Erlanger provides biggest share of free care

Chattanooga's two nonprofit hospitals each claim about 40 percent of the local market, yet one of them -- Erlanger Health System -- shouldered nearly 80 percent of the free hospital care provided to poor patients who aren't expected to pay their bills last year, according to the most recent data reported to the state.

Erlanger, with 42 percent of the market, provided $22.4 million in charity care in 2009. That compared to $4.7 million provided by Memorial Health Care System, which claimed about 39 percent market share, based on total net patient revenues.

Including losses from treating TennCare patients and bad debt from patients who can't pay their bills, Erlanger absorbed $74 million in uncompensated care -- more than three times that of Memorial.

The local division of the charity care burden reflects a national trend that's increasingly relevant as the ranks of uninsured Americans continue to grow.

According to a 2009 report from the Internal Revenue Service, fewer than 15 percent of nonprofit hospitals provide nearly two-thirds of the nation's total uncompensated care.

The uncompensated care figures for Erlanger and Memorial were calculated from provisional financial data reported in the 2009 Joint Annual Reports, which hospitals must submit annually to the state health department. The losses were calculated based on the hospitals' actual costs of providing care as opposed to hospital "charges" for care, which often provide a dramatically inflated picture of a hospital's costs.

Under federal law, both Memorial and Erlanger -- as nonprofit hospitals -- must provide charity care to warrant tax-exempt status, but the law doesn't specify minimum standards.

"There is no question that Erlanger and Memorial are radically different in their [charity care] performance level and Memorial gets just as much of [a tax] exemption as Erlanger," said Gordon Bonnyman, executive director of the Tennessee Justice Center, a nonprofit public interest law firm in Nashville.

Provisions in the new federal health reform law, as well as reforms by the IRS, aim to make reporting of charity care and charitable services more consistent for nonprofit hospitals across the country.

"There is a lot of stuff in (the reform law) that has just not gotten any attention and this is one of those issues," Bonnyman said. "I think part of the impetus is to really set some rules and provide some transparency."

Memorial officials pointed out that Erlanger receives local and state funding to support its efforts as the public safety net hospital in Chattanooga. Memorial does not receive that funding.

Erlanger receives $3 million each year from Hamilton County taxpayers and received $2.6 million in state "disproportionate share" funding in 2009 for treating a large number of patients with TennCare. The funds help offset losses because of low reimbursements from the state-federal Medicaid program.

Private, for-profit Parkridge Health System, which is owned by HCA in Brentwood, Tenn., provided just $962,967 in charity care in 2009, based on state reporting guidelines.

But unlike tax-exempt Erlanger and Memorial, Parkridge paid $5.9 million in local and state taxes in 2009, Parkridge officials said.

"I wouldn't criticize them [for their charity care totals]," said Steve Johnson, vice president for payer relations at Erlanger, referring to Parkridge. "Their responsibility is to stockholders, and they pay taxes. Their fiduciary duty and mission is different than ours."

Parkridge Chief Financial Officer Jay St. Pierre said the charity care figures understate hospitals' community-service expenditures. A better indicator of the community service hospitals provide would be hospitals' losses on all patients who are uninsured but who don't always qualify for, or apply for, "charity care" status under state guidelines, he said.

By that measure, Parkridge provided $11 million in uncompensated care to all its uninsured patients, or 16 percent of the total provided by the three hospital systems in this measure.


Comparing nonprofit facilities that offer different services has pitfalls, said LaDonna Merville, vice president of the Hospital Alliance of Tennessee, an advocacy organization for Tennessee nonprofit hospitals.

She noted that Erlanger is a trauma center, handling serious injuries with costs that can be extremely high. That adds to uncompensated care costs, she said.

Erlanger also operates a neonatal intensive care unit and provides OB-GYN care. Those both tend to have higher volumes of TennCare patients, whose reimbursements are lower, she said.

Memorial offers other community services that wouldn't be calculated in charity care totals, such as programs for overweight women and infant mortality reduction that aim to address unmet local health needs, Merville said.

The Hospital Alliance of Tennessee has been working with hospitals on improving the reporting of these efforts, she said. A new IRS 990 form, which 501(c)(3) nonprofit hospitals must submit annually, was amended in 2009 to reflect clearer guidelines for reporting these community benefits, she said.

