Medicaid reform seeks to end hospital charity-care debate

By Jamey Dunn

Changes to the state’s Medicaid program, which Gov. Pat Quinn recently signed into law, were heralded as historic reform and are expected to shave billions off of the state’s liability under the program. But the sweeping plan also attempts to resolve some longstanding disputes over health care policy in Illinois. This is part one in a two-part series that looks at those components of the new law.

The reform package, which contained five separate bills, will make a number of changes. It will reduce some services offered through Medicaid, increase taxes on cigarettes and other tobacco products and give coverage to thousands of uninsured residents of Cook County.

The plan also aims to resolve the longstanding issue of what hospitals must do to be considered charitable organizations eligible for local property tax exemptions. 

Under the new law, hospitals must provide charity care and other services that are equal to the tax liability that they would have incurred without the exemption. If they do not meet the threshold, they can make donations to other charitable health care providers. For-profit hospitals will also be able to earn tax credits for charitable care that they provide.

In the past, hospitals have argued that there were no clear standards for what they must do to receive the exemption. A 2010 Illinois Supreme Court ruling found that Provena Covenant Medical Center in Champaign County did not qualify for the tax exemption. The court said the hospital was not offering truly charitable care but instead, it was writing off bad debt, much like a for-profit hospital would. The ruling went on to spell out parameters for measuring what is or isn’t charity care, but it did not set a specific threshold that hospitals must meet.

Following the ruling, the Illinois Department of Revenue pulled exempt status from Northwestern Memorial Hospital's Prentice Women's Hospital in Chicago, Edward Hospital in Naperville and Decatur Memorial Hospital. The department said it used characteristics defined in the Provena decision to determine the later rulings.

However, Democratic Supreme Court Justices Anne Burke and Charles Freeman disagreed with part of the ruling, saying the court does not have the power to set the standards for defining charity. “This can only cause confusion, speculation and uncertainty for everyone: institutions, taxing bodies and the courts. Because the [Illinois Supreme Court] imposes such a standard, without the authority to do so, I cannot agree with it,” Burke wrote in her dissent.

After the Provena decision, lawmakers voiced concerns that such uncertainty would encourage cash-strapped municipalities to target nonprofit hospitals in search of revenue. “I have a concern now that we are going to see a rush of local governments trying to go after other health facilities. Thinking that this is a way to get some quick revenue from property taxes … the government may get a few extra dollars in property taxes, but then government is going to have to start providing all those services that those health care facilities used to provide,” Rockford Republican Sen. Dave Syverson, the minority spokesperson of the Senate Public Health Committee, said after the ruling.

“Some legislative response is probably going to have to be made to protect those health care facilities,” he added.

Quinn put a hold on any new rulings from the Department of Revenue and tried to work out a separate deal with hospitals. But the March 1, 2012, deadline he set for reaching an agreement came and went with no results. Quinn’s office did not respond to requests for comment for this report.

Instead, the solution came in May at the end of the spring legislative session, slipping somewhat under the radar as just one component of a proposal to reduce the state’s Medicaid liability by $2.7 billion.

While the new law could mark the end of the debate, some say there are likely to be few changes in the way that hospitals operate as a result. “I’m not sure, to tell you the truth, that a whole lot will change,” said John Colombo, a tax law professor at the University of Illinois. “My sense is that this isn’t going to affect the behavior of hospitals in any major way.” Colombo, whose research primarily focuses on tax-exempt organizations, said the standard is set up in a way that hospitals will likely be able to meet it with what they are already doing. “Even those hospitals [that don’t reach the threshold] at the end of the day, all they have to do is total up what they were missing the mark by and then cut a check."

He added, “Think about it, right, this bill was favored and pushed by the Illinois Hospital Association.”

Previously Colombo said that hospitals argued that any community outreach was charitable. But he said that would change under the law. “You don’t get to count every single dollar that you put into health fairs.” He said that the new law does make an important distinction. It requires hospitals to show that whatever they classify as charitable care for the exemption has to be targeted at those who cannot afford health care. “At least the bill seems to concede that when it comes to assessing charitableness of hospitals, it’s all about services that help the poor. It’s all about services that help some underserved population.”

Colombo said his concern with setting a black and white threshold for qualifying for the exemption may discourage hospitals from going beyond what is required of them and could prompt some to scale back on charity care. “Five years from now, are we going to find that all hospitals have magically converged on this single number?” Colombo asked. “When there is a numerical target, pressures will combine to structure operations so that you hit the target, maybe exceed it just a little bit so you have some cushion. But there’s no real reason to do anything but that target. If you hit your target, why would you do anything more?”

He advocates instead weighing what charity-care hospitals provide that for-profit hospitals are less willing to offer, such as services that are unlikely to turn a profit. He lists trauma centers and emergency psychiatric care as examples. “Why is it that the Chicago Symphony orchestra is a tax-exempt charitable organization? Because it can’t exist in the private market. Same with the Field Museum. Same with the Shedd Aquarium,” Colombo said. “What is it that nonprofit hospitals do, if anything, that for-profit hospitals do not do? That ought to be our inquiry.”

