Not-for-profit health systems have been accused in hundreds of lawsuits of overcharging uninsured patients and aggressively pursuing debt collection, and have been under the public microscope.
In this installment of Straight talk, held on October 4, 2005 at Modern Healthcare's Chicago headquarters, we explore the issues surrounding tax-exempt status and how health systems should publicize their charitable work. Fawn Lopez, publisher of Modern Healthcare, was the moderator.
Lopez: To begin the discussion, will you very briefly describe the health systems you represent?
 Loudermilk: Phoebe Putney Health System is a system of three hospitals -- a mother ship and two smaller hospitals. We are around 500 beds in total. We are an AA-rated facility in a very poor congressional district in Southwest Georgia.
 Skogsbergh: Advocate is a faith-based healthcare system located here in Chicago. We have 10 hospitals, three large medical groups and a home healthcare company. In terms of size, we are $3 billion in assets. We employ 25,000 folks and serve about 3 million patients on an annual basis.
 Lanier: I am here as a trustee representing Wheaton Franciscan Services, which operates 17 hospital campuses, four long-term care facilities and 70 clinics throughout Illinois, Iowa and Wisconsin. The system provides about $300 million of community benefit annually.
Lopez: There's been a lot of discussion about hospitals' charity care policies, particularly in relation to their tax-exempt status. Why do you think the industry is facing this issue today? What were some of the key drivers?
Skogsbergh: According to various accounts, there are somewhere between 50 million and 75 million Americans without insurance. The growing number of uninsured has captured the attention of the public. The high cost of healthcare is another concern. I think those are two significant forces, which explain why we are focusing on charity care so intently.
Loudermilk: I think there are a couple of important points. While the uninsured is a huge issue, the underinsured is a group that is growing very, very rapidly. The growth of out-of-pocket expenses for middle-income America, in terms of growing co-payments and deductible amounts, will make this more of an issue than it has been in the past. The shift of healthcare costs from employer to employee is really a shift to the providers because increasingly the patient can't pay the higher co-payments and deductibles. Many of these people qualify for charity care.
Lanier: We are spending far more than any other industrialized country on healthcare -- about 15% of the gross national product -- yet the life expectancy is not what it ought to be given the tremendous expenditure. Also, the outcomes that we receive for the vast expenditures are not as great as they should be. Those are two reasons. A third reason is that businesses are not as competitive as they should be simply because they have to devote so much of their capital to benefits for their employees and retirees. A fourth reason is that our system is in many ways catastrophically inefficient.
 Friz: I think there are a couple of other drivers. The post-Enron scrutiny that Congress placed on the corporate sector led to the enactment of the Sarbanes Oxley Act in 2002, which is directed toward publicly traded companies. It seems to me to be a natural extension for Congress to now focus on the tax-exempt sector. The tax-exempt sector makes up a significant part of the economy. As part of the hearings that the House Committee on Ways and Means conducted earlier this year, the commissioner of the Internal Revenue Service, referencing statistics from 2001, said that hospitals and healthcare organizations are the largest part of the tax-exempt sector in terms of assets. Because of their size in the tax-exempt sector, hospitals stand out. On top of this, I think there are some other drivers. One issue is that the IRS revenue ruling defining the characteristics of a tax-exempt hospital dates back to 1969. Since that time, there have been significant changes in the healthcare industry, such as the development of large healthcare systems and the growth of for-profit hospitals. This revenue ruling sets forth the community benefit standard to differentiate a hospital entitled to exemption from federal income tax. Certain factors satisfying the community benefit standard -- including an open medical staff and a practice of treating all emergency room patients without regard to ability to pay -- are now generally common, rather than differentiating features between the two types of hospitals. This has come out of the congressional testimony. As a result, I believe there has been more of a focus on other activities, constituting charity care and community benefit.
Lopez: Do you think that the community benefit standard is too flexible?
