Last Wednesday, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) advised members of the Senate Finance and Judiciary Committees to take a fresh look at tax laws governing non-profit hospitals.
Prompted by public reports about the practices of two hospitals, University of Virginia (UVA) Medical Center and Methodist Le Bonheur Healthcare in Tennessee, Grassley asked each organization to explain their approaches to charity care and financial assistance as tax-exempt, non-profit hospitals. He wrote:
“Since the enactment of Section 501(r) into law ten years ago, I have heard from the healthcare industry that Section 501(r)’s requirements are overly strenuous for non-profit hospitals. This inquiry unfortunately has shown that, if anything, the requirements of 501(r) need to be strengthened rather than softened… Tax rules “should make clearer what non-profit hospitals must do for low-income patients in order to maintain their tax-exempt statuses.”
According to the Internal Revenue Service, to qualify as a tax exempt 501(c)(3), organizations must document that “no part of their net earnings may inure to the benefit of any private shareholder or individual which might be construed to include executive compensation, and no substantial part of their normal operating activities can involve advocacy earmarked to influence legislation.”
The spotlight on the financial business practices of not-for-profit hospitals is not new nor limited to the two organizations called out by Grassley. It’s been a recurring theme for the past 20 years, often focused on executive compensation and perks, financial performance including “profits” and how hospitals collect overdue bills from patients.
What’s new is the timing: for not-for-profit hospitals, attention to business practices comes at a particularly vulnerable time:
Revenues are Down and Expenses are Up due to the Pandemic
Hospital revenues are down 4.8% year-to-date while costs are up 1.9%. Non-essential services are suspended in hospitals in 9 states as the pandemic hospitalization exceeds 100,000. According to Moody’s, Fitch, and Standard and Poor’s, operating cash flow and expense management is better in most investor-owned hospitals compared to not-for-profit and publicly owned hospitals: that’s because investor-owned operators cut programs and staffing much faster than others and they’re aggressive in revenue management and expense controls. Notably, academics have shown a direct correlation between financial solvency and patient safety and outcomes—an advantage for investor-owned hospitals in competing against less-financially-strong not-for-profit/public hospitals. The capital market recognizes the advantage of investor-ownership: that’s problematic for not-for-profits that make decisions for purposes other than shareholder returns.
New Regulations make it Harder for NFP Hospitals to Compete
Effective January 1, every hospital must post its prices and all relevant underlying costs for 300 “shoppable” services. The site neutral payment policy and cuts in 340B drug program funds start shortly after. Unlike investor-owned hospitals that exit unprofitable markets routinely, not-for-profits encounter significant pushback from community leaders when attempting to alter clinical programs or curtail service to stay afloat. And the ability to access the public equity market vis a vis IPOs and attractive corporate debt structure gives investor-owned hospitals an advantage in accessing capital cost-effectively.
Growing Concern about Healthcare Affordability
43% of Americans are uninsured or underinsured. 7 in 10 believe health costs are unnecessarily, inexplicably high. And 91% think price transparency is needed. In families with incomes below twice the poverty level, the average family payments for health insurance premiums and medical care, combined, average about 14% of family income (9% for insurance premiums, 5% out of pocket) and 19.4% if a family member is in fair or poor health across all income groups. Many have given up on healthcare costs deeming them unmanageable or unpredictable. That includes the 24.4 million workers who were displaced by the pandemic and unable to replace their employer-sponsored coverage.
In 1975, there were 7156 community hospitals in the U.S. Today, there are 5196.
In 1975, there 775 investor-owned hospitals, or 10.8%. Today, there are 1296 (24.9%); 2937 (56.5%) are not-for-profit and 965 are owned by state/local governments (18.6%).
All are adversely impacted by the pandemic. All are challenged by Medicare and Medicaid reimbursement cuts, labor costs and workforce anxiety, medical inflation for technology and drugs and heightened public pressure to be price transparent. But investor-owned hospitals have an advantage in the current environment.
