Fueled by rising numbers of uninsured Americans, hospitals are absorbing higher levels of charity care and bad debt, forcing them to shift those costs to other patients and payers. Today, PricewaterhouseCoopers' Health Research Institute released a new survey that shows hospitals may be providing far more in free care than the $25 billion they report annually. The research also showed that the true value of charity care is unknown because of inconsistencies in the way it is provided, reported and paid for.
The number of uninsured Americans has increased to 45 million.(1) The increase is driven by three factors: Small businesses are dropping coverage because it is too expensive; rising insurance premiums mean that employees are opting out of coverage even when it is offered; and, the economic downturn has led to job losses and subsequent loss of health insurance. In addition, there has been a 23 percent increase since 2000 in the number of undocumented workers (estimated at 10.3 million in the U.S.),(2) many of whom are afraid to apply for health insurance because of their immigration status.
"The availability of free medical care for uninsured people at hospitals across the country is masking the scope of the uninsured problem in the United States," said Kelly Barnes, a partner in PricewaterhouseCoopers Health Industries Group. "Our hospitals are being deluged by more and more uninsured patients who cannot or choose not to pay for medical care, and these acts of charity are all that stand between a thorny policy dilemma and an access crisis for millions of Americans."
The findings of the PricewaterhouseCoopers 2005 Charity Care Survey were included in a comprehensive report on hospital charity care published by PricewaterhouseCoopers Health Research Institute. The report, Acts of Charity: Charity Care Strategies for Hospitals in a Changing Landscape, included an overview of the changing landscape for charity care among U.S. hospitals, survey responses from 100 hospital financial executives and in-depth interviews with top health industry leaders. Highlights of the report include:
- Hospitals in the survey reported providing charity care equivalent to
an average of 5 percent of net operating income, although many provided
levels that are significantly higher
- Ninety-two percent of hospitals surveyed said that part of their bad debt could be classified as charity.
- Hospitals increasingly are revising and communicating their charity care policies.
The muddy waters between charity care and bad debt have made it a confusing and difficult topic, resulting in a wave of proposed legislation, litigation and negative press. This attention is aimed particularly at not-for-profit hospitals, which can qualify for exemptions from federal income tax and certain state and local taxes based on varying standards that take into consideration the amount of charity care they provide.
Unable to accurately quantify their community benefit, not-for-profit hospitals have become the target of trial attorneys, Congress and the Internal Revenue Service as to whether they are fulfilling the charitable purposes that qualify them for applicable exemptions. According to the report, 31 states have introduced or passed legislation related to charity care in 2004 and 2005, and federal class-action lawsuits against charitable hospitals have prompted hospitals to review their charity care and collection policies.
Who Qualifies for Charity Care?
Much of the misunderstanding over charity care has arisen from inconsistencies in hospital policies over qualifying for charity and the fact that the qualification process is extremely complex. Many people do not comply with requirements. Without patient cooperation, hospitals cannot correctly classify them as charity cases, and, when these patients do not pay for services, hospitals ultimately must write off the debt.
The PricewaterhouseCoopers survey found that:
- Nearly 70 percent of hospitals had voluntarily revised their charity care policy within the last year. In almost every case, the change was to expand eligibility by raising the Federal Poverty Level percentage.
- More than half of hospitals surveyed have begun posting their charity care policies online.
Accounting for Charity Care
Multiple methods of calculating and reporting uncompensated care in the hospital industry make it difficult to calculate the true cost of charity care, benchmark hospitals or track aggregate trends:
- Three-quarters of hospitals surveyed by PricewaterhouseCoopers calculate charity care based on charges, not actual costs. An additional 9 percent use a combination of charges and costs.
- Hospital charges vary widely by hospital and are influenced by market conditions and competitive pressures. Charges typically are much higher than actual costs, depending on supply and demand. This would suggest that charity care numbers may be significantly higher than true costs.
Hospital Pricing a Much Bigger Problem to Solve
Much of the negative press has focused on hospitals' attempts to collect, sometimes aggressively, on their debts as well as criticism that the uninsured are charged higher prices for services than the discounted prices negotiated by managed care plans or the prices paid by Medicaid and Medicare. Complicating the matter is that (1) hospitals apply a variety of discounts to uninsured patients which make prices difficult to track and (2) hospital charges bear little resemblance to actual costs.
Approximately 5 percent of hospital respondents revised their charity care policy in the past year to apply pricing discounts similar to Medicare or managed care rates.
"The details about how charity care is accounted for are more important today than ever before because charity care affects healthcare resources, bed spaces and physician time, and the cost is reallocated to other patients," said Reatha Clark, partner, PricewaterhouseCoopers Healthcare Industry Group. "It is foolish to think that hospitals can continue to bear the costs of the growing uninsured population. Ultimately, the question is: Whose responsibility is care for the poor and uninsured?"
In its report, PricewaterhouseCoopers provides guidance and nine recommended charity care strategies for hospitals. A full copy of PricewaterhouseCoopers Health Research Institute's Acts of Charity: Charity Care Strategies for Hospitals in a Changing Landscape is available online at http://healthcare.pwc.com/cgi-local/hcregister.cgi?link=pdf/charitycare.pdf.
The PricewaterhouseCoopers 2005 Charity Care Survey included responses from 100 hospital financial executives. Survey respondents had a broad geographic representation from across the U.S. and a strong urban hospital representation. Hospital representation by type included non-academic not-for-profit hospitals (54 percent), academic or teaching hospitals (38 percent) and for-profit hospitals (8 percent).
About PricewaterhouseCoopers Health Research Institute
PricewaterhouseCoopers Health Research Institute provides new intelligence, perspective, and analysis on trends affecting all health-related industries, including healthcare providers, pharmaceuticals, health and life sciences and payers. The Institute is part of PricewaterhouseCoopers' larger initiative for the health-related industries that brings together expertise and allows collaboration across all sectors in the health continuum.
About PricewaterhouseCoopers
PricewaterhouseCoopers (http://www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 139 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders.
Unless otherwise indicated, "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership. PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited.
(1) U.S. Census Bureau Report: "Income, Poverty, and Health Insurance
Coverage in the United States: 2003," August 2004:
http://www.census.gov/prod/2004pubs/p60-226.pdf
(2) Jeffrey S. Passel, "Estimates of the Size and Characteristics of the
Undocumented Population," Pew Hispanic Center, March 21, 2005