published Sunday, June 24th, 2012

Memorial Hospital slides on charity care burden in Chattanooga

L to R: Erlanger Hospital, Memorial Hospital, Parkridge Hospital.
L to R: Erlanger Hospital, Memorial Hospital, Parkridge Hospital.
Photo by Laura McNutt /Chattanooga Times Free Press.

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What the numbers mean

The numbers used in this story, except for hospital profit numbers and Memorial's total community benefits, were taken from the Joint Annual Report that all Tennessee hospitals file with the Tennessee Department of Health. These 43-page reports ask for the same information from all public, nonprofit and for-profit hospitals about their services, financial data, patient numbers, staff and other hospital information.

Erlanger and Memorial file reports for fiscal year July 1 through Dec. 31, while Parkridge files reports for Jan. 1 through Dec. 31. All 2011 filings are provisional and will become final later this year.

Memorial's totals include information for its main hospital and Memorial North. Erlanger's totals include its main hospital, Erlanger East, Erlanger North and Erlanger Bledsoe. Parkridge's totals include Parkridge Medical, Parkridge East and Parkridge Valley.

Both Memorial and Erlanger health systems are comprised of additional entities that are not hospitals. Total revenue numbers reported in this story do not include those entities, so may differ from previously reported revenue numbers.

Charity care and bad debt are reported as gross charges on the Joint Annual Reports. To determine actual cost for the hospitals as reported in the story, that number is multiplied by a hospital's cost-to-charge ratio. A cost-to-charge ratio varies from year to year for each hospital and is determined by dividing a hospital's total expenses by its total charges.

To find the amount of uncompensated TennCare costs for each hospital, gross TennCare charges were multiplied by the cost ratio and the net revenue paid by the state subtracted from that number.

All percentages were calculated as a percent of the hospital's total expenses, which is the standard calculating method used by most reporting agencies.

In the last four years, Memorial Hospital raked in more than $130 million in profits, and its charity care costs rose by half.

Yet for all Memorial's growth, Chattanooga's other nonprofit hospital -- financially ailing Erlanger -- still shoulders the lion's share of the free medical care provided to those unable to pay their hospital bills.

Last year, public hospital Erlanger Health System provided 78 percent of the charity care for area patients unable to pay their bills -- 5 percent of its expenses -- while Memorial chipped in about 19 percent -- not quite 1.5 percent of its expenses. Neither hospital pays federal, state or local taxes, and the hospitals have a similar market share based on their revenues.

The remaining 4 percent of the charity care was provided by for-profit Parkridge Health System, which is about half the size of Memorial. Parkridge also pays millions in taxes every year.

Under federal law, Memorial and Erlanger -- as nonprofit hospitals -- must provide community benefits to warrant tax-exempt status.

But there are no specific requirements for how much charity care a nonprofit hospital must provide. However, a study released earlier this year shows nonprofit Memorial Health Care System lags behind other nonprofits across the nation in the amount of free care it provides.

From 2008 to 2011, Memorial increased its charity care from $4 million to $6 million, but that barely has moved the needle on the overall percentages. And the figure is still a small part of its burgeoning profits.

At the same time, Erlanger increased its charity numbers from $23 million to $26 million, while seeing steadily declining profits -- and even a $15.4 million loss in 2008.

"When you hear those big numbers, you realize where a lot of health care dollars are going," said Beth Uselton, the executive director of the Tennessee Health Care Campaign, a consumer health care advocacy group. "The balance should be more weighted toward patient care. And from our position, charity care needs to be commensurate with tax exemptions."

Two years ago, lawmakers implemented new federal laws aimed at requiring more accountability for the amount of free care and community benefits provided by nonprofit hospitals as part of the Affordable Care Act. But it is still unclear exactly how much change those laws will bring.

Some experts say nonprofit hospitals -- which make up more than half the hospitals in the country -- should provide at least 1.5 to 3 percent of their expenses in charity care, while others put the number at 5 to 7 percent of annual costs.

Erlanger meets the test in either case.

Memorial reaches the minimum amount, though its executives say its charity care number does not include millions of dollars in additional community benefits.

Uncompensated care

The uncompensated care a hospital provides falls into three categories -- the direct cost of charity care, higher costs in providing TennCare than the state pays and bad debt, which includes unpaid bills.

How hospitals calculate each of those categories varies greatly, experts say, which makes comparisons difficult.

"What we've been adamant about is having transparency around what the hospitals are providing," said Jessica Curtis, who is the hospital accountability director for Community Catalyst, a Boston-based national health care advocacy group. "But there aren't any real hooks in the law and there haven't been any connections between the profit a hospital is making and its percentage of charity care."

Nonprofit hospitals nationally provide about 5.7 percent of their total expenses in charity care, unreimbursed Medicaid and other unreimbursed costs from government programs, according to a January report by accounting firm Ernst & Young. That report evaluated about 30 percent of hospitals required to follow the new reporting guidelines for hospitals using their 2009 tax filings.

