“Charity” Care within Catholic Hospitals – Who Pays for It and Why?

One of the topics Catholic hospital execs love to talk about is “charity” care.  They constantly remind people that as mission-driven organizations, Catholic hospitals provide lots of charity care.  So it’s worth looking into how much charity care a Catholic institution like PeaceHealth, one of the largest hospital systems operating here in the Pacific Northwest, provides compared to other healthcare providers.  It’s also meaningful to look at financial incentives that drive hospitals to provide charity care.

According to the Washington State Department of Health, more than a billion dollars in charity care charges were reported statewide in 2010.  Harborview in Seattle (which is a public hospital) reported the most charity care with $186 million, more than triple the next largest amount of $62 million, reported by Providence Regional Medical Center in Everett.  All told, the total amount of charity care reported was 2.62% of total revenue for the reporting hospitals.

As a percent of total revenue, statewide charity care charges were 3 percent for rural hospitals, 3 percent for suburban, and 2.6% for urban hospitals.  Uncompensated care, which includes bad debt and charity care, totaled 5.8% of hospital expenses in 2010.

For 2012, PeaceHealth reported a “profit” (revenue minus expenses) of $112 million on revenue of $2.3 billion.  The corporation also reported charity care of $79 million, and, as a side note, a charge of $77 million because of changes in the valuation of interest rate swaps, which is a form of financial derivative used to hedge interest rate risk.  (I find it interesting that an expense related to financial derivatives is almost as great as the expense for charity care.)  The percentage of charity care PeaceHealth reported as a percentage of revenue was 3.43%.

Also worth noting is that in 2012, the sources of revenue to PeaceHealth were 34% Medicare, 9% Medicaid, 49% Commercial and other, and 8% Private Pay.  As a qualifying hospital nonprofit, PeaceHealth pays no federal or state income taxes.

A little known facet of the whole topic of charity care is that there is a charity care requirement under IRS rules for nonprofit hospitals.   In the post World War II era, when the federal government was investing in infrastructure, it offered cities that wanted hospitals a subsidy.  Institutions that wanted to qualify for the subsidy had to have nonprofit tax status and a promise to provide “community benefit,” which the IRS originally defined as 3% of operating revenue to take care of patients who couldn’t pay.

What this means of course is that all nonprofit hospitals are incented to provide “community benefit” in order to qualify for nonprofit status under IRS rules.  According to a recent study by the IRS of 487 hospitals, the mean (average) community benefit as a percentage of an individual hospital’s total revenues was 9%, and the median was 5%.  Uncompensated care accounted for 56% of the total community benefit expenditures reported by the respondents, which means that the average uncompensated care reported for the 487 hospitals in the survey was approximately 5%.  (Other types of community benefit can include community education programs, medical education and training, and medical research.)

Which brings us to an important question:  If the average amount of uncompensated care provided by hospitals in a 487-hospital study conducted by the IRS was approximately 5%, and PeaceHealth provides 5.6% in uncompensated care, including 3.7% of charity care (the rest is typically “bad debt”), where is the big “charity care” advantage for Catholic hospitals compared to other nonprofit hospitals?

It’s also important to understand who pays for the charity care PeaceHealth and other Catholic hospital systems provide.  As mentioned previously, 43% of PeaceHealth revenues came from Medicare and Medicaid, with the rest coming from “Commercial and other” and Private Pay patients.  Because PeaceHealth reported a net “”profit” of $122 million, the charity care which PeaceHealth provides is funded by its sources of revenue, which ultimately means the people who fund Medicare and Medicaid (we the taxpayers), the people who fund direct tax subsidies from hospital taxing districts (again taxpayers), and the people and organizations – including large employers (which includes the State of Washington) – that pay privately.  Of course, private pay patients include many self-employed people, including the father who wrote this letter.

Given our current structure for delivering health care, charity care is a positive thing.  But it’s important for people to recognize that nonprofit hospitals are obligated to provide charity care under IRS rules in order to retain their nonprofit status and that the sources of revenue used to fund charity care in Catholic and non-Catholic hospitals come from all of us.

Here in Washington State, where the percentage of self-identified Catholics is 16%, the vast majority of people who are funding care delivered through Catholic-operated and owned hospitals are nonCatholics.  And of course, it’s important to remember that even Catholics don’t agree with with their bishops when it comes to social policy/health issues including abortion, contraception, and gay marriage.

Policy makers and state leaders would do well to keep all of this in mind as they consider how to protect Washington patients and taxpayers from the extreme positions staked out by unelected religious leaders who want to impose their will on all of us through their self-proclaimed “moral authority” and the Ethical and Religious Directives for Catholic Health Care which all Catholic health care institutions are required to follow.

 

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One thought on ““Charity” Care within Catholic Hospitals – Who Pays for It and Why?

  1. Keith Comess

    Additionally, so-called “non-profit” hospitals actually do profit by their tax-exempt status. PH (along with other such institutions) likely realizes a substantial revenue enhancement as a result of its status vis-a-vis the IRS. So, along with the advertising and public relations benefits (helping thereby to increase market share) that accrue from trumpeting the “charitable mission” of the facility, there is probably a distinct financial benefit accruing as well. As the hospital does not pay taxes, the community derives no revenue from it’s presence, aside from the jobs provided. Further, the region likely suffers from the cost burdens that accrue from hospital consolidations which, in the case of Whatcom County, has an effective monopoly on health care. Here is a URL for a recent New York Times article on the topic of cost and consolidation:
    http://opinionator.blogs.nytimes.com/2013/08/13/the-cure-for-the-1000-toothbrush/

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