The new attention to not-for-profit hospitals in the Senate comes as Congress considers another CARES relief package that might include hospitals. Notably, in the first round, the nation’s largest investor-owned system, HCA, elected to forego $1.6 billion in Provider Relief Funds and $4.4 billion in Medicare Advance Payments while other FP systems took the money. In its third quarter earnings release, the $51 billion company reported revenues up 4.9% and earnings per share at $1.95. Since March, its stock has increased from $58/share to more than $158/share rewarding its shareholders and managers handsomely and availing the company of substantial access to capital for growth/acquisitions. The company is doing well. But three in four not-for-profits and public hospitals aren’t. That’s the issue.
In 1980, New England Journal of Medicine Editor Arnold Relman railed against investor-owned hospital ownership: “this new medical-industrial complex may be more efficient than its nonprofit competition, but it creates problems of overuse and fragmentation of services, overemphasis on technology and cream-skimming, and it may also exercise undue influence on national health policy”
Investor-owned hospitals have their share of detractors and their major beef is legitimate: their investors expect a return. Profits matter more than community benefit and ESG (environmental, social and government) responsibility because their shareholders expect no less. Some appear to balance their profits and purpose better than others. Most provide services that are comparable in safety and efficacy. And all deny their lean staffing and business practices compromise patient care in any way. That’s the business.
For not-for-profit hospitals, what constitutes community-benefit, charity care, appropriate debt collection and executive compensation merits fresh discussion. How not-for-profit systems invest in/develop new for-profit businesses while cutting core staff and programs will be widely discussed. But the bigger discussion in Congress and in every hospital board room should be about the future for hospitals in the context of systemness, clinical innovation, technology-enabled self-care, widespread disparity in access and affordability, limited resources, consumerism, social unrest and the complicated role of investor ownership of hospitals and other privately-funded emergent competitors.
It’s time for that discussion!
Stay safe. Stay well.
Wendi C. Thomas “Nonprofit Hospital Almost Never Gave Discounts to Poor Patients During Collections,
Documents Show”; December 4, 2020; ProPublica
“Grassley to Colleagues: Rules for Non-Profit Hospitals Need Scrutiny”; December 2, 2020; United States Senate Committee on Finance
“National Hospital Flash Report: November 2020”; Kaufman Hall
Dean D. Akinleye “Correlation between hospital finances and quality and safety of patient care”; April 16, 2019; National Library of Medicine
“Exploring the Association between Quality and Financial Performance in U.S. Hospitals: A Systematic Review” Journal of Healthcare Finance
“Table 89. Hospitals, beds, and occupancy rates, by type of ownership and size of hospital: United States, selected years 1975–2015”; CDC
“Fast Facts on U.S. Hospitals: 2020” American Hospital Association
“Consumer Expenditures 2019” September 9, 2020; US Bureau of Labor Statistics
“What is Affordable Healthcare?” Leonard Davis Institute, University of Pennsylvania
“Household Pulse Survey” United States Census Bureau
“How affordability of health care varies by income among people with employer coverage”; April 19, 2019; Peterson-KFF Health System Tracker
Federal Panel Approves Initial Vaccine Distribution Plan
Tuesday, the Advisory Committee on Immunization Practices voted 13-1 that the 21 million health-care workers and 3 million residents of long-term care facilities will be first to receive Note: 39% of COVID-19 deaths to date have been nursing home residents. Vaccines by Pfizer are expected to be administered this week and Moderna’s next week.
Peter Loftus, Jared Hopkins, Betsy McKay “CDC Panel Recommends Giving First Covid-19 Vaccines to Health Workers, Nursing Homes”; December 1, 2020; Wall Street Journal
Analysis: Access to Unemployment Insurance During Pandemic Lowered Health Costs for Recipients
Unemployment insurance (UI) was temporarily expanded by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, adding $600 weekly federal payments to state payments plus longer benefit duration (39 weeks) and broadened eligibility for minimum-wage, self-employed, contract, and gig workers (Pandemic Unemployment Assistance). This cross-sectional study used data from the Household Pulse Survey collected from June 11 to July 21, 2020 to evaluate the impact of UI on costs and access to care. Key findings:
Having UI benefits was associated with lower risk for unmet health-related social needs, delaying health care, and depressive and anxiety symptoms. Being uninsured was not significantly different.
