Sunday, January 22, 2017

Non-Profit for Profit:
Lessons in modern hospital finance

Last week Modern Healthcare reported a legal challenge from a state government to a hospital system's non-profit property tax status.

The government's challenge raises a question about the profit and non-profit associations common in today's health systems. Are the hospitals in these health systems getting further and further away from the charity care responsibility their own tax exempt status is based upon?

When a non-profit hospital becomes a health system, it alligns with for-profit surgery, diagnostic, treatment, specialty and provider practices. Sometimes the health system owns the land and the buildings these centers and offices are built upon. The health system uses the hospital's assets to gain loyalty and referral relationships which keep the hospital running.

Occasionally services provided by the hospital to insured patients are now provided by a for-profit outpatient setting on hospital grounds: the new adjacent office tower. Or those services are now provided to insured patients by the new for-profit joint venture surgi-center just a few miles away.  In these settings all, or a large portion, of the site and all the equipment are purchased from Hospital revenues by the Health System.

Hospitals watch as patients are siphoned off;  both inpatient and outpatient volume and revenue once necessary to fund the hospital itself are now a part of a for-profit outpatient business. A business whose profits are shared by members of the health system.

Doing this raises the overall cost of patient care in the hospital, since fewer patients in the hospital drive up the per-patient hospital cost necessary to keep the hospital open.

Siphoning the insured volume and driving hospital per-patient costs up makes expensive and high-profit clinic diagnostics and care look cheaper by comparison.

Think of it this way: Doing one more surgery in a hospital doesn't add a penny of rent, equipment and in many cases staff cost, because most hospital surgeries have capacity. But the financial calculations load that surgical case with all the direct and indirect expenses of the hospital. There is no incremental income calculation. The actual cost of that new surgery in the hospital is much cheaper than moving to the surgi-center, where the entire new building and new equipment leases, and medical leadership salaries, burden that cost, along with a higher ratio of provider to dedicated staff. If that patient has a complication, they must then be transferred back to the hospital. But those expenses are not always included in the surgi-center's cost calculations.

Hospitals are very expensive to run, and for-profit outpatient clinics are  viable alternatives. But their cost structure benefits in part because they calculate their expenses differently, and they have no obligation to provide indigent care. By siphoning off paying patients and leaving a higher mix of indigent care to the hospital, the cost of the hospital becomes prohibitive, almost as a self-fulfilling prophecy, even though it is actually the location that can generate the greatest economies of scale,  the lowest costs, and the safest medical care.

Leveraging the size, experience and resources of the hospital staff to provide outpatient services, essentially generating huge economies of scale for the health system,  is an inexpensive way to serve many of these outpatients. But it isn't easy, nor useful in a for-profit world that must move the insured outpatient  away from the non-profit hospital setting in order to reap profits from the revenue stream.

But profit doesn't magically appear just by a neat re-sorting of insured patients into what is, when calculated accurately,  actually a higher-cost  free-standing setting. One has to make the hospital look less profitable, and the outpatient setting more profitable.

And that brings up the issue of  what, for accounting purposes, today's Health System calls "charity."

Are unpaid bills / discounted bills charity?

Health systems have a method of billing which includes providing insurors with deep discounts to win their clients' business. And that means that an un-insured patient can be billed two-to-three hundred percent more for a stay than a large insuror. But what is the actual cost to the hospital? It is less than any private insurance company's rates.

Charging patients with no insurance several times what an insurance company pays is an attractive formula for today's health system. This price-setting practice gives the system a platform to offer huge discounts to the insurance company in order to win their business: thousands of patients in the community. Insurance company executives drive their sales staff relentlessly to bargain deep cuts. And now everyone wins, right?

For example, let's say the private-pay patient's total bill was $200,000, but the Blue Cross rate would have been $65,000. And the Medicare rate, the lowest of all rates, would have been $50,000. Most all hospitals engineer their actual expenses around the Medicare rate.

Let's say that the patient and local charities, after appealing on local news networks,  are able to cover $65,000. The hospital actually covers all its expenses, and adds $15,000 to its own bottom line.

But it doesn't end there. The difference between the $65,000 paid and the $200,000 billed is accounted and reported as a loss, and attributed to indigent charity: That's $135,000 of charity care.

In truth, all the hospital's expenses for that patient were met with the $65,000 paid, and a net margin of $15,000 was accrued. But that reported "loss" is entirely deducted from the actual reported profit of the hospital. And so the hospital becomes "non-profit" even while achieving $15,000 "profit" and allowing itself to deduct another $150,000 on paper from its actual profit. Where does that go? It may help cover bad debt, as the Hospital fights with their insurors, who, like the government, redefines the expenses they will cover month-to-month.

This is not the same as serving an indigent patient with no ability to pay anything. But the financial calculations make both look identical. And in this way, inflates the picture of true charity care provided by the hospital.

We expect a lot from hospitals and health systems. Many of their patients cannot pay anything for their care and the hospital does eat those costs. Medicare reimbursement and non-profit status both require a specific level of charity care.

The current pricing and accounting practices of today's hospital may overstate the amount of true indigent care that hospital actually provides.

Hospitals do perform miracles. Real miracles.  Every day.  They perform  miracles of Spirit,  of compassion,  dedication,  healing.   And accounting.

Hospitals may have adopted pricing practices from a long honored tradition of car dealerships, and an older tradition of horse traders.

But every day, they get it right, also.

And they all have a mission. For that alone, the dialogue needs to open up. The first step is transparency.

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