Indy Star Article Re: Tax-Exempt Status and Community Benefit

This recent article in the Indianapolis Star addresses many of the fundamental issues that surround the issue of the tax-exempt status of many hospitals and the disconnect between the value of the tax-exemption and the actual benefit that is provided to the community which they are supposed to serve.

Indy Star Sunday Dec 14, 2008:

Are hospitals doing enough for the poor?

Nonprofit facilities get millions in tax breaks for providing free care and other community benefits. But some say those benefits come up way short.

Each year, Central Indiana’s four major nonprofit hospitals receive tens of millions of dollars in tax breaks in return for providing outreach programs and care for the poor.

But those hospitals’ current level of “charity care” — care for which they expect no payment — raises questions about whether they deserve those tax breaks and whether measures should be taken to protect taxpayers.

A review of federal, state and hospital records by The Indianapolis Star reveals that the area’s four nonprofits — Community Health Network, St. Francis Hospital & Health Centers, St. Vincent Health and Clarian Health — devoted less than 3 percent of revenue each to charity care in 2006, the most recent year for which such information is publicly available. All told, they spent $78.8 million that year on charity care, of which Clarian’s Downtown hospitals contributed more than half.

By comparison, the area’s public taxpayer-funded hospital, Wishard Memorial Hospital, provided roughly $149.1 million in free care in 2006 — nearly twice the total of the four nonprofits combined, or the equivalent of 35 percent of its patient revenue.

This imbalance isn’t happening by accident. Across America, nonprofit hospitals are moving to the suburbs, where they can attract patients far more likely to be insured — and are far less likely to encounter patients in need of the free or subsidized care that merits their nonprofit tax breaks.

Taxpayer-funded hospitals, which, like Wishard, are more often in inner cities, are left to pick up the ever-increasing slack and cost.

The situation has drawn the attention of state and federal lawmakers, who see a need for hospitals to better justify their nonprofit status.

“My bottom line is that I think there are problems,” said Sen. Charles Grassley, R-Iowa, who is pressuring hospitals to defend their tax-exempt status. “You need to do the charitable things that charities have tax exemption for.”

Some states have minimum requirements. In Texas, for example, hospitals are required to devote at least 4 percent of revenues to charity care — a threshold that none of the four Central Indiana hospital providers met in 2006.

Neither the IRS nor the state of Indiana, however, requires any set amount of charity care to receive or maintain nonprofit status.

In 1969, the Internal Revenue Service set standards for tax-exempt status and an expectation for community benefit, including charity care.

Indiana requires nonprofit hospitals to file an annual community benefit report with the Indiana State Department of Health. The report is for information only and ostensibly shows what the hospitals have done to benefit the community. But hospitals define community benefit differently, making it difficult to compare charity care levels for different providers or over time.

Last year, state Rep. Thomas E. Saunders, R-Lewisville, introduced legislation that would have required hospitals and other nonprofits to prove their property was used for charitable purposes to remain eligible for tax exemption.

He said he soon learned from lobbyists that such rules had little support. The bill died.

“I wasn’t a very popular person last year,” he said.

Saunders said he intends to keep pressing the issue but has no plans to reintroduce legislation. “I just wanted it to be debated,” he said, “and it didn’t get debated.”

Grassley sent letters earlier this year questioning certain charity care or billing practices at two high-profile, tax-exempt hospitals: M.D. Anderson Cancer Center in Houston and the University of Chicago Medical Center in Illinois.

University of Chicago hospitals performed $10 million worth of charity care in the most recent fiscal year, yet received $59 million in tax exemptions, according to the Center for Tax and Budget Accountability, a Chicago nonprofit.

The concern has caught the attention of the IRS, as well. Starting next year, tax-exempt hospitals nationwide will have to provide more detailed financial information to the agency about the charity care and community benefit they provide. Still, there will be no quantifiable requirement.

Arguments against thresholds

Although some argue that hospitals should meet certain charity care thresholds — such as 5 percent of patient revenues — to receive tax breaks, others say such requirements would only lead to more problems.

