PODCAST: Hospital Charity Care Explained

BY ERIC BRICKER MD

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Capital Sources for Hospitals

Understanding the Liquidity Crunch -with- Publisher’s Interview

By Calvin W. Weise; MBA, CMA, CPA

www.HealthcareFinancials.com

HO-JFMS-CD-ROMHospital are struggling in the current financial crisis, and like most of us, liquidity is scarce. In general, hospitals have three sources of capital: equity from earnings, equity from donations, and long-term debt.

 

 

Equity from Earnings

Earnings generate cash, and a portion of that cash is available to fund capital investments. Besides funding capital investments, cash generated from earnings is used to fund working capital. As operations grow, more working capital is required to fund the difference between the operating receivables and operating payables since days of revenue in receivables tend to be a good deal higher than days of expense in payables. Additionally, cash on hand should increase as operations grow so that days of cash remain constant or increase. Once working capital has been adequately funded, any remaining cash generated from earnings is available to invest in capital.

Donations

Most not-for-profit hospitals engage in active fundraising to generate donations. Donations are a good source of capital in certain markets. Often, fundraising initiatives are less useful than they appear due to the costs expended in the fundraising activities. It is important to ensure that all the costs incurred in fundraising activities are properly attributed.

Long-Term Debt

Borrowing long-term debt has been an important source of capital for hospitals and will continue to be. Debt is particularly attractive due to the low cost associated with borrowing on a tax-exempt basis. Long-term debt, borrowed on a tax-exempt basis, is probably the lowest cost form of capital available to hospitals. Tax-exempt borrowing is fairly complex due to the tax regulations affecting it. Because of its complexity, the costs associated with these transactions are quite high, making it less practical for small borrowings.

Assessment

Tax-exempt borrowing transactions require many lawyers and high-priced investment bankers. Credit rating agencies and credit enhancers are also typically involved. Accessing the tax-exempt markets requires a good bit of sophistication and expertise. Despite these requirements, this capital is highly attractive to hospitals and should be used whenever possible.

Interview

Read: Dr. David Edward Marcinko’s recent interview on the current status of hospitals.

Link [unedited version]: https://healthcarefinancials.wordpress.com/2009/04/01/medical-news-of-arkansas-interviews-dr-marcinko/?preview=true&preview_id=9094&preview_nonce=d9039cf076

Link [edited version]: http://www.arkansasmedicalnews.com/news.php?viewStory=738dem2

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. What is the financial status of your hospital, today? How has the cash flow crisis affected it; and your practice? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

 

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About the Hospital Debt Justice Project

Aggressive Debt Collectors Take to the Web

By Staff Reportersradar2

Thousands of patients face crippling debt to hospitals and healthcare systems across the country; even though they may have qualified for free care.

www.HealthcareFinancials.com

Yale-New Haven Health System

Now, the Yale-New Haven Health System, Yale-New Haven Hospital and Bridgeport Hospitals are pursuing aggressive debt-collection practices—including liens, wage garnishments and foreclosures—even though they have millions of dollars set aside for free care for patients who can’t pay. Others have colossal endowments as well, and often pay their CEOs handsomely.

Assessment

But, according to their website, the Hospital Debt Justice Project is only fighting for fair treatment and accountability from our community hospitals.

Link: http://www.hospitaldebtjustice.org

Industry Indignation Index: 85

Conclusion

Your thoughts and comments on this Medical Executive-Post are appreciated. Isn’t it a charity hospital standard that not-for-profits typically charge the poor and indigent up to four times the UCR of insured patients? Your experiences are welcomed. 

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Non-Profit Hospital Accountability

Raising the Ethical Bar

Staff Reportersred-cross3

According to the Wall Street Journal, December 18 2008, Senator Charles Grassley – ranking Republican on the Senate Finance Committee – is weighing proposing legislation in early 2009 that would hold nonprofit hospitals more accountable for the billions of dollars in annual tax exemptions they enjoy.

Minimal Levels of Care Sought

The legislation would require non-profit hospitals to spend a minimum amount on charity care, and set curbs on executive compensation and conflicts of interest. Disclosure requirements would also be increased.

Assessment

Under the new legislation, penalties would be imposed on nonprofit hospitals that fail to meet the new requirements, while penalties could escalate from taxes and fines to stripping a hospital of its federal-tax exemption if it continues to misbehave.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Charity Care Law Violations

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Collections Agency Sued for Alleged Violations

[By Dr. David Edward Marcinko; MBA, CMP™]

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According to Ann Zieger of Fierce HealthFinance on January 7, 2009, a Washington state healthcare collection agency is being sued by a law firm for allegedly violating state charity care laws. This is a case that could become a class action if the firm gets its way.

The Case Argument

The case hinges on a Washington measure that, among other things, defines individuals and families with annual incomes below 100 percent of the federal poverty level as officially eligible for hospital charity care with no charges.

The Law Firm

Seattle-based Phillips Law Group has filed a lawsuit claiming that healthcare collection firm Audit & Adjustment Company has been misleading patients by telling them they owe the full charges on hospital billing statements.

The Argument

The suit argues that the collections firm is required to tell patients that they might potentially be entitled to charity care that would cut or eliminate their hospital debts. It also alleges that this behavior violates not only Washington’s charity care law, but also the Consumer Protection Act [CPA] and the Fair Debt Collection Practices Act [FDCPA].

The Remedy

The attorneys seeks to stop the agency from attempting to collect from charity care-eligible patients, as well as to establish procedures to allow patients to qualify for charity care, and let patients from which it has collected in the past four years become eligible for reductions in their debt.