"What has been happening in the last few years is there has been more attention paid to charity care and community benefit [of nonprofit hospitals]," she said. "What has been lacking in the past is a way to measure and report what is actually happening in facilities and through hospital systems."

Evaluating hospitals' losses from treating poor or uninsured patients is fraught with complications, Bonnyman said.

For instance, losses from an additional unpaying patient must be viewed in context, since hospitals will incur their fixed costs -- like staffing a bed, purchasing equipment and providing utilities -- whether or not a charity care patient takes up a bed and uses the hospital's resources, Bonnyman said. He likened the situation to an airline that fills a $300 seat last minute at a deep discount.

"If they were a hospital they would be saying that they lost $225 on that fare. Obviously they didn't. They were going to be flying that airplane, they were going to be buying the fuel -- the incremental cost literally was peanuts for filling that seat," he said.


Across the United States, the bulk of charity care is provided by a small minority of nonprofit hospitals, according to a report published in 2009 by the Internal Revenue Service. The IRS based the report on survey responses from almost 500 hospitals.

The report found that 14 percent of the hospitals surveyed were handling 63 percent of the total uncompensated care.

The issue is increasingly pressing as charity needs rise. Nationally, hospitals' uncompensated care reached $36.4 billion in 2008, compared to $24.9 billion in 2003, according to the American Hospital Association.

Legislators, financial regulators and hospital industry leaders have for years debated whether nonprofit hospitals should face minimum charity care requirements to justify their tax-exempt status.

The IRS noted that the accuracy of its 2009 report was limited because hospitals tend to report charity care differently. Of hospitals surveyed, 44 percent included bad debt -- losses incurred when patients are unable to pay their bills -- as part of their charity-care totals. Twenty percent included the difference in their costs and their payments from Medicare and Medicaid payments.

Bonnyman said TennCare losses and bad debt should remain separate from charity care. Losses from TennCare stem from discounts agreed upon during contract negotiations with the TennCare Bureau's managed care companies, he said.

"Claiming contractual allowances as charity care is like a car dealership claiming that the difference between the sticker price and the price at which the car sells is 'charity care' and is clearly bogus," he said.

But Erlanger financial officials point out that losses from treating TennCare patients can be enormous: In August, one trauma patient on TennCare spent six months in the hospital, incurring $1.1 million in costs. Erlanger lost nearly $550,000 treating that single patient, Chief Financial Officer Britt Tabor said.


U.S. Sen. Chuck Grassley, R-Iowa, was among the most vocal supporters of including provisions in the recent federal health care reform legislation that would set minimum charity-care requirements for nonprofits to retain tax-exempt status, despite protests from the hospital industry.

The American Hospital Association has argued that a formulaic requirement for charity care penalizes hospitals that are providing community benefits in other forms, such as free health care screenings to the community.

The law that passed fell short of Grassley's goals, but did include new standards that supporters hope will lead to a more equitable, and transparent, distribution of charity care among nonprofit hospitals.

The law mandates that nonprofit hospitals conduct a community-needs assessment every three years, widely publicize their financial assistance policies to explain what free or discounted care is available, and make efforts to connect patients with assistance before using aggressive collection methods.

It also limits charges to patients who qualify for financial assistance to the amount billed to insured patients. Tennessee already has a law limiting the amount uninsured patients can be charged to 175 percent of a hospital's costs, Merville said.

Using this data, federal regulators will report annually on nonprofits' uncompensated care.

The reforms "provide further transparency about tax-exempt hospitals' fulfilling their charitable mission," Grassley said in a statement after the health care bill was signed in March. "Congress, the IRS, and the public will now have additional tools and information to ensure that charitable hospitals act charitably."

A 2001 state-level effort to address the discrepancy in the local charity care burden failed to gain traction in the Tennessee General Assembly. Two state senators introduced a bill that would have required nonprofit hospitals to provide a level of unpaid care equal to the value of their tax-exempt status, or pay the difference to the state, according to Chattanooga Times Free Press archives. The bill failed to pass.

"In politics it's about money and votes. I alone didn't have either, and hospitals have both," said former state Sen. David Fowler, now president of the Family Action Council. He and a colleague introduced the bill, which was supported by Erlanger hospital and opposed by Memorial.

The bill would have created a formula to standardize reporting of charity care so taxpayers could know "who is taking care of the least among us, and what are we getting as taxpayers for the revenues lost due to" nonprofit hospitals' tax exemptions, Fowler said.

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