Danny Chun, vice president of corporate communications and marketing for the Illinois Hospital Association, said the association did not lobby specifically for the charity care standards in the plan. “I don’t want people to be left with the impression that we proposed it, that we supported it and that we pushed for it.” He said his organization backed the plan as a whole. While he said there were some pieces that the group liked and some it did not, Medicaid reform would not have happened without every component that was passed. “In order for all those bills to move, they had to be part of a package.” Chun said the Medicaid reform package should really be viewed as an overhaul of health care in the state. “At the end of the day ... those five bills were all health-care related. ... Several of the measures had nothing to do with Medicaid in a direct way.”

Chun said the hospital association is “very pleased” that a specific threshold that is “clear and transparent to everyone” has been set for hospitals seeking the tax exemption. “It’s not a free pass because it does hold hospitals accountable. It sets very clear parameters of what hospitals need to do.”

Sen. Heather Steans, who worked on the Medicaid reform package, agreed that the tax exemption issue may not have been resolved without being rolled into a larger proposal. “That has been out there languishing for decades.”

She said it was easier to get agreements on the charity care issue and Medicaid reform if providers could consider them all at once and have an idea of what the lay of the land would be going forward. “So everything is known, and you know how you can and can’t survive. You sort of have to solve it all at once.”

Indeed, Fitch Rating agency praised the provision for creating a consistent standard. "Fitch believes the legislation provides long-overdue clarity as to what constitutes charity care and should not negatively affect the Illinois hospitals we rate,” said a written statement from the agency.

Steans said the give and take of negotiation allowed controversial topics to be put on the table. Hospitals have resisted attaching a dollar amount of charity that must be given to get the exemption. Attorney General Lisa Madigan pushed without success in 2006 to require that hospitals spend 8 percent of revenue on charity for the exemption. “It’s really hard sometimes to win stuff against these lobbying groups, unfortunately,” Steans, a Chicago Democrat, said. “It’s one or the other on this one. It’s not all good, not all bad.”

Madigan also supports the charity-care provisions in the new law. “Providing access to quality health care has been a consistent priority for Attorney General Madigan. We are pleased that Illinois will now have a standard by which hospitals must provide free health care for people who cannot afford it. Our office engaged in discussions throughout the spring session with our primary goal being to ensure that people and families in need can access health care when they need it the most,” said a prepared statement from her office.

Colombo agreed. “It’s messy; it’s sausage. This is just the way the process works. ... You go through legislative compromise, and you end up with a product that often doesn’t satisfy everybody.” Colombo said it is possible that the Illinois Supreme Court might take issue with some of the provisions in the bill, such as allowing hospitals to count as charity care the shortfalls between Medicaid reimbursements and the actual cost of services they provide —a direct contradiction to the Supreme Court ruing. “The opinion says Medicaid shortfalls don’t count. The bill says they do. .. .It’s going to be interesting if it ever ends up before the Illinois Supreme Court.” However, he said it is unlikely that the law would end up before the court. “Maybe it could get challenged by a local school district or somebody who has a stake in local tax revenue.”

Overall, Colombo acknowledged that the standards for charity care and the threshold for the exemption are likely a “win” for the hospitals. But he said that not even the standards set in the Provena decision were necessarily here to stay. “There would have been more litigation. We wouldn’t have had this settled for years. ... It’s not a slam dunk that the Provena version of this would have survived another round of litigation."

Chun said that as federal health care reform goes into effect, the number of so-called charity care patients, who cannot afford care and are not covered by insurance or a safety net program, would shrink significantly. Many will obtain federally subsidized insurance or be added to the Medicaid program. He said that hospitals would need flexibility in what can be dubbed as charitable. “There are all kinds of other things that hospitals do to serve the uninsured and the under-insured and low-income that are not strictly classified as charity care.” Chun points to community clinics, preventative care and screening and vaccination programs offered by hospitals. And yes, even participation in the Medicaid program. “Hospitals have stepped up by partnering with the state to help support the Medicaid program.” Which means “low rates, low pay and slow pay.” He said some hospitals are waiting up to six months for reimbursements. “That’s why you can’t just look at charity care anymore. ... The numbers are going to change. The needs are going to change. How we serve people and where we serve them is going to change,” he said. “Looking at health care through an old snapshot and old framework pre-[federal] health reform just doesn’t make sense these days.”

Colombo also said that there is a need to modernize thinking about hospitals and charity care. But he is looking a little further back in time.

 “The real issue is, are hospitals really charities at all?” he said. “Hospitals got labeled as charitable in the 1800s and early 1900s, when hospitals were places where poor people went to die. ... The thing that we call a hospital today did not exist.” He added: “Maybe we need to let go of the past, and we need to just recognize that an industry that is labeled as charitable because of what they did 100 years ago isn’t charitable anymore. They’re running a business.”

 Colombo argued that it does not make sense to try to tackle health care problems with tax policy. “When we have poor people who are starving, do we say to the local Kroger’s, ‘You could be tax exempt if you gave food to poor people?’ We don’t do that. We have food stamps,” he said. “Why don’t we just treat [hospitals] like grocery stores? ‘You sell your product, and we will deal with access to your product for the poor through other government programs.”