Health Reform WK-EDGE Charity care: always in flux, but necessary despite Medicaid expansion
Friday, July 15, 2016

Charity care: always in flux, but necessary despite Medicaid expansion

By Kayla R. Bryant, J.D.

Hospitals expect to provide charity care and consider the write-offs a part of doing business. One of the aims of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) was to ensure better access to health care by giving patients coverage so that they could afford the care they needed. This would, in turn, change the business of providing care, resulting in the decrease of charity care—specifically, due to Medicaid expansion. This Strategic Perspective explores the effect of Medicaid on charity care, diving into the differences between Medicaid expansion and non-expansion states.

Charity Care: Required by Law for Tax Exemption

Tax-exempt hospitals were originally required to provide charity care within their financial ability under IRS Revenue Ruling 56-185. Hospitals were concerned that the establishment of Medicare and Medicaid would decrease the demand for charity care and impede their ability to comply with the IRS mandate. In response, the IRS established the “community benefits” standard through Revenue Ruling 69-545, which recognized the provision of charity care as a benefit to the community as a whole. Hospitals would remain tax exempt to the extent they provided community benefits. This ruling stood as the only standard until sec. 9007 of the ACA required that nonprofit hospitals conduct a community health needs assessment, establish a written financial assistance policy, establish an emergency care policy, comply with limits on charges, and refrain from various “extraordinary collection actions.”

In an interview with Wolters Kluwer, Travis Jackson, principal at Polsinelli, P.C., stated that the ACA turned what hospitals were already doing into a requirement for tax exemption by creating Internal Revenue Code section 501(r). He also noted that hospital charity care programs became much more transparent, and assistance became much easier to obtain. Hospitals are now required to create and publicize their financial assistance policy (FAP) and change how charity care and unpaid bill collection coincide (see Protect non-profit hospital status by ensuring financial assistance compliance, May 18, 2016).

Patient Reliance on Charity Care

Charity care is prevalent, but the numbers are not always in agreement. The American Hospital Association (AHA) publishes an annual report of uncompensated care costs incurred by hospitals participating in the AHA’s Annual Survey of Hospitals. The numbers represent both charity care (for which the hospital did not anticipate receiving payment due to the patient’s inability to pay) and bad debt (representing payments the hospital expected to receive, but did not). When the survey began in 1990, 5370 hospitals reported $12.1 billion in uncompensated care costs, comprising 6 percent of total expenses. The AHA’s 2016 report indicated that hospitals have provided over $502 billion worth of uncompensated care to patients since 2000. The number peaked in 2013 at $46.4 billion over 4974 hospitals, and dropped to $42.8 billion (4926 hospitals) in 2014. The 2014 figures represented 5.3 percent of hospital expenses, the lowest percentage ever observed by the survey.

Hospital Requirements and Funding

When reporting to the IRS, tax-exempt hospitals are required to submit Schedule H, which contains specific information about a hospital’s financial assistance policy, billing, emergency medical care policy, and community health needs assessments. Under this form, financial assistance is only considered to be care that the hospital intended to provide as uncompensated or discounted care, not bad debt or payments from Medicare and Medicaid that fail to cover the cost of care. Although shortfalls can be reported as a community benefit, the IRS’ extensive questions on free or discounted care seem to indicate that this type of care is seen as a more significant benefit. In addition, the questions asked in Schedule H about a hospital’s financial policy indicate that the IRS is focused program efficiency and transparency, because they question a hospital’s efforts to ensure that charity care is widely understood and utilized by patients who need it. The inquiries include: how a hospital determines eligibility, which factors the hospital considers, how an individual can apply, and steps the hospital has taken to ensure that the policy is clearly visible to patients.

Where does the money come from? In 2010, the Urban Institute attempted to predict the effects of the ACA on charity care. The report relied on estimates of uncompensated care at $57.4 billion in 2009, $21 billion higher than the AHA’s figures. About $7.2 billion of the funding was believed to come from Medicare disproportionate share hospital (DSH) payments and indirect medical education payments, and about $10.9 billion came from some Medicaid payments intended to support uncompensated care and offset the low rate of Medicaid reimbursement. Overall, public funding was estimated to cover the vast majority of uncompensated care as many of the hospitals providing care to the uninsured had few private payers on which to shift costs.

Health reform predictions. The Urban Institute used the Senate’s predictions that through health reform, the number of uninsured would fall from 49.1 million in 2009 to 34 million in 2014 and 23 million in 2019. The House was even more hopeful, predicting 23 million in 2014 and 18 million in 2019. Both expected the cost of care to rise per uninsured person, but the significant drop in the number of people was expected to drop uncompensated care costs from 62.1 billion (yet another estimate) in 2009 to $46.6 billion (Senate) or $36.5 billion (House) in 2019. Without health reform, the number of uninsured was expected to grow by 7.9 million by 2019 in the best care scenario, resulting in a 71.7 percent increase in uncompensated care in 2019 compared to 2009. In the worst case scenario, the number of uninsured was expected to grow by 16.7 million, with a 127.8 percent increase in uncompensated care.