Friz: That is an interesting question. Overall, I do believe that the community benefit standard has merit. I think the not-for-profit hospital industry needs to have a point of view on this issue, particularly with everything that is going on in Congress. The community benefit standard is a more flexible standard for determining tax-exempt status than its predecessor -- a 1956 ruling, which focused on a requirement that a hospital operate to the extent of its financial ability for those patients not able to pay for the services rendered to obtain tax-exempt status. During the House Committee on Ways and Means hearings, the IRS commissioner said the flexibility of the community benefit standard may be, in fact, exactly what we need, given the complexity of healthcare in this changing environment. I tend to agree. It allows flexibility with regard to approach about how different health systems further their charitable objectives. But there are a number of theories that have been set forth about what entitles an organization to a tax exemption. A June 2004 press release for the House Committee on Ways and Means hearings said that another approach is to view tax-exemption as a subsidy for a cost the federal government would otherwise incur, such as charity care. Framing it in that context leads to putting more of an emphasis on looking at the value of that charity care and comparing that to the value of the tax exemption.
Lopez: There is no question that not-forprofit hospitals provide charity care, but the question is how much of it exists? What are the measurements for it?
 Clark: Because of the flexibility of the community benefit standard, hospitals are able to present the community benefit numbers to make any point they need. If I were to wish for any standardization, it would be for a very defined way to calculate what is actually charity care. I think everybody would agree that comparing among hospitals or regions based on charges is ludicrous because charges have come to mean nothing. But there is no common methodology to convert those charges to actual costs. The General Accounting Office published a report this summer to try to measure and compare the costs of uncompensated care. The GAO's approach, which considered both bad debt and charity care, masks the core issues around charity care. But it did come up with a methodology that has some merit, which is: convert charges to costs and then subtract payments. For example, the cost of charity care for a person who is partially insured could be, in fact, zero because there aren't any real costs associated with the co-payment and deductible that you didn't collect -- it is profit that you didn't collect. Coming to a cost-based measure for charity care has a lot of merit and levels the playing field. But somebody is going to have to mandate that.
Lopez: How do you get real data on costs?
Clark: I think lowering charges is one of the first steps. Most health systems have grossly understated the charges on an inpatient room -- because everybody looks at that in comparing charges -- and outpatient services are priced dramatically higher than costs. That isn't true in every case, but as a generality, it is very true. I believe that accurate data makes choices easier, and we have evolved over forty years to a pricing structure and negotiated rates that have absolutely nothing to do with resource consumption.
I think state insurance commissioners can help on the insurance side if they really believe that there is voter support for lowering the prices of hospital stays. I talked to a chief financial officer of a hospital two weeks ago that lowered prices a year ago. The hospital doesn't have a lot of managed care contracts. He said that net income has gone up because cash collections have gone up. People that were walking away from their $10,000 bill were paying their $3,000 bill. His hospital's net revenue went up in one year because the pricing change didn't impact their insurance contracts, which stayed flat, and consumers were not afraid of their bills.
Lopez: Identification of who is eligible for charity care is a big issue. What are you doing to address this?
Loudermilk: Part of the problem with the way we measure charity care is that we often identify it on the back end -- after the patient care is given -- rather than on the front end. At Phoebe, we ask every patient at every registration opportunity: Would you like to apply for financial assistance? Until recently, we weren't asking that in the right way with the right script. So we created a script for our registration people. The number of applications increased dramatically. Under the old system, we gave someone who qualified for financial assistance a business card from the financial counselor, who wrote the date on which the patient had to reapply on the back of the card. That was the benefit card. We got frustrated with that approach. We created something that looks like a credit card, called a Phoebe Care card. It has the beneficiary's picture on it and an expiration date. We list all of our facilities on the back of the card. With the Phoebe Care card, the patient account is properly classified immediately. Also, our billing processes are more efficient because the right bill, or no bill, is generated.
Lanier: Another reason why we haven't been more successful in identifying on the front end those vulnerable individuals who need charity care is that we often don't consider the cultural sensitivities of people who are presenting themselves to our facilities. We have too many people in our society who are reluctant to step up and ask for charity care simply because of pride or cultural or ethnic issues.
Clark: There is a health system in suburban Atlanta that requires their financial counselors to be bi-lingual or multilingual. The cultural sensitivity changed the kind of person who does that job. They must have four-year degrees and they must be bi-lingual because they are authorized by their organization to make a decision on the spot as to whether someone qualifies for charity care. In the past, the hospital employed clerks to take an application. They really upgraded that role and invested a lot more in those people.