Being in a household that received UI was associated with fewer health-related social needs, less health care delay, and better mental health. However, many who reported pandemic-related job loss did not receive UI—particularly Hispanic individuals and those with less education.
Seth Berkowitz, Sanjay Basu “Unemployment Insurance, Health-Related Social Needs, Health Care Access, and Mental Health During the COVID-19 Pandemic ”; November 30, 2020; JAMA Internal Medicine
Drug Abuse, Deaths Increase During Pandemic
More than 76,000 people died of a drug overdose between April 2019 and April 2020– the most ever recorded during a 12-month period. Federal health officials say the drug crisis has only been amplified by months of social isolation, high unemployment, and the diversion of resources to combat the virus. Last Tuesday, more than 70 public health organizations sent a letter to President-elect Biden urging elevation the head of the White House drug office to a Cabinet level designation.
“Issue brief: Reports of increases in opioid- and other drug-related overdose and other concerns during COVID pandemic”; October 31, 2020; American Medical Association
University of Michigan Poll: Highest Risk Groups Less Likely to Get Vaccination
The University of Michigan Health Lab interviewer 1655 adults between 50 and 80 years of age about their intent to get Covid-19 vaccinations. Key findings:
58% of adults say they are somewhat or very likely to get vaccinated to prevent COVID-19.
20% said they’d want to get vaccinated right away when vaccines become available, but 46% said they’d rather wait for others to get vaccinated first before doing it themselves.
Women, people of color, people between 50 and 64 years old, and those with lower incomes and education levels were less likely to say they’d seek vaccination in general. Only 40% of older adults who are Black, and 51% of those who are Hispanic, said they are somewhat or very likely to get vaccinated, despite the greater risk of hospitalization and death for members of these groups if they develop COVID-19.
“Over Half of Adults Over 50 Say They’ll Get Vaccinated Against COVID-19, but Many Will Want To Wait”; November 23, 2020; Michigan Health Lab
Update: Biden Healthcare, Economic, COVID-19 Teams
This week, President Elect Biden will announce the balance of his nominees for key healthcare positions. Over the weekend, he announced…
Xavier Becerra, the Democratic Attorney General of California, as his nominee for Secretary of Health and Human Services
Rochelle Walensky, MD, the chief of infectious diseases at Massachusetts General Hospital, will be selected to lead the Centers for Disease Control and Prevention replacing Robert Redfield
Vivek Murthy, MD, who served as surgeon general under President Barack Obama, will reprise that role for Mr. Biden
Previously the transition team announced…
Anthony Fauci, MD will continue as Director of the National Institute of Allergy and Infectious Diseases and also a new post as White House Medical Advisor.
The Transition Covid-19 Advisory Board Chaired by FDA Commissioner Dr. David Kessler, former Surgeon General Dr. Vivek Murthy and Dr. Marcella Nunez-Smith, Yale associate professor of medicine and epidemiology. Note: A coronavirus coordinator is also likely to be named to work across federal agencies: Jeff Zients, a co-chairman of the Biden transition team who led the Obama administration’s National Economic Council is rumored to be in the running.
“Biden transition advisers emerge as top contenders to run covid-19 response”; December 2, 2020; Washington Post
“Biden Picks Xavier Becerra to Lead Health and Human Services”; December 7,2020; New York Times
CMS Issues “Year-End” Rules
In the last week, CMS issued final rulings and interim final rules on a variety of its priorities:
Most favored nation drug pricing: On November 20, 2020, CMS issued an interim final rule to use Most Favored Nation pricing methodology for 50 high-cost drugs to be phased on over a seven-year period starting January 1, 2021. Note: BIO filed suit against the administration last week to delay the policy implementation.
Geographic direct-contracting model (GEO): Last Thursday, CMS’ Center for Medicare and Medicaid Innovation on Thursday announced details of its Geographic Direct Contracting Model (GEO) which allows Direct Contracting Entities to accept full financial risk for all traditional Medicare enrollees in their region.