Expanded Medicaid Coverage

The ACA’s original intention was to require every state to expand Medicaid eligibility to include nonelderly adults with incomes up to 133 percent of the federal poverty level (FPL). This was expected to drastically reduce the number of uninsured, therefore reducing the amount of charity care required. When the Supreme Court’s ruling on the matter forced the government to make Medicaid expansion optional, nonprofit and safety net hospitals in different states found themselves on unequal footing depending on the state’s decision to expand coverage (see Safety-net hospitals struggling with changing health care landscape, May 6, 2015).

Economic impact. As of March 23, 2015, 28 states and Washington, D.C. had chosen to expand their Medicaid programs, taking advantage of the 100 percent federal matching rate available until 2016. The HHS Assistant Secretary for Planning and Evaluation (ASPE) noted that Medicaid was the second-largest program that reduced the rate of Americans in extreme poverty, considered to be those under 50 percent FPL, and the third largest poverty-reducing program overall. The agency touted the economic benefits of expansion to states by pointing to research indicating that Medicaid expansion is financially advantageous, and emphasizing that states choosing not to expand “would forego an estimated $88 billion in federal funding.” The White House stated that a chunk of this funding would compensate providers for care that previously would have been uncompensated, therefore reducing the costs of charity care borne by governments, those with private insurance through fee shifting, and providers. The Administration also tried to sway states by selling the possible economic benefits by highlighting Kentucky’s post-expansion study, which estimated an economic contribution of $30.1 billion over seven years, job growth in the thousands, and a net positive impact on the state budget of slightly under a billion dollars.

ASPE reports in both 2014 and 2015 suggested that Medicaid expansion caused uninsured and self-pay admissions to fall, as did the number of emergency visits. In 2014, uncompensated care costs for that year were expected to fall 16 percent, saving $5.7 billion. In 2015, the analysis of the previous year raised those estimates to 21 percent and $7.4 billion. The ASPE also pointed out that Medicaid expansion states saw a drop in uncompensated care in 2014 of $5 billion, compared to a drop of $2.4 billion in nonexpansion states after the ACA’s implementation. These changes were even felt by for-profit hospital groups in expansion states, with several large groups reporting roughly a 30 percent decline in the amount of uninsured admissions. In 2014, little data was available on the effects insurance expansion had on uncompensated care and bad debt, but early indications showed that some for-profit hospitals were seeing declines in 2014. Although nonexpansion states saw less of a drop in uncompensated care, the ASPE did point out that a large number of newly-covered Medicaid patients were expected to have a smaller impact on uncompensated care costs due to the lower payment rates compared to those obtaining marketplace coverage.

Jackson pointed out that while Medicaid expansion reduced uncompensated care in those states, it also increased demand for services. A larger number of patients receiving preventive care may reduce the need for expensive services down the line. Yet, hospitals may not be prepared to offer services to a large number of new patients and the increased operating costs, which would place a burden on hospitals and even state Medicaid programs. He stated that safety-net hospitals are still adjusting to this additional demand, increased regulatory scrutiny, and strategic partnerships between payors and providers that have formed as a result of the ACA.

DSH payment and changes. Hospitals were not permitted to simply enjoy the windfall created by receiving at least some reimbursement for care that would have otherwise been provided without any expectation of payment, even at the low rates Medicaid pays providers. The Medicare DSH payment is provided for hospitals that treat a larger number of patients covered by government health program. Section 3133 of the ACA established changes to the Medicare DSH payment and the additional payments for uncompensated care. The new formula reduced the DSH payment amount to 25 percent of the amount that would have been paid under the old formula. The remaining 75 percent was made available for uncompensated care, after the amount is reduced according to changes in percentages of uninsured. A DSH hospital would receive uncompensated care payments based on the share of Medicaid and Medicare Supplemental Security Insurance days. These new calculations were to further an annual aggregate reduction in federal DSH funding from 2014 to 2020, starting with a $500 million reduction and ending at a $3 billion reduction. Medicaid DSH payments also were supposed to be subject to reductions, but these were delayed from 2014 to fiscal year (FY) 2018. A Kaiser Family Foundation (KFF) report theorized that states implementing Medicaid expansion would see larger reductions in DSH payments, but the expected new patient revenues could offset these reductions.

Ascensions Health’s experience. In 2015, Ascension Health, a delivery subsidiary of Ascension, the largest nonprofit health system in the country, reported its experience following ACA implementation. Ascension provided nearly $1.8 billion in care to impoverished citizens and community benefit programs in 2014. Ascension hospitals in expansion states saw larger increases in Medicaid discharges, along with decreases in uninsured and self-pay volume between 2013 and 2014. The difference in uninsured/self-pay volumes was stark: 32.3 percent in expansion states, 4.4 percent in non-expansion. Medicaid revenue in expansion states increased 8.2 percent, while self-pay revenue decreased 63.2 percent. At the same time, nonexpansion states saw a 9.4 percent decline in Medicaid revenue. Numbers also indicated that hospitals in expansion states saw more newly covered Medicaid patients on an outpatient basis, compared to giving inpatient care. Although charity care costs decreased 40.1 percent in expansion states (6.2 percent in nonexpansion), hospitals felt the Medicaid shortfall significantly in expansion states. Medicaid reimbursement rates do not always cover the cost of treating beneficiaries, and in expansion states, the shortfalls increased 31.9 percent.

