A stubborn recession continues to put economic pressures on hospitals, governments and the public and they coalesce on the topic of how charity care affects tax exemptions. Financially strapped hospitals are treating a higher proportion of uninsured patients while state and local governments hunt for extra revenues to fill their own budget gaps. The precarious situation has led governing bodies to review the tax-exempt status of some hospitals and call for them to provide proof of charity care.
In some cases, the strategy has worked. Last March in Illinois for example, the state Supreme Court denied the property tax exemption of Provena Covenant Medical Center in Champaign-Urbana, deciding that the hospital “was not entitled to charitable or religious exemption from real property taxes.”
A statement from the hospital called the ruling “troubling” and promised that Provena officials would work to “prompt a dialogue among hospitals and elected officials about not only how we define charity care, but also how we better ensure that the people who need financial assistance get it.”
Some provider groups are understandably going on the offensive, such as the Wisconsin Hospital Association, which in mid-October issued a release touting that the state’s hospitals provided $226 million in charity care to 268,568 individuals.
“Even as the economy slowly recovers, job losses, layoffs and loss of health insurance are still realities for many Wisconsin families,” WHA Board chair David Olson said in the release. “Patients that have nowhere to turn find a safe harbor in our community hospitals when medical services are urgently needed.”
Reform a game-changer?
Although some of the most significant tenets of President Obama’s healthcare reform legislation won’t kick in for several years, hospitals are already looking at its potential impact on charity care, said George Whetsell, managing director for Chicago-based Huron Consulting Group.
“As insurance exchanges get started under healthcare reform and mandate that people buy insurance, there won’t be any uninsured, which means a smaller percentage of charity care,” he said. “There is some concern among hospitals that they would lose their tax exempt status because they won’t be handling any charity cases.”
If hospitals are having difficulty quantifying the amount of charity care they do, it could be because the term itself is subjectively defined, Whetsell said.
“Some hospitals will take write-off bad debts as charity, but if it is defined in too much detail, it could be awkward,” he said. “We have worked with hospitals that have a charity policy for patients who don’t have insurance or who can’t meet their deductibles. Some have a foundation that sets aside money to provide care. But not getting paid by itself is not charity and neither are the discounts for Medicare and Medicaid.”
As it stands, the bulk of charity care is being done in mostly urban “safety net” hospitals, primarily used by indigent and uninsured patients. Because of this disproportionate commitment, they have more financial challenges and “basically have no income to tax,” Whetsell said.
Conversely, suburban hospitals have less of a charity load and tend to be financially stronger, which has led some state officials to consider charging those hospitals “usage fees” for basic services in order to redistribute funds to poorer urban hospitals.
“If the state is truly trying to do the right thing and provide funding for the uninsured and underinsured and there are hospitals that are making money while safety net hospitals are hanging on by a thread, they might get the idea to take some of the money from the profitable hospitals and reallocate it to the hospitals that serve the highest percentage of the disadvantaged,” Whetsell said.
S&P prognosis: Uncertain
In gauging the fiscal health of U.S. hospitals, a new Standard & Poor’s Rating Services report has determined that the overall healthcare economic environment has improved, but that “operations have not returned to 2006 and 2007 levels.” Currently, S&P analysts are “uncertain if operating margins will continue to grow or remain stable at current levels as small hospitals look for opportunities to increase volumes and cut costs amid continued soft patient volumes and higher unemployment.”
Moreover, as the longer-term outlook is tied to national healthcare reform, the S&P report is unsure about whether hospitals “can cope with the unfolding impact of the healthcare reform law in addition to the ongoing economic pressures.” Although the reform law contains several provisions that could be favorable for small and rural hospitals and will likely increase the number of insured patients, “we also believe small hospitals will experience elevated costs from implementing electronic health records and reporting quality data as well as possible lower payments from Medicare and Medicaid.”
At an early October teleconference, S&P associate director Ken Gacka said small not-for-profit hospital bond ratings have skewed toward speculative grade and that rating trends have been “volatile…because of less financial flexibility to absorb any added challenges in times of stress.” This has been apparent over the past three years, he said, as hospitals have been strained by the recession.
Bond rating downgrade-to-upgrade ratios tell the story, he said, as this year’s nearly 6:1 ratio is far higher than three years ago, when the ratio was less than 3:1. Further, in three years, S&P downgraded 23 hospitals from investment grade to speculative grade and 30 more within the speculative category.
It should be noted, however, that “a considerable portion of this occurred during the peak of recession,” Gacka said. “While the downgrades continue, we have observed some stability and the ratio is better.”