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
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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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