The New Charity Care

The Center for Health Care Strategies (CHCS) observed that about 7.6 million uninsured adults that would qualify for expanded Medicaid live in nonexpansion states. Hospitals, clinics, and other charity care programs must still find a way to meet the needs of these patients as well as compensate for low reimbursement rates from some programs. While DSH cuts hurt hospitals, other programs that typically rely on private donors and government grants have watched their funding sources become scarcer as well. CHCS believes that the ACA and Medicaid expansion have given donors, legislators, and voters the impression that charity care is no longer necessary, resulting in cuts that make it impossible for care to be provided to the uninsured. It also noted that health systems that previously provided significant charity care to patients may see those patients enrolled in Medicaid or a marketplace plan with networks that do not include that health system, resulting in loss of potential revenue from those newly insured patients who are forced to seek care elsewhere.

As a result of these changes, some charity care programs have begun to reject patients who qualify for Medicaid or marketplace plans but have chosen not to enroll. This directs limited funding toward patients who are truly unable to obtain coverage. Others have started assisting patients with enrollment, therefore qualifying for other ACA funding. Jackson reiterated that the ACA simply requires that a hospital have a charity care program, but does not mandate how much charity care hospitals provide. He thinks that if Medicaid expansion reduces the amount of charity care provided, Congress could possibly change the tax exemption requirements for hospitals but believed it would be in the distant future.

340B and Charity Care

Charity care requirements and the changing health care coverage landscape also impact other programs. The 340B Drug Pricing Program was enacted by sec. 340B of the Public Health Service Act (PHS Act) to ensure that the uninsured and underinsured receive the medications they need without increasing the strain on funding. Eligible organizations, such as DSH hospitals, children’s hospitals, and other providers that typically serve vulnerable patients or are the main provider in a geographic location may register to participate. Once enrolled, these providers receive covered outpatient drugs from manufacturers at significant discounts. These drugs can be given to that provider’s patients, but Medicaid drugs that are subject to rebates through a separate program can only be given under certain circumstances.

An Avalere Health analysis revealed that although 340B hospitals are supposed to be the ones providing access to necessary care for those in need, 64 percent of 340B hospitals provide less charity care than the national average. The national average also reflects charity care provided by for-profit hospitals. Because this program was created to assist the uninsured, 340B hospitals should be providing more charity care than the national average. In addition, 37 percent of DSH hospitals spend less than 1 percent of total patient costs on charity care. Many hospitals are simply not pulling their weight as a large majority of charity care at 340B DSH hospitals overall (80 percent) is provided by 24 percent of hospitals. This information coincided with a Government Accountability Office (GAO) report, which observed similar trends (see Unintended consequences: Does discount affect drug utilization?, July 8, 2015).

Avalere Health pointed to program eligibility criteria as the source of the problem. Currently, hospitals are more likely to be eligible when their uninsured patients enroll in Medicaid because eligibility can be determined by the DSH percentage, which includes the number of Medicaid patients treated on an inpatient basis. As noted above, care that is provided to patients that is covered by Medicaid is not considered true charity care, even when the reimbursement is insufficient to cover the cost of services. Avalere stated that hospitals may not have a significant amount of vulnerable patients and may not provide a large amount of charity care, but still qualify for 340B. In 2005, 583 hospitals participated in 340B, but this number more than doubled by 2010 to reach 1,365, with a significant increase to 2,140 by 2014. With the increase comes more scrutiny and reviews indicate some noncompliance. The Alliance for Integrity and Reform of 340B found that 340B hospitals were not meeting the ACA’s tax exemption requirements. According to the 2013 analysis, only 37 percent of hospitals reduced the charges for those who were eligible for charity care, and only 60 percent of the hospitals made it a point to notify patients of their potential eligibility before seeking payments.


In Jackson’s opinion, hospitals will continue to “encounter indigent patients with high deductible plans or who need services that aren’t covered.”. Although the ACA resulted in millions of previously uninsured citizens gaining care, including those with low incomes, high out-of-pocket costs are an increasing concern. Hospitals will receive payment for newly covered Medicaid enrollees, but must shift their business strategies due to the low reimbursement rates, the increased number of patients, and the constantly changing landscape of health care delivery. The ACA ensures that regardless of these and other variables, charity care will remain a priority for all hospitals that value their tax exemption status.

Attorneys: Travis Jackson (Polsinelli P.C.)

Companies: Center for Health Care Strategies, Inc.; Avalere Health

MainStory: StrategicPerspectives NewsFeed 340BNews AccessNews DrugNews EnrollmentNews InpatientFacilityNews MedicaidExpansionNews MedicarePartBNews ProviderPaymentNews TaxExemptionNews

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