Outpatient surgery: CMS added 11 services to the ambulatory surgical center (ASC) covered procedures list — including total hip replacements — in a final rule released Wednesday night, Along with the 11 added services, CMS revised the criteria it uses for adding procedures to the ASC covered procedures list, allowing an additional 267 musculoskeletal-related services to be covered by Medicare if conducted in an ASC. The changes are part of the Outpatient Prospective Payment System and Ambulatory Surgical Center calendar year final rule and will take effect Jan. 1, 2021.
“Final Policy, Payment, and Quality Provisions Changes to the Medicare Physician Fee Schedule for Calendar Year 2021”; December 2, 2020; CMS
Primary Care Collaborative Analysis: Spending Declined Last Year, Funding Inadequate
Last Wednesday, the not-for-profit coalition Primary Care Collaborative released its 2020 Evidence Report focused on spending for primary care services. Key findings:
When considering services delivered by physicians (family, general, internal, and pediatric medicine), primary care spending accounted for 4.67% of overall commercial insurance spending in 2019, a decline from 4.88% in 2017.
When accounting for primary care services provided by physician assistants and nurse practitioners (nurse practitioners, physician assistants, geriatricians, adolescent specialists, and gynecologists) in addition to physicians, overall spending in the specialty still dropped from 7.8% to 7.69%.
Primary care spending declined from 2017 to 2019 in the majority (30) of states. Both the narrow and broad definitions vary by a factor of 3 between the highest- and lowest-spending states.
Between 2017 and 2019, primary care per capita healthcare spending declined by 2.48%, while primary care spending per capita fell by 3.78%.
“Primary Care Spending: High Stakes, Low Investment” December 2, 2020; Primary Care Collaborative
Study: One in Four Children Used a Retail Clinic in Last Year, Lower Among Uninsured
According to data from the National Health Interview Survey released last week:
Nationally, 26.4% of children visited urgent care and retail health clinics at least once in the past year.
Children with private or public insurance accessed care at similar rates (27.6% vs 25.2%), but uninsured children accessed retail clinics at lower rates (19.35)
Children with parents who had more than a high school education were more likely than kids with parents who completed high school at most to access these clinics (28.1% vs 22.1%), as were children with family incomes above versus below 200% of the federal poverty level (28.1% vs 23.8%)
Hispanic and Black children were also less likely to have visited urgent care or retail health clinics than white children (22.6% and 24.9% vs 29.2%).
Elizabeth Hlavinka “One in Four Kids Seen at Urgent Care, Retail Clinics in 2019”; December 3, 2020; MedPage Today
Study: CON Laws Do Not Result in Limits on Lower Spending
Background: Certificate of need (CON) laws provide state-level regulation to limit spending and control hospital expansion in order to prevent excess capacity. The Northwestern research team examined the association between certificate of need laws which regulate health system spending and expansion in 35 states and the District of Columbia. Findings:
“There were no significant differences found between states without and with certificate of need regulation for overall hospital procedural volume; hospital market share; county-level procedures per 10 000 persons; or risk-adjusted 30-day postoperative mortality, surgical site infection, or readmission.”
Yuce et al “Association of State Certificate of Need Regulation With Procedural Volume, Market Share, and Outcomes Among Medicare Beneficiaries ”; November 24, 2020; JAMA Network
Citius Analysis of Medicare Advantage Plans: Enrollment Growth Strong, Customer Service Weak
Medicare Advantage enrollment growth (+8%) continues to outpace overall Medicare FFS membership growth (+3%): 37% of Medicare enrollees are now MA members, according to the Citius analysis.
Growth in MA contracts (+73) rose disproportionately as compared to absolute MA membership growth
Half of the MA contracts underperformed in the Clinical & Experience domains, while a large majority performed at high levels for the Operational domain
2/3rds of MA contracts missed a 4 Star measure rating by less than 2%, in terms of absolute compliance rate
“CMS Medicare Advantage 2021 Star Ratings: An Analysis”; November 2020; CitiusTech