Hospitals see decline in charity care costs

As health insurance coverage has expanded under the federal health law, hospitals in Minnesota have seen a significant decline in costs to cover free and discounted care.

The 10 largest hospital systems in the state last year spent about $236 million on what the industry calls charity care — a decline of $43 million, or 15 percent, from 2013, according to a Star Tribune analysis.

Some of the savings is being swallowed by patients with big deductibles who aren't paying their medical bills, hospitals say, which the industry refers to as bad debt.

But it's also starting to create room in budgets as hospitals are being pushed to develop more community programs and other health promotion efforts that could ultimately drive down the need for costly care.

"Hospitals will likely see some backlash if they appear to get some savings … and they're not using it in community health," said Gary Young, a health policy researcher at Northeastern University who studies how hospitals satisfy their community benefit obligations.

Hospitals say they're already putting money toward other community needs.

Charity care is health care that's provided for free, or at a discount, to patients deemed eligible by hospitals. Charity care policies typically make financial assistance available to people only at certain income levels.

Hospitals are not required to provide a particular amount of charity care, but such programs usually are part of how nonprofit hospitals justify tax exemptions. Bad debt is uncompensated care for patients not eligible for free care.

The Star Tribune analysis looked at charity care costs over five years as reported on financial statements for 10 of the largest health systems in the state as measured by share of hospital beds. Charity care costs were steadily increasing between 2011 and 2013, the analysis shows, before dropping significantly in 2014 and 2015.

The shift corresponds with the expansion of health insurance coverage under the federal Affordable Care Act (ACA), which allowed states like Minnesota to expand eligibility for Medicaid. The program primarily covers lower-income Minnesotans, and the state has seen its uninsured rate drop to less than 5 percent thanks in part to growing Medicaid enrollment.

This month, researchers at Northwestern University published a study looking at 2014 data on uncompensated care, which is the combination of charity care and bad debt. The report didn't include Minnesota numbers, but it found a significant decline in uncompensated care costs for hospitals in Medicaid expansion states across the country.

"We should more carefully understand what [hospitals are] doing, and how they're changing what they're doing, in response to what has been a financial windfall," said Craig Garthwaite, an assistant professor at Northwestern's Kellogg School of Management.

It's perhaps not surprising that Minnesota hospitals reject the "windfall" description.

The median operating margin for Minnesota hospitals last year was 3.3 percent, up from 3.2 percent in 2014, according to the Minnesota Hospital Association. Thirty eight hospitals across the state last year actually lost money on operations, the trade group says.

Many people newly covered under the health law have benefits through the state-federal Medicaid program, which reimburses hospitals at a rate that only covers about 60 percent of costs, said Matt Anderson, senior vice president of policy and strategy at the Minnesota Hospital Association. This shortfall is part of how hospitals document their community benefits to the IRS.

Hospitals are spending more to complete "community health needs assessments" that are required of nonprofits under the Affordable Care Act, Anderson said. The reports are guiding hospital investments in programs to prevent or manage chronic diseases, which fits with a push by health insurers for hospitals to take more responsibility for the health of populations.

Such strategies are crucial for containing health care costs in the future, said Nancy Kane, a professor at the Harvard T.H. Chan School of Public Health who does research on the financial and strategic performance of hospital systems.

"There's a lot of illness and disability that, if you could prevent it in the first place, you wouldn't need to pay hospitals all of that money," Kane said.

Less money for charity care could free up funds for these new community benefit strategies, said Anderson of the Minnesota Hospital Association. But he said hospitals also must provide financial assistance to the growing number of patients struggling with high deductibles; when patients don't pay, those write-offs are categorized as bad debt.

The Star Tribune analysis shows a more complicated picture of bad debt, where expenses in 2015 were down from the previous year but still up from 2013. Like a report last year from the Minnesota Department of Health, the Star Tribune numbers suggest that hospitals are seeing more savings from the decline in charity care than increased expense from bad debt.

In its own numbers, the Minnesota Hospital Association also saw a decline in bad debt expense in 2015 but hasn't yet calculated the net impact on uncompensated care. Hospitals question whether the bad debt decline was a one-year blip.

"It's really difficult to know whether people have acclimated to high-deductible plans, and they're learning to … save up the resources they need," Anderson said. "It could be that people are getting [fewer] services if they have a high-deductible plan, and they're putting off care."

At the St. Cloud-based CentraCare system, more individuals owe money on medical bills than they used to, but the average amount owed is smaller, said Kathy Parsons, the director for revenue cycle and managed care. The changes fit with the decline in people lacking health insurance altogether, Parsons said, and the increase in patients who must pay high deductibles.

Coverage expansion under the health law is one factor, Parsons said, but another is Minnesota's relatively healthy economy.

Minneapolis-based Allina Health system saw charity costs drop by $14.7 million, or 50 percent, between 2013 and 2015. The cost of bad debt increased by $4.6 million. Allina officials say the net decline in uncompensated care hasn't driven an increase in profitability.

The savings goes to other community expenses such as "investing in our business to take better care of patients, to actually keep them out of the hospital," said Ric Magnuson, the senior vice president for finance at Allina.

Charity care is widely publicized, Magnuson said, and the total provided is driven by the volume of patients seeking it, and their care needs. The health system says it hasn't changed its charity care policy in recent years to tighten access.

The Rochester-based Mayo Clinic saw charity care costs decline by 14 percent, or $11.4 million, between 2013 and 2015. Bad debt at the clinic was down last year, but not to the level reported in 2013.

After adjusting for revenue growth, charity care spending last year was at a level comparable to 2011, said chief financial officer Kedrick Adkins.

"I'd have to see a little bit more of a trend," Adkins said. "If we do see some favorable trend … we plow that money right back into education and research and our mission,"

Some of the financial benefit to hospitals from reduced charity care costs should eventually make its way to people buying health insurance, because hospitals are seeing a decline in one of their standard expenses, said David Dziuk, the chief financial officer at Bloomington-based HealthPartners. The health system saw charity care costs decline by $5.9 million, or 18 percent, between 2013 and 2015.

Hospital budgets aside, the change benefits patients.

"If you're uninsured … you're less likely to go to the doctor because you don't have the resources to pay, and you're more likely to end up with an urgent situation where you let your health condition get to the point where it's a crisis," Dziuk said. "That's what we're trying to avoid by getting people covered."

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck