July 1999

Foreword

Summary

Charity Care Policy for Washington Hospitals

Charity Care Defined

Measuring Hospitals' Charitable Contributions to Their Communities

Charity Care in Washington Hospitals

Charity Care Projections for FY 1998

How Hospitals Project Charity Care

How Hospitals Verify Need for Charity Care

How Hospitals Notify the Public About Charity Care

The Future of Charity Care

Appendices

Appendix 1: Charity Care Dollars as a Percentage of Gross Patient Revenue and Adjusted Revenue

Appendix 2: Rural Definition and Charity Care as a Percentage of Gross Patient Revenue and Adjusted Revenue for Rural Hospitals

Appendix 3: Charity Care Provided or Projected: Actual FY 1997 and Estimated FY 1998

Appendix 4: Charity Care Laws RCW 70.170.060 and Rules C 246-451

Appendix 5: 1999 Federal Poverty Guidelines

Stating that access to health care is among the state’s goals, the 1989 Legislature included language which prohibits any Washington hospital from denying access to emergency care based on inability to pay, or adopting admission policies which significantly reduce charity care. The same legislation directs each hospital to develop a charity care policy consistent with the statute. The Department of Health (DOH) is responsible for rule-making and monitoring related to charity care, and is required to report to the Legislature and Governor on an annual basis. This report presents data submitted by Washington hospitals in their fiscal year (FY) 1997 Hospital Year-end Report and 1998 Annual Budget Submittals.

This document discusses aggregated findings for all licensed Washington hospitals, for hospitals grouped by regions, and for rural hospitals. Hospital-specific data were reviewed for accuracy.

RCW 70.170 defines charity care as "necessary inpatient and outpatient hospital health care rendered to indigent persons..." A person is considered indigent if family income is at or below 200% of the federal poverty level. Past hospital accounting practice did not consistently separate bad debt (often stemming from non-payment of bills by low income patients) from charity care. As a result of improvements in charity care accounting required by law, this report utilizes only charity care rather than a combination of charity care and bad debts as in previous reports.

Washington hospitals provided $102 million in charity care for 1997, which is a decrease of 3.60% below 1996 and a 7.44% decrease below the 1995 levels. Charity care for 1997 was 1.37% of total hospital revenue and 2.63% of "adjusted revenue" (with Medicare and Medical Assistance Program payments deleted for comparisons focused on each hospital’s base of primarily private payments). From 1989 until 1993, charity care steadily increased in total dollars and as a percent of revenue, while from 1994 through 1997, charity care has steadily declined in both categories.

Seventeen hospitals each provided more than $2 million of charity care in FY 1997, which accounted for 70% of the statewide charity care. Regionally, King County clearly provides the largest dollar amount of charity care, with Harborview Medical Center alone providing in excess of 18 percent of the statewide total. Rural hospitals report less charity care, in proportion to their total adjusted revenue, than do urban hospitals. Rural hospitals also have a higher proportion of revenue from Medicare and Medical Assistance (including Medicaid), resulting in a smaller base of private sector payers to which charity care costs could be shifted.

Since 1991 Washington hospitals have been required to maintain a charity care policy on file with the Department of Health, Hospital and Patient Data Systems (HPDS). Each policy includes the following information:

• A set of definitions describing terms the hospital uses in its charity care policy ;
• The procedures the hospital uses to determine a patient’s ability to pay for health care services and to verify financial information submitted by the patient;
• The establishment of a sliding fee schedule for individuals whose annual family income is between 100% and 200% of the federal poverty standard, adjusted for family size;
• Procedures used to inform the public about charity care available at that hospital.

In addition to the charity care policy, each hospital annually reports actual total charges for charity care, bad debt, and total uncompensated health care in its fiscal year (FY) within 120 days of the close of the fiscal year as part of the hospital’s year-end report. Hospitals also provide estimated charity care 30 days prior to the start of their fiscal year in their annual budget submittal. Two health maintenance organization (HMO - Group Health) hospitals are not included in this report since health care charges are prepaid through member subscriptions and therefore uncompensated health care is not incurred. This report is based on data collected from the remaining 90 licensed Washington hospitals for fiscal year 1997.

Charity care data reported to the State does not include the number of patients granted uncompensated care. Therefore, it is unknown whether the number of charity care cases is going up, down or remaining the same over time. The authors believe this number is required to better characterize the provision of charity care in Washington. For that reason, in the future the Department will request this information be reported along with charity care charges. Thus, beginning with 1998 data, the reports will reflect the number of patients provided charity care in each hospital, by region and for rural hospitals.