Related Cases

In an unrelated matter, a Missouri hospital based in St. Joseph, owned by Heartland Health, Inc has been sued over allegations that it too allowed its captive collections agency to collect without letting patient-debtors know the agency was owned by the same company as the hospital. Kansas City Attorney Derek Potts filed suit against the hospital, Heartland Regional Medical Center, on behalf of three clients, and is asking the court for class action status. The collection agency, Northwest Financial Services, is owned by Midwestern Health Management, which is also owned by Heartland. 

And, here in Atlanta, charitable entity Grady Memorial Hospital, the region’s only a Level I trauma center, just received a $200 million grant from a private foundation with ties to Coca-Cola. It was the largest gift on record to a single public hospital, according to the Center on Philanthropy at Indiana University. Grady has been struggling financially for some time, now.

Assessment

Considering the financial mismanagement and extreme revenue seeking tactics of some not-for-profit hospitals today – much like Mrs. Jellyby the misguided do-gooder in Charles Dickens’s “Bleak House” – some hospitals practice a form of “telescopic philanthropy” [first termed by Richard Oastler; in 1727]. As you may recall, Jellby neglected her chaotic family to devote time to improving conditions in distant Borrioboola-Gha, Africa. Conclusion

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Non-Profit Hospitals Seeking Financing

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Association of Debt Financing with Not-For-Profit Hospitals

[By Dr. David Edward Marcinko; MBA, CMP™]

US not-for-profit hospitals undertook unprecedented amounts of debt in the mid-to-late 1990s. This happened because sparse corporate finance theory – and the modicum of economic literature on hospital financing at the time – suggested that debt constrained hospitals’ capacity to deliver uncompensated care.

Little Research

Yet, few health economists empirically evaluated the potential association of debt financing with uncompensated medical care. Of the first perhaps – in our space – was Stephen A. Magnus; PhD, MS Assistant Professor, Department of Health Policy and Management, University of Kansas School of Medicine; Dean G. Smith, PhD, Professor and Chair, Department of Health Management and Policy, University of Michigan School of Public Health; and John R.C. Wheeler, PhD, Professor, Department of Health Management and Policy, University of Michigan School of Public Health [personal communication].

Multi-State Statistical Analysis

In one of the first statistical analyses of a multi-state sample of audited hospital financial statements in 1997 – and ultimately published in the Journal of Health Care Finance in 2004 – the researchers found that hospital debt levels predict higher levels of uncompensated care.

More Tax-Exempt Debt Issued

As further studies yielded similar results over time; hospital boards, policy makers and regulators concerned with the provision of uncompensated care encouraged hospitals to issue more debt. This encouragement was provided through explicit flexibility, such as removing requirements for hospitals to issue tax-exempt bonds through state finance authorities and/or removing the project financing constraint. Likewise, hospital CFOs and physician-executives who managed their organizations’ financial risk, benefited from a realization that optimizing the sources of financing did not impede mission-related objectives.

Assessment of Temporal Trade-Offs

Relationships between hospital operations, including uncompensated care, and capital structure represent a fruitful area for future investigations. A key issue to explore is the possibility of inter-temporal trade-offs. Higher levels of debt may initially help to fund public services like uncompensated medical care, but debt repayment eventually could limit a hospital’s ability to provide core community benefits.

Bankruptcies

Up until the recent financial meltdown and credit market freeze, even current studies still seemed to offer no evidence to support concerns that debt had a negative impact on uncompensated care. However, hospitals filing bankruptcy in the fourth quarter, of 2008 included: a two-hospital system in Honolulu; one in Pontiac, MI; Trinity Hospital in Erin, Tennessee; Century City Doctors Hospital in Beverly Hills, Lincoln Park Hospital in Chicago, and four hospital system Hospital Partners of America, in Charlotte. 

Assessment

On the other hand, research results simply may have reflected the unusual economic and stock-market conditions prevailing in the mid 1990s; that are certainly not present today.

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Conclusion

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Charity Care versus Managed Care

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Physician Participation in Managed Care Levels

By Staff Writers

According to Robert James Cimasi of Health Capital Consultants LLC, in St. Louis, Researchers at the Center for Analyzing Health System Change [CAHSC] completed a study several years ago on the effect of competition and managed care on charity medical care, provided by physicians, that further illustrates the effects of dysfunctional competition in healthcare.

The Study

The study was based on data on the amount of charity care provided by over 10,000 physicians between 1996 and 1997.

Definition of Charity Care

According to www.HealthDictionarySeries.com and others, charity medical care was defined as healthcare provided without cost or at a reduced cost because of the inability of the patient to pay for the cost of the service.

Inverse Relationship Findings

An inverse relationship was found between the amount of physician revenue derived from managed care and the amount of time spent providing charity care. Specifically, physicians who received 85% or more of their income from managed care provided only half of the hours of charity care provided by physicians who received less than 85% of their revenue from managed care contracts.

Also, physicians practicing in areas with high managed care penetration provided less charity care. Further, a relationship was observed between increased practice size and diminished time spent on charity care.

Assessment

The reporter of the study, a contributor to www.HealthcareFinancials.com and others, attributed these practice differences to increasing financial pressures faced by physicians because of increased competition and their reduced ability to use “cost shifting” to shift excess charges from paying patients to cover costs for those unable to pay. Under the scenario they describe, increasing numbers of the uninsured and the prevalence of managed care plans will continue to shift costs back to the government and the public for indigent care unless systemic changes are made to incorporate provisions for charity care into an increasingly for-profit healthcare system.

References: Cunningham, P. J., et al. “Managed care and physicians’ provision of charity care.” JAMA 281 (1999): 1087.

Conclusion

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