February 14, 2017

In the Line of Fire: Tax-Exempt Hospitals, the Low Income Pool & Struggling Floridians

The governor’s recommended budget views nonprofit and public hospitals through a harsh lens. These hospitals are serving indigent patients for whom health options are limited and they continue to serve them as state and federal funding is in jeopardy. If there are substantive issues with the profits earned by these hospitals, impartial review is warranted, with legislative follow-up. The governor’s proviso neither serves this purpose nor calls for review.

In his 2017-2018 budget, Governor Rick Scott recommends the continuation of more than $600 million for the Low Income Pool (LIP) program. Included in this figure is $374 million of federal funding that will not be available unless there is a change in federal policy. The LIP program, initiated in 2006, was intended to be a “temporary cushion” of supplemental funding for hospitals that serve high proportions of indigent patients (also called “safety net” hospitals) as the transition was made to statewide Medicaid managed care.  The funding is scheduled to expire June 30, 2017. Notably, the governor qualifies his continued support for LIP with some particularly harsh words directed to public and non-profit hospitals and their tax-exempt status:

“Funds in Specific Appropriation 200 are provided on top of $3,315,115,397 in tax exempt profits at not-for-profit and public hospitals, which are at an all-time high relative to the cost of charity care provided by these same hospitals…”, (Line item 200, Proviso, emphasis added)

The governor also targets cuts to those hospitals devoting “a smaller portion of their profits to unreimbursed Medicaid and charity care compared to the for-profit hospital industry.”  (Line item, 198 Proviso) The governor attempts to address this issue by qualifying hospital eligibility for these funds after looking at the ratio of “a hospital’s charitable purpose relative to its profitmaking purpose.”

Is Scott’s criticism of non-profit hospitals justified?  Currently neither federal nor Florida law quantify the amount of charity care a non-profit must provide in order to keep its tax-exempt status. A University of California study found that some tax-exempt hospitals’ spending on free or subsidized care was comparable to those in the for-profit sector [1].

Lawmakers and courts are starting to take notice. For example, the Illinois Legislature enacted a law requiring hospitals to provide charity care that is at least equal to the amount of their property savings. In 2015, a New Jersey court required a not-for-profit hospital to pay back property taxes because it acted more like a for-profit entity than a charity.

However, the governor’s apparent cheerleading for the for-profit hospitals must be considered with a healthy dose of skepticism. A recent national study identified the top 50 hospitals that gouge patients the most [2].  They are charging the uninsured more than ten times the cost of care. Notably, 26 of those hospitals are located in Florida (more than any other state) and all but one are for-profit entities.

Also, keep in mind that LIP has a shrinking and unpredictable funding stream and depends on local governments and providers making contributions toward the Medicaid state share.  The locals are reluctant to contribute their share of the matching funds when the corresponding contributions from the state and federal government are unknown. This is no way to provide stable funding for a statewide health care delivery system.

And while hospitals’ participation in the LIP program is “voluntary,” the uncompensated care demand doesn’t stop. Anyone who shows up at the emergency room, including the uninsured, must be screened and provided services to at least “stabilize” their emergency condition. Uninsured patients are likely to have more unmet, serious and costly health care needs.

Cuts to LIP or other supplemental hospital funding will increase the uncompensated care burden and jeopardize vulnerable uninsured Floridians’ “last resort” source of care.  Funds to support hospitals providing this charity care are vital and must not be reduced.

Governor Scott’s troublesome proposals will undoubtedly be a catalyst for further and justified policy debate around these issues.

[1] Valdovinos, Erica, Le, Sidney and Hsia, Renee (2015). In California, Not-For-Profit Hospitals Spent More Operating Expenses On Charity Care Than For-Profit Hospitals Spent. Health Affairs, 34 (8), 1296-1303.

[2] Bai, Ge and Anderson, Gerard (2015). Extreme Markup: The Fifty US Hospitals With The Highest Charge-to-Cost Ratios. Health Affairs, 34 (6), 922-928

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