Loudermilk: Cultural sensitivity is a huge issue. We hired a market research firm to conduct sessions with the uninsured. What we found was that the older group was hesitant to ask for the assistance but the younger group wasn't. The younger group wanted our financial counselors to take off their blue suits and put on jeans and t-shirts and work in the emergency room. They wanted our counselors to be one of them. We have actually done that with our emergency-room financial counselors.
Lopez: If we end up with increased government oversight when it comes to charity care, how will that change the way you measure and report on what you've done?
Loudermilk: I hope the industry will embrace better reporting of what they are doing for the community. If you go to guidestar.org and look at hospital tax returns, you are going to find that 90% of them have only three sentences about how they reach the community benefit standard. That is inadequate. At Phoebe, we have been reporting our community benefit participation for years as part of our 990s (IRS tax forms for nonprofit tax-exempt organizations). You've got to provide the information and you ought to be proud of the things you are doing to serve your community.
Skogsbergh: I think the increased oversight is already here. You are talking to an organization that has answered a lot of questions from a lot of different parties. It is very frustrating and time-consuming and not a good use of our resources. On the other hand, I think the notion of increased transparency and accountability to our constituents is healthy. So I think the industry is responding appropriately, although it is too bad that we needed to be prodded. All of my colleagues around the country are as concerned about this issue as anything else. We absolutely want to do the right thing.
Friz: I think that is an excellent point. On the current Form 990, most healthcare organizations disclose charity care and community benefit on part three, which asks for a general statement about program services and accomplishments. It is not a schedule in which hospitals and other healthcare organizations are asked specifically to detail how they meet various factors of the community benefit standard. The IRS has indicated that it is currently working on a significant revision with respect to the Form 990. I think we will probably see some specific questions about how the organization satisfies the community benefit standard on the new form. I think organizations are well advised to focus on that section. It is a great opportunity to provide detail in the 990 about charity care and how the community benefit standard is satisfied.
Lopez: What actions have hospitals taken in response to this call for greater transparency?
Clark: There's been a lot of activity to improve reporting. Rob described how health systems are using part III of the 990. It is a very free-form section in which you can add attachments. As Kerry described, most of the 990s that I have looked at have only a narrative. They have not quantified the value of the benefits. The states are taking it out of a lot of people's hands with mandatory reporting requirements. For example, this is the first calendar year in which reporting is mandated in Illinois. Texas has done that for years. Georgia requires some reporting of charity care. The hazards are obvious: If all of the state agencies require something and the IRS develops a standard, we will have too many different standards.
Lanier: One of the things that the Wheaton regional CEOs have done is to get out in the community and simply meet with business leaders, explaining how a high degree of charity care impacts their businesses as well as our hospitals. We are getting them co-opted early on and educating them. We have got to get outside of our domain and get in the community and enlist the support and involvement of the corporations in devising solutions because they have as large or larger a stake in this than we do.
Lopez: Have any of you modified your actual charity- care policies in the last several years as a result of this additional scrutiny?
Loudermilk: We haven't changed the substance of our policy in many years as far as at the financial criteria to qualify. What we have changed is how we implement the policies. To qualify for indigent-care funds in the state of Georgia, patients must meet the standard for medically indigent, which is 125% of the federal poverty level. In addition to adhering to that definition, Phoebe also has a sliding scale that goes up to 200%. Another aspect of the policy -- which has been in place for many years -- is unique. If healthcare costs are more than 25% of a patient's income -- no matter how high that income is -- the patient also fits into a charity-care category. Sometimes it is a discount, sometimes it is a very extended payment plan, and sometimes it is to say, "This is all you can pay over two years." That is a one-time catastrophic policy, which is how many people who now have high-deductible plans still qualify for charity care.
Skogsbergh: We continue to tweak ours. We do an annual ethics scan at Advocate in which we look at the ethical issues that confront our industry and then we select one or two to do kind of a deep dive on. About three years ago, we said, "The number of uninsured patients is just increasing in magnitude. Let's look at this." With our board's leadership, we revised our charity-care policy. The standard in Chicago at the time was 200% of the federal poverty level level, and we were there. But we went to 400% of federal poverty level.
