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Charitable conundrum: Bad debt, free care present a nearly $1B pitfall for local hospitals

Types of free care

Three terms often come up around this topic:

• Bad debt: Unpaid patient bills considered uncollectable and recorded on a hospital's income statement as an expense or a reduction of revenue.

• Charity care: The free or reduced-cost medical care that hospitals provide to poor people as part of their charitable mission. Some hospitals also include in this figure the difference between the cost of providing care and the reimbursement they get from Medicaid.

• Uncompensated care: The total of bad debt and charity care.

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Saturday, Dec. 22, 2012, 8:56 p.m.
 

Hospitals in Western Pennsylvania gave away nearly $1 billion in medical care in their last fiscal year.

Although about half that figure, which rose 5 percent from the year before, came from providing free care to uninsured patients, it wasn't all charity.

The other half was lost because economically strapped patients didn't pay medical bills.

These unpaid bills, known in the hospital industry as bad debt, are a growing concern for nonprofit hospitals. Providing free care is part of their charitable mission, but bad debt is adding to financial strain at many hospitals.

“The current trends, coupled with scheduled cuts in Medicare reimbursement to hospitals, would cause great financial stress on Western Pennsylvania hospitals,” the Hospital Council of Western Pennsylvania said this month when it released a survey of finances at 56 hospitals in the region.

Among financial indicators tallied for the fiscal year ended June 30: $449 million in bad debt and $475 million in charity care. The total, $924 million, was up from $880 million the year before.

Large hospital systems to small community hospitals reported increases in bad debt during the 2012 fiscal year.

UPMC, the biggest system in Western Pennsylvania, recorded bad debt of $234 million in the most recent fiscal year, up from $198 million the year before.

“It's a burden on all providers, including UPMC,” said Robert DeMichiei, UPMC's chief financial officer.

The health system of 19 hospitals and 3,300 doctors hasn't finished compiling its charity care report for 2012, but it had $96.5 million in charity care in 2011.

Butler Health System, owner of the 307-bed Butler Memorial Hospital, had bad debt of $9.2 million in 2012, up from $9.1 million in 2011. Bad debt at Excela Health, owner of three hospitals in Westmoreland County, grew to $26.6 million, up from $25.2 million.

And at financially struggling West Penn Allegheny Health System, Pittsburgh's second-largest system, bad debt rose to $80.8 million, from $69.1 million.

Excela Health Chief Financial Officer Timothy Loch said bad debt is growing because employers are shifting more health insurance costs onto employees through higher copayments and deductibles, and large numbers of uninsured people continue.

“It's clear employers are pushing more costs onto employees and those costs are increasingly harder to pay in the economic environment we are in,” Loch said. “Let's be realistic: If people have a choice between paying for food on the table and paying a medical bill, they are going to pick food, hands down. Health care is way down on the list of what people consider to be a priority payment.”

Rising bad debt comes at a time when profit at most hospitals is squeezed. Low profit leaves hospitals with less money to invest in facilities, technology and staff.

“While charity care has increased, several other revenue-related indicators are lower, resulting in declines in hospital operating margins and total margins,” said Denis Lukes, vice president of payer relations and reimbursement at the Hospital Council.

Operating margin for the 56 hospitals in the council's survey was 4.5 percent in fiscal 2012, down from 5.0 percent the year before. That means on average hospitals are clearing 4.5 cents on a dollar of revenue after expenses.

Total margin, which includes non-operating gains such as investment income, fell to 4.7 percent, from 6.9 percent, the survey found.

In addition to driving up bad debt levels, higher numbers of people without insurance led to lower patient volumes in the region's hospitals.

Admissions fell to 503,849 across the region, down from 518,137. The number of surgeries performed dropped to 154,299, from 159,386, the council said.

Hospitals can expect to gain many newly-insured patients starting in 2014, when the Patient Protection and Affordable Care Act mandates that virtually all Americans be covered by health insurance and Medicaid expands in many states.

Yet officials in Western Pennsylvania caution that, although more people may have insurance, reimbursements from Medicare will be cut. Medicare, the government's health insurance for retired people, provides large portions of funding at local hospitals because of the extensive elderly population here.

“There will be reductions (in Medicare),” DeMichiei said. “And those will be the substantial drivers of health care economics.”

With Pennsylvania's political leaders on the fence about expanding Medicaid, the government's health insurance program for the poor and disabled, a segment of the population could remain uninsured.

“I'm certain we'll see more bad debt before the situation gets any better,” Loch said.

Hospitals are more aggressively seeking payments from patients.

Excela is trying to collect more money up front and working harder to qualify patients who can't afford to pay, Loch said.

“We're here to serve the people of Westmoreland County. We'll always take care of them; we'll just have to put more efforts into collecting the fees and working with them to determine if they qualify for any charitable care,” he said.

UPMC is doing the same, and it helped 11,000 patients last year sign up for Medicaid, which the state calls Medical Assistance, said April Langford, vice president of finance.

“For those patients that we cannot obtain Medical Assistance for, we move to our financial assistance program,” she said.

UPMC will open a patient financial services center next month in its office building at SouthSide Works, where patients could meet with hospital financial advisers, Langford said.

“It's a tremendous win-win,” DeMichiei said of Medical Assistance. “It benefits us because we're getting paid and the patient is actually getting coverage.”

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or anixon@tribweb.com.

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