Charity care is defined in RCW 70.170.020 as necessary hospital health care rendered to indigent persons, to the extent that the persons are unable to pay for the care or pay the deductibles or co-insurance amounts required by a third-party payer. A person in need of care is considered "indigent" if family income is at or below 200% of the federal poverty level. Past hospital accounting practice did not consistently separate bad debt from charity care. The basic distinction between bad debts and charity care in the health care setting can be made between uncollectible accounts arising from a patient’s unwillingness to pay (bad debt) and those arising from a person’s inability to pay (charity care).

Effective March 1991, the Department of Health adopted accounting rules which provided uniform procedures, data requirements, and criteria for identifying patients receiving charity care. These rules also provided a definition of residual bad debt. These changes have resulted in more accurate and consistent reporting on the components of uncompensated care. So this report utilizes only charity care, rather than a combination of charity care and bad debts as in earlier reports (pre-1995).

Measuring what a hospital gives back to the community or comparing one hospital’s contribution with another is not an easy exercise. Hospitals often support their communities through free or low-cost services, which are not easily quantifiable and are not included in their uncompensated health care totals reported to Department of Health.

Comparisons based solely on data included in this report can lead to misleading findings. A high level of charity care may just as easily reflect demographic conditions (income level, unemployment rate, etc.) as the charitable mission of a hospital. Conversely, a low level may reflect a relative absence of need for charity care in a hospital’s service area, rather than a lack of commitment to serve the community.

Therefore, this report makes no value judgment of individual hospital’s provision of charity care. In addition, the state has not established the "appropriate" amount of charity care that a hospital should provide.

A hospital can provide only so much uncompensated health care and remain a financially healthy institution. Ultimately, if enough charges are uncompensated, whether they are attributed to bad debt expense or to charity care, the facility will face operating losses. Hospitals may attempt to recover uncompensated health care by shifting costs to other payers, subsidizing uncompensated charges with nonoperating revenue (e.g., parking lots, gifts shops, endowments), or increasing prices for hospital services. With the advent of managed care, these options are becoming less and less viable.

Charity care decreased from $110.2 million in FY 1995, to $105.8 million in FY 1996, to $102 million in 1997. This represents a 3.6 % decrease in total charity care from 1996 to 1997. Table 1 summarizes the statewide provision of charity care from 1995 through 1997. This table also presents charity care as a percentage of total revenue (including Medicare and Medical Assistance) and adjusted revenue (without those government programs).

While total statewide charity care dollars have decreased, total revenue and net income (profit) have increased over the same period of 1995 through 1997. Hospital representatives have indicated that the need for charity care has decreased as a result of subsidized insurance, elimination of pre-existing conditions clauses, and the increase in preventative medicine. This topic will be discussed later in this report.

The hospital accounting concept of "adjusted revenue" subtracts Medicare and Medical Assistance (including Medicaid) charges from total patient care revenue to allow meaningful comparisons of hospital levels of charity care. Medicare and Medicaid have specifically excluded participation in covering charity care from their prospectively-determined payment levels. Since the payments that hospitals receive from Medicare and Medical Assistance do not cover charity care, the hospitals adjust their rates to recoup the charity care from their base of private purchasers and payers. This private paying base differs widely among hospitals as a percentage of their business. Therefore, the use of "adjusted revenue" allows for a comparison of hospital charity care as a percentage of this meaningful base of privately-sponsored patients.

A majority of the state’s charity care comes from relatively few hospitals. Seventeen urban hospitals each reported $2 million or more, and together provided $71 million in charity care (approximately 70% of the charity care provided statewide) in FY 1997 (see Table 2). The amount of charity care individual hospitals provided ranged from $0 to $18.8 million, which reflect differences in their size, types of services provided, provisions for charity care in their mission statements, and the characteristics of surrounding communities.

The three hospitals providing the most charity care as a percentage of gross patient revenue were:

• Harborview Medical Center - Seattle, at 5.84%
• Good Samaritan Hospital - Puyallup, at 2.59%
• Lourdes Counseling Center - Richland, at 2.49%

The three hospitals providing the most charity care as a percentage of adjusted revenue were:

• Harborview Medical Center - Seattle , at 13.41%
• Providence Centralia Hospital - Centralia, at 6.97%
• Lourdes Counseling Center - Richland, at 6.70%

For the first time, not one hospital reported zero charity care in FY 1997.

Tables 3 and 4 group hospitals into five regions. The 1997 proportions of charity care show wide variations among different areas of the state. Four of the five regions are groups of 8 to 22 contiguous counties. The fifth region, King County, is the state’s largest population center and has a concentration of hospitals.

Among these regions, King County clearly provides the largest dollar amount of charity care. However, this picture changes dramatically when Harborview Medical Center’s $18.8 million in charity care (18.5% of the statewide total) is excluded. Then charity care in King County drops from 2.97% of adjusted revenue to 2.05%. It is also important to note that Harborview derives 56.4% of its revenue from Medicare and Medical Assistance, far more than the aggregate percent of other King County hospitals (41.8%) or the statewide percent (48.1%). This comparison shows a very limited base for the cost-shifting of charity care at Harborview.

Using definitions from DOH Office of Rural Health (Appendix 2), there were 44 hospitals which could be classified as rural in 1996. Of these, 8 were in sparsely populated "Frontier" areas, 19 in "Remote Rural" areas, and 17 in "Less Remote Rural " areas. Most rural hospitals are small; two-thirds have less than 45 set-up beds. Included in the Less Remote Rural category are five larger Medicare-designated rural referral hospitals which range in size from 107 to 222 set-up beds.

Rural hospitals reported total charity care of $10.6 million in 1995, $10.3 million in 1996, and $9.9 million in 1997. Overall, rural hospitals have tended to provide less charity care than their urban counterparts and have also tended to be more dependent on Medicare and Medical Assistance discounted payments, as shown in Table 5. For rural hospitals, charity care averaged 2.18 percent of adjusted revenue, while charity care for urban hospitals averaged 2.57 percent of adjusted revenue.

For 1997, rural hospitals derived 56.4% of their total revenue from Medicare and Medical Assistance discounted payments. This indicated a more limited base for shifting charity care charges to other payers in rural hospitals than in urban hospitals, which have 46.8% Medicare/Medical Assistance payments.

In 1997, charity care (Appendix 2) was less than one percent of total revenue for 34 of the 44 rural hospitals; of these 34, it was 0.5% or less for 18 hospitals. In terms of adjusted revenue, charity care was less than 2% for 29 of the 44 hospitals; of these 29, it was 1% or less for 15 hospitals.

Among the three categories of rural hospitals, Less Remote Rural hospitals provided the most charity care as a percentage of adjusted revenue during 1997, and Frontier hospitals the least.

In accordance with state statute, hospitals submit a projected annual budget prior to the start of their fiscal year. Included in their budget are projections for their anticipated total charges for charity care for the next fiscal year (FY 1998). Overall, hospitals projected that charity care would increase 2.72 percent, or $3.2 million above the projected FY 1997 or 18.7 percent above the actual FY 1997 (see Table 6 below). With the exception of 1995, hospital projections for charity care have been higher than actual experience over the past several years

Most hospitals’ FY 1998 projections were based on an analysis performed during their budget process. These analyses usually took into account the following factors:

• A hospital’s historical fiscal years and its most recent year-to-date total number of patients and patient charges;
• Planned price changes;
• Projected volume changes
• Known usage factors (including the area’s economy and demographics);
• Hospital budget constraints; and
• A hospital’s mission or statement to support the community.

Many hospitals state as part of their mission that they will serve the poor and underserved. Hospitals usually restrict their uncompensated health care programs to individuals unable to access entitlement programs such as Medical Assistance, unable to pay for medical obligations, or to those with limited financial resources.

These individuals generally include the recently unemployed; those employed but without employer-provided health insurance; those whose health insurance requires significant deductibles or co-payments; single parents; those recently or currently experiencing a divorce; transients or those without a permanent address; students, as well as spouses and their dependents; retired persons not yet eligible for Medicare; and the elderly who have limited or no Medicare supplemental insurance coverage.

As a result of RCW 70.170.060(5) every hospital has a charity care policy on file with the Department of Health which states the hospital’s procedure to determine and verify the income information supplied by persons applying for uncompensated health care services. The hospital’s charity care policy is consistently and equitably applied so that no patient is denied uncompensated health care based upon race, creed, color, sex, national origin, sexual orientation, disability, age, or source of income. Table 7 summarizes the steps that hospitals generally use to determine eligibility or verify applicant information.

1) Hospital identifies any uninsured, underinsured, or self-pay patients.

2. Patient completes application/determination of eligibility form.
3. Patient completes financial statement that includes income, assets, and liabilities. Patient supplies documentation of resources (e.g., w-2, pay stubs, tax forms), and outstanding obligations (e.g., bank statements, loan documents).

4) Hospital considers federal poverty guidelines and family size.

5) Hospital verifies third-party coverage, if indicated.

6) Designated hospital staff person interviews patient to assess the patient’s ability to pay in full; ability to pay reasonable monthly installments; and qualification for charity care.

7) Hospital attempts to secure federal, state, or local funding, if appropriate.

8) After the hospital makes an initial determination of insufficient funds, income, and health care benefits, the claim becomes eligible for final review, often by a committee composed of administrative, business office, social services and nursing staff. Occasionally, hospital board members serve on these committees.

In general, hospitals provide information on charity care, as well as applications for assistance, at the time of registration, in their emergency rooms, and in fiscal services offices. These applications may also be included in a patient’s admission packet or with itemized bills that are mailed to a patient after discharge from the hospital. Additionally, hospitals provide applications for assistance upon a patient’s request. Many hospitals publish brochures or pamphlets describing the availability of charity care and identifying the criteria for qualification. Some hospitals offer individual counseling at the time of pre-admission or during the collection process and determine an individual’s lack of financial resources. Signs may be posted both in English and other languages commonly used in the hospital’s service area, explaining available charity care services. These signs are usually located in the admitting and emergency entrance areas of the hospital. Hospitals also publish annual notices in local or area newspapers describing charity care programs.

From the beginning, hospitals have included service to the poor and underserved as part of their mission. Ever since hospital rate setting was suspended in law, in 1989, charity care expenditures grew steadily until 1993. Since 1993 until now, that growth has stabilized and is declining. Today, welfare reform, along with changes to Medicare and Medicaid entitlements and the continuing expansion of managed care organizations, are leading issues which may affect the future of charity care. Although welfare reform may ultimately increase the number of ineligible clients, and thus increase the need for charity care, representatives from the Department of Social and Health Services have indicated that the number of Medicaid clients has not decreased and is not expected to vary in the next biennium.

During July, 1998, the Office of Financial Management, Forecasting Division, released the estimates of the uninsured people in Washington State based on the completion of the first stage of the 1996 Washington State Family Health Insurance Survey. This survey was conducted by the Rand corporation, in conjunction with Mathematica Policy Research, Inc. The 1996 survey is the second of its kind in Washington. The first survey was completed in 1994. In 1994, RAND estimated that 12.2 percent of the population lacked insurance. The new RAND study finds that in 1996 the proportion had dropped to 10.9 percent. The decline in the proportion of uninsured has been particularly dramatic among children. In 1994, 11.4 percent of children lacked insurance, but in 1996 only 7.3 percent lacked coverage. The actual number of uninsured children declined from 178,000 in 1994 to 118,200 in 1996. The U. S. Census Bureau recently released data that further supports this trend. The number of uninsured children in Washington for 1997 is estimated at 99,000.

Medicaid coverage for children has increased and the Basic Health Plan has enrolled more clients with a current enrollment of 216,000 residents. There have also been changes in insurance policies aimed at providing guaranteed insurance portability and limitations on exclusions for pre-existing conditions. These combined factors most certainly contributed to the current declines in the amount of charity care being provided. However, to what degree and how this is true is not fully understood at this time. Nevertheless, the Department receives very few complaints from the pubic regarding charity care denials. On this basis, it is assumed that hospitals have not limited the availability of charity care for those seeking it.

As hospitals operate more and more like for-profit businesses, the debate whether they warrant their tax-exempt status continues at both the state and federal level. Do hospitals provide sufficient benefits, including charity care, to their community and state to offset the loss of potential tax revenue? Private entities are also examining how charity care is being provided in their communities. For example, a Community Benefits Inventory Project, working with a group of representatives from hospitals and other organizations in Seattle and Spokane, has defined "community benefits" as charity care and community services. The participants working on this project have identified three objectives:

(1) Provide reliable information to inspire and support collaborative community benefits activities among hospitals and delivery systems;

(2) Provide credible information to support the tax-exempt status of non-profit hospitals and systems; and

(3) Support public education activities aimed at reinforcing the image of hospitals and systems as community-oriented organizations

This information should be beneficial in the review of charity care. It will provide a much broader and possibly a truer picture of benefits provided by Washington hospitals. A final report is scheduled for publication in November 1999.

The Legislature has provided the following mandate for the Department in RCW 70.170.010(3):

... access to health care is among the state’s goals and the provision of such care should be among the purposes of health care providers and facilities. Therefore, the legislature intends that charity care requirements and related enforcement provisions for hospitals be explicitly established.

Until such time as all residents of Washington have health insurance, the need for charity care will continue. Although the amount may vary from year to year, the Department will continue to collect and report the level of charity care provided in Washington hospitals.