Lanier: Wheaton is at 300% of the federal poverty level.
Lopez: Is their a danger that health systems will run out of resources to provide charity care to an ever-increasing number of uninsured and underinsured patients? What are the possible solutions?
Loudermilk: There is going to come a point when the healthcare industry, from an individual facility basis, can't continue to meet the demand for charity care. We are going to bump into that wall in a few years, based on growth rates and based on the fact that American corporations are reducing insurance benefits for their employees because it has gotten so expensive. We are taxing those that can pay to subsidize those who can't pay. Let's face it -- what we have done is we have a tax that has been in place in the healthcare industry since Medicare cost reports began in the 1960s. That's where the pressure points are.
Clark: I am aware of one initiative to implement a rate-approving system in a state. There would be a single body that would use a single approach to set rates.Health systems wouldn't negotiate with every payer. There would be an agency that would set rates. They have been talking about this and doing some research around getting Medicare wrapped into the state formula, which is a step closer to a single-payer system.
Loudermilk: From a social perspective, a single-payer system might make a lot of sense to me. The devil would be in the details. We can't let politicians build it for us, which means we need to be out in front in terms of describing how it should be built and what it should look like. There is a huge opportunity with such a system to reduce healthcare costs. If we went to a single-payer system, could I dismantle some departments, say the managed care department, for example? We might be able to take that kind of cost out of the system.
Skogsbergh: Like Kerry, I have been in the business about 25 years. I am more open to a single-payer system today than I have been, and I think it is worthy of evaluating very, very carefully. We want to care for our citizens even better than we do. That is what it is all about. That is why we are all here.
Friz: I think what tends to come up in the debate -- and potentially is at the heart of it also -- is should hospitals be entitled to exemption from federal income tax in this world where you have for-profit healthcare systems? And, if so, is the community benefit standard appropriate for evaluating whether a hospital qualifies for exemption? When you sit back and say, "What would happen, for example, if Congress did scale back or eliminate the tax exemption from the not-for-profit hospital sector?" If you do modify or take away the tax exemption at the federal, state and local level -- a number of state and local standards key off of the federal standards -- the increased costs to tax-exempt hospitals could be tremendous. It could likely deplete significantly the resources needed to conduct their charitable activities. I think this issue should be at the forefront of the national discussion.
Steps you should take to be prepared for additional public scrutiny of the tax-exempt status granted to health systems:
- Download (http://grassley.senate.gov) Senator Grassley's May 25, 2005 letter to 10 health systems in which he asked myriad questions about charity care, billing, conflict of interest, venture and for-profit companies and other issues, and prepare answers to the questions;
- When preparing Form 990, include not only narrative discussion of your community benefit but quantitative information as well;
- Be prepared to show with data the value of the community-benefit programs and charity care you provide versus the value of your tax exemption;
- Embrace every public relations opportunity to show the public how you meet your charitable mission;
- Work with payers in contract negotiations to solve the pricing issue -- to get to cost-based, contracted rates.
Want to learn more about issues surrounding charity care and community benefit?
Contact PricewaterhouseCoopers: Reatha Clark at (678)419-1014 or click here to send her an email or Robert Friz at (267)330-6248 or click here to send him an email. You also can visit PricewaterhouseCoopers on the web at pwc.com/healthcare.
Participants:
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Jack Lanier
Professor of Health Policy
Virginia Commonwealth University School of Medicine
Richmond, VA
Trustee of Wheaton, IL
Franciscan Services, Inc. |
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Kerry Loudermilk
Senior Vice President
CFO Phoebe Putney Health System
Albany, GA |
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Jim Skogsbergh
President and CEO
Advocate Health Care
Oak Brook, IL |
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Reatha Clark
Partner
PricewaterhouseCoopers
Atlanta, GA |
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Robert Friz
Partner
PricewaterhouseCoopers
Philadelphia, PA |
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Fawn Lopez
Publisher
Modern Healthcare
Chicago, IL |
The views expressed by Straight Talk participants are not necessarily the views of Modern Healthcare, Crain Communications Inc. or PricewaterhouseCoopers. Special advertising supplement and educational session provided by PricewaterhouseCoopers.
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