Following a year of extreme economic turmoil, lawmakers in Washington have turned their attention to the reform of an industry that the Wall Street Journal called “one of the brightest spots in an otherwise gloomy economy”—the health care industry. For months, lawmakers have been busy debating the value of health care reform and the need to implement changes that will extend coverage to uninsured Americans. Though Congress has yet to reach a resolution, proposals have raised concerns with certain hospitals, such as safety-net hospitals and physician-owned specialty hospitals about whether they will be able to operate in a post-reform environment. Reform proposals may also leave nonprofit hospitals scrambling to justify their tax-exempt status.
Safety-Net Hospitals
With a few notable exceptions, hospitals stand to benefit from the current health care reform proposals. Although hospitals may face $155 billion in reductions in Medicare and Medicaid payments over the next 10 years, hospitals remain hopeful that extending coverage will ultimately increase revenues. In the current environment, hospitals bear the burden of the costs associated with providing emergency care to uninsured and impoverished Americans. Extending coverage to currently uninsured Americans would alleviate some of that burden. In fact, conservative estimates suggest that extending coverage to uninsured Americans will decrease hospitals’ uncompensated care burden by at least $171 billion.
Although expanded coverage and increased revenue will benefit hospitals overall, cuts in Medicare and Medicaid payments may disproportionately affect hospitals located in our nation’s poorest inner-city and rural neighborhoods. Commonly referred to as “safety-net hospitals,” these hospitals provide a significant portion of uncompensated care to the nation’s poorest people. As a result, safety-net hospitals often operate in negative margins and rely heavily on disproportionate share (DSH) payments from the state and federal government for their survival. Despite the need for DSH payments, current reform proposals will cut such payments by $20 billion.
Lawmakers theorize that DSH payments will not be necessary because of the extended coverage and additional insured patients. However, safety-net hospitals will continue to provide uncompensated and undercompensated care in the post-reform environment. For instance, even with extended coverage, it is likely that certain individuals, such as illegal immigrants or individuals that have not applied for insurance, will remain uninsured. In addition, reimbursement for services provided to Medicaid patients often falls below cost. Current proposals advocating the expansion of Medicaid coverage to uninsured individuals will likely continue that tradition. Without DSH payments, safety-net hospitals will have to continue to bear the burden of these costs, leaving no choice but to cease operations.
Physician-Owned Specialty Hospitals
In addition to safety-net hospitals, physician-owned specialty hospitals are in grave danger of becoming extinct in a post-reform environment. Physicians argue that such specialty hospitals are positive models for patient care due to efficient operations and high-quality outcomes. However, lawmakers and hospital associations have long been critical of the specialty hospitals, arguing that self-referrals lead to anti-competitive outcomes. Physician owners can cherry-pick the healthiest, wealthiest patients and perform only the most lucrative procedures.
In general, the physician self-referral proscription (commonly referred to as the “Stark Law”) prohibits physicians from making referrals for designated health services that may be covered by Medicare if the physician has a financial relationship with the entity. Two exceptions to the Stark Law, the “whole hospital exception” and the “rural exception,” have created a loophole, opening the door for physician-owned specialty hospitals. Despite various attempts, lawmakers have ultimately been unsuccessful in their attempts to close that loophole.
Unsuccessful, yet undeterred, lawmakers are once again seeking to eliminate physician-owned specialty hospitals. Both the House and Senate health care reform proposals contain language that would ban further construction of these hospitals and would prevent existing physician-owned hospitals from expanding. Should this prohibition make it into the final health care reform bill, physician ownership of specialty hospitals would effectively be eliminated.
Nonprofit Hospitals
As previously discussed, health care reform and expanded coverage will decrease the amount of uncompensated or “charity” care required by hospitals. Though expanded coverage will generate additional revenue for most hospitals, it may also jeopardize the tax-exempt status of nonprofit hospitals.
Before 1969, a hospital had to provide a certain amount of charity care to justify its tax-exempt status. In 1969, the Internal Revenue Service (IRS) announced that it was moving away from the charity-care standard and would instead measure the benefit the hospital provided to the community. The IRS indicated that it would consider the facts and circumstances of each hospital and apply a multi-factor test to determine whether the hospital provided a benefit to the community. Although the provision of charity care is not a factor per se, the amount of charity care provided by hospitals remains an important fact in determining whether a tax-exempt hospital benefits the community.
In the current environment, hospitals have relied, in part, on emergency care and other services provided to uninsured individuals to justify their tax-exempt status. Certain lawmakers, including Sen. Charles E. Grassley, a ranking member of the Senate Finance committee, have questioned whether nonprofit hospitals can continue to justify their tax-exempt status if reform should take place. Grassley stated that “[i]f, as a result of health care reform, everyone has health insurance, presumably hospitals should see a steep decline or the elimination of uncompensated care.”
In earlier reform proposals, Grassley pushed for a minimum annual level of charity care to justify a hospital’s tax-exempt status. The reform proposals currently do not contain such a requirement. However, the Senate Finance Committee’s America’s Healthy Future Act of 2009 imposes additional requirements to conduct a community-needs assessment every three years and adopt an implementation strategy to meet the identified needs. In addition, nonprofit hospitals would be required to adopt and widely publicize a financial assistance policy, limit charges to patients who qualify for financial assistance and make reasonable attempts to inform individual patients about the financial assistance policy before undertaking extraordinary collection actions.
Conclusion
As the debate over health care reform wages in Washington, hospitals and other industry leaders are concerned about the possible changes and effects of health care reform. This is particularly true for entities like the safety-net hospitals and physician-owned specialty hospitals that are uncertain as to whether they will be able to operate in a post-reform marketplace. In addition, community-based nonprofit hospitals remain uncertain as to how the reform measures will ultimately affect the hospital’s tax-exempt status. With more questions than answers, hospitals are at a standstill, unable to plan for an uncertain future.