis Beacon, July 16, 2012 - One question left unanswered by the health-reform law is how much charity care nonprofit hospitals must provide in exchange for numerous tax breaks. These hospitals pay no federal income and capital gains taxes, no state and local property taxes and no taxes on purchases.
The issue of whether communities get enough in return for this generosity used to be hotly debated, but it isn't given much ink in the 2,400-page Affordable Care Act. Even so, hospitals will still need relatively robust charity-care budgets because of the number who will remain uninsured in spite of the ACA.
A report by the Robert Woods Johnson Foundation estimates that the law will fail to cover 23 million uninsured people. Though the group's estimate wasn't broken down by states, its numbers presumably include the 255,000 in Missouri and more than 700,000 in Illinois who would be untouched by ACA's benefits.
Although hospitals say they are prepared to continue serving those left uninsured, some regret that the health law did not specify what percentage of resources nonprofit hospitals must devote to this care. The law did add new tax rules requiring hospitals to spell out more fully how they are meeting a community's health needs.
"The law doesn't specifically say how much charity care nonprofit hospitals have to provide, but we wish it would have," says Karen Roth, research director at the St. Louis Area Business Health Coalition.
Roth's latest report on hospital quality and finances shows that charity care as a percentage of operating revenue among nonprofit hospitals here reached 2.29 percent in 2010, up from 1.99 percent in 2009.
Profits and charity
But the study shows that the percentage of resources devoted to charity doesn't necessarily rise in relation to revenue for most hospitals, and some executives say revenue and profit aren't the best indicators of levels of charity care. They argue that one visible example of the real impact of charity care is seen each day in emergency rooms serving patients who can't pay for their medical care.
Roth says the 2.29 percent devoted to charity care in 2010 wasn't unexpected, given that the recession left many area residents without jobs and health insurance. According to her report, six of 35 hospitals in the region enjoyed double-digit profits in 2010, led by Alton Memorial Hospital (16.8 percent), St. Louis Children's Hospital (15.3 percent), Barnes Jewish Hospital in St. Peters (14.9 percent), Barnes Jewish Hospital in St. Louis (14.3 percent), Missouri Baptist Medical Center (13.9 percent), and St. Joseph Hospital in Breese, Ill. (13.04 percent).
Charity cost as a percentage of operating revenue among these six most profitable area hospitals was 2.27 percent for Alton Memorial; 0.74 percent for Children's; 1.33 percent for Barnes Jewish in St. Peters; 2.33 percent for Barnes Jewish St. Louis; 6.9 percent for Missouri Baptist; and 0.62 percent for St. Joseph in Breese.
Roth said 11 area hospitals, about half of them in the SSM Health Care network, provided charity care above 3 percent of operating revenue. Her report also singled out Touchette Regional Hospital in Metro East for providing charity care equal to 11.5 percent of its operating revenue, the highest among all hospitals in the metro area.
A few health facilities within hospital networks had negative profit margins, but the aggregate profit for all 33 hospitals in the St. Louis region was 7.57 percent, the report showed.
"It's fair to talk about the profit margins because they are so high," Roth says.
"Some had pretty astonishingly high operating margins as well. So I think it's fair to compare the percentage of operating revenue that they spend on charity care with their operating profit margins."
Not a simple equation
But some hospital executives don't think that using the ratio between charity care and operating profit margins is the best way to judge how effective hospitals are in meeting community needs.
"Our philosophy and practice around charity care -- we call it financial assistance -- is to give patients who are uninsured and underinsured the care they need when they need it," says June Fowler, vice president for corporate and public communications for BJC Healthcare.
She simplified the philosophy in this way: "Say our profits are $10. We don't say that since we have $10 in profit, we are going to do $4 in charity care. The reason we don't do that is what happens if we've provided $4 in charity care and we're only eight months into the year? What do we do in the next four months?"
She says BJC provides more charity care than any other system in Missouri primarily because it chose not to follow the western movement of hospitals, beginning in the '70s.
"Barnes stayed here, Jewish stayed here, Children's Hospital stayed here. Christian stayed in north county," she says.
No matter where they are situated, she says hospitals aren't like most businesses. "If you walk into a grocery store and pick up things, they don't let you walk out without paying for them. It's not the same with health-care services, especially when you are coming through the emergency department."
IRS scrutiny
The difference, of course, is that hospitals get a tax break for allowing poor customers to walk out without paying the bill. While the ACA didn't spell out how much charity care a hospital must provide, hospitals are coming under more scrutiny from the Internal Revenue Service, partly as a result of ACA. The tax agency's newly amended Schedule H that is part of Form 990 adds new Affordable Care Act requirements that hospitals must meet to qualify for tax exemption.
Among other things, hospitals must provide the IRS with more data and details to justify their tax-exempt status. They are required to explain their charity care, including the criteria for determining whether patients qualify for this care. They are also required to do a community needs survey every three years and spell out community efforts they have undertaken to boost health and safety during the past year.
Those efforts might include advocacy for health improvement, leadership training, and housing or economic development initiatives that benefit communities served by the hospital.
Roth says, "There is now more transparency, more information available to consumers under IRS Form 990, which hospitals must file. They also must explain, among other things, which patients qualify for discounts."
The coalition's review showed that most area hospitals offered free care to needy patients with incomes below 200 percent of poverty. That about $46,100 a year for a family of four. The coalition also found that spending on community efforts among the hospitals ranged from nothing to under 1 percent of expenses.
"The ACA gave the IRS a little bit more authority," Roth says, adding that hospitals are now limited in the amount of uninsured patients could be charged.
"They couldn't be charged, for instance, the gross charge amount, which is like the list price. It's far more than anybody else pays."
Roth says hospitals also are now forbidden to engage in certain collection action, such as lawsuits and liens, at least not before determining if patients are eligible for financial assistance.
The IRS can also impose a tax of $50,000 if a hospital fails to comply with the new rules. Roth says that's "a pretty big fine" for a small rural hospital, but not for large facilities like those in St. Louis.
Charity care was just one of many issues reviewed in the Business Health Coalition's report. It found that area hospitals in general were improving on issues ranging from avoidable readmission rates to infections.
"They are doing better," she says. "We're very pleased that the infection rates for coronary artery bypass graft, for example, have dropped by 30 percent annually, and that's really huge. That was for patients at the highest risk."
She added that avoidable readmission rates also had declined for 14 of the hospitals and that others with higher than average readmission rates were reaching out to communities to "help people from returning to hospitals so much." Part of the incentive for this is the financial penalty imposed by the Centers for Medicare & Medicaid Services.
Beginning in September, hospitals with preventable readmission rates might face a loss of up to 1 percent of their aggregate inpatient Medicare payments during the first year, 1.25 percent in the second year, and 1.5 percent in the third year.
The Business Health Coalition's report said the success hospitals were making "reinforces the power of public reporting to improve care quality."