In 2009, charity care and unreimbursed TennCare made up 3.5 percent of Memorial's expenses, 3.1 percent of Parkridge's expenses and 10.8 percent of Erlanger's expenses. By 2011, Memorial's numbers had gone up to 3.8 percent, Parkridge had passed Memorial at 5.7 percent and Erlanger's remained unchanged.

National figures show that many for-profit hospitals come close to providing as much uncompensated care as nonprofits, despite paying taxes, according to Nicholas Newsad, senior associate in the Denver office of health care consulting and valuation firm HealthCare Appraisers Inc.

Officials at Parkridge agree.

"Our approach to the uninsured population is not significantly different from our tax-exempt competitors," said Jay St. Pierre, chief financial officer for Parkridge Medical Center. "When you consider all the care, our total community care is comparable to anyone else."

Officials at each of the local hospitals say they make every effort to assess whether a patient is eligible for charity care. Their financial assistance policies are posted online; they provide information packages to patients who come into the hospital; and they have employees who work with patients to make sure they receive any financial assistance for which they qualify.

Memorial officials noted that Erlanger provides trauma and pediatric care, services Memorial does not offer.

Both of those services often result in large bills, which uninsured or TennCare patients may not be able to pay.

Memorial's numbers do not accurately reflect all the community benefits the hospital provides, President James Hobson said in a recent interview. According to its 2011 community benefits report, Memorial provided an additional $6 million in various community health services and financial contributions to community organizations. Such services include support groups for weight-loss patients, health education classes for local residents and family health nights at elementary schools.

"Our focus is to work with the community in a thoughtful and intentional way to provide access to health care where it is most needed," Hobson said.

Erlanger officials countered that it offers similar benefits that are "certainly comparable to, and in all likelihood exceeds" other area hospitals. Nonprofit hospitals should have a certain commitment level for providing direct patient care, said Erlanger Chief Operating Officer Britt Tabor in an email.

"Uncompensated care will always be a critical need of the community," Tabor wrote. "The question is how willing are the not-for-profit hospitals to share in that commitment to the community."

With all the conversation about whether charity care should be 3 percent or 7 percent of a hospital's operating expenses, Newsad thinks people need to be looking more broadly at how hospitals compare to nonprofits other than hospitals.

For example, the Salvation Army spends 85 percent of its budget on community benefits, Newsad said.

"That's a huge, huge difference," he said.

Tax equation

There is also little accounting of how much money nonprofits would owe if they were not tax-exempt. The number is not tracked by federal, state or local governments.

"It's kind of like the Wild West -- there are no rules," said Newsad. "But the system is primed for the discussion. And I would suspect that in the next few years there may be some new rules at the federal level."

In Illinois, the state recently withdrew the tax exemptions of several hospitals, saying they did not provide enough charity care, Newsad said.

But there is very little analysis of what taxes those hospitals do not pay because of their tax-exempt status. The numbers generally cited are a decade old, when the Internal Revenue Service released numbers showing that nonprofit hospitals nationwide received about $12 billion in tax breaks in 2002. Those numbers were not broken down by state or by hospital.

Local and state taxing authorities said they do not track the amount of taxes nonprofits would owe if they were not exempt.

Curtis and Newsad said they are not aware of any group that tracks the amount of exemptions nonprofit hospital receive.

"That would certainly be an interesting number," Newsad said.

Federal business taxes are as high as 40 percent in the highest tax brackets, Newsad said.

St. Pierre said Parkridge pays federal, state and local taxes that amounted to $27.7 million last year.

Memorial Hospital provides at least as much monetary benefit to the community as it receives in tax breaks, Hobson said.

When asked if they could supply a number for their estimated tax exemption, Memorial officials said they did not calculate the number and it would be difficult to determine a figure without a great deal of staff work.

Erlanger officials said, as a government entity and safety net hospital for indigent care, it is unable to calculate what its tax effect would be.

Experts agree the 2010 changes are simply a step in the process.

The IRS wanted to have a better picture of what sort of care nonprofits were providing before they made drastic changes, Curtis said.

Newsad said he would not be surprised if, a few years down the road, federal laws required specific numbers. Eventually, he expects more hospitals will become for-profit hospitals that are allowed to deduct their charity care from their taxes.

The situation is ripe for change, he said, as nonprofit hospitals see an increase in profits and the new federal health care law boosts the number of insured patients -- driving down charity care. In addition, state and federal governments have had decreasing tax revenues.

"I think it begs the questions of how much charity care is enough," he said.

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about Mariann Martin...

Mariann Martin covers healthcare in Chattanooga and the surrounding region. She joined the Times Free Press in February 2011, after covering crime and courts for the Jackson (Tenn.) Sun for two years. Mariann was born in Indiana, but grew up in Pennsylvania, Tennessee and Belize. She graduated from Union University in 2005 with degrees in English and history and has master’s degrees in international relations and history from the University of Toronto. While attending Union, ...

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