Hospitals and doctors likely would demand higher rates if they incurred more losses from charity care, some say.

Already, uninsured patients often are charged the highest prices for care because they do not receive discounts negotiated by large insurers. More pressure would be placed on those with any ability to pay, forcing some people into bankruptcy.

Some hospitals would never reach the charity care goal because they are in areas that would make that impossible.

“You could have a hospital in an affluent area seeing every charity care case that walks through that door and not hit that number,” said Douglas Leonard, president of the Indiana Hospital Association.

Calculating benefit

Indeed, based on 2006 figures, a 5 percent minimum would be daunting for some.

Charity care at St. Vincent’s Indianapolis and Carmel hospitals was more than $12 million in 2006, but the hospitals had more than $907 million in revenue — putting their charity care at 1.36 percent. At 5 percent, the two hospitals would have provided more than $42 million in care to the poor.

Charity care at St. Vincent’s flagship 86th Street hospital on the Far Northside was about 1.5 percent of total revenue of $765 million in 2006.

But St. Vincent Health Chief Executive Officer Vince Caponi said it’s unfair to base his hospital’s tax-exempt status on charity care alone. He says the treatment of Medicaid patients, for which the hospital is not fully reimbursed, and other community programs also must be considered.

“As a faith-based organization, charity is very important to us,” Caponi said. “It’s something that quite frankly we budget for every year.”

St. Francis’ parent organization, Mishawaka-based Sisters of St. Francis Health Services, said it would have paid $178.6 million in federal and state taxes in 2007 had its hospitals not been tax-exempt.

That year, Sisters of St. Francis said it provided $71.6 million in charity care at its Indiana and Illinois hospitals. But the hospital reported $215.9 million in community benefit, which included unpaid Medicaid costs and other expenses.

Community Health Network, which operates four nonprofit hospitals in Central Indiana, performed $9.2 million in charity care in 2006, yet received $33.75 million in tax exemptions. Community had total 2006 revenue of about $995 million.

But Community officials also stress that charity care represents just a portion of what the network does to justify its tax-exempt status. The hospital system calculates its total community benefit, including health outreach programs and its shortfall from treating Medicaid patients, at $69.48 million.

No one suggests that using Medicaid shortfalls to calculate community benefit is inappropriate. However, the rates negotiated with insurers are set, in part, to help offset that shortfall.

Also, just as nonprofit hospitals in the suburbs tend to serve far fewer patients who are uninsured, they also serve far fewer who are on Medicaid.

Location, hospital officials acknowledge, determines who their patients will be — and location has created tension.

In 2011, St. Francis plans to close its Beech Grove hospital, which has served the blue-collar community for generations.

Such a move might improve the bottom line, but St. Francis’ parent organization, in its 2006 IRS filing, states that its primary purpose for tax exemption is to continue the healing ministry of Christ, and to provide “service to the less fortunate among us.”

Greg Anderson, vice president of finance for St. Francis, said his system plans to keep some outpatient services in Beech Grove.

“We are not going to abandon this community,” Anderson said.

Yet he acknowledged that St. Francis’ withdrawal from Beech Grove could result in indigent patients ending up in emergency rooms at taxpayer-funded Wishard or other nearby hospitals, including Methodist and Community Hospital East.

The move doesn’t sit well with Daniel Evans, Clarian’s chief executive officer.

“Our facilities are where the poor people are,” Evans said. “If you close your Downtown operations and move to the extremes of the county, it’s natural that you would provide less charity care.”

For Clarian, taking on a larger share of indigent patients is a hit to the bottom line. But at Wishard, it’s a hit to taxpayers.

To help with the cost of providing care to uninsured patients, Wishard receives support from Marion County property taxes, although that funding has decreased as its load has increased.

In 2006, Wishard received $50.3 million in property tax support, or 12.6 percent of expenses, according to records provided by the Marion County Health and Hospital Corp. In 2009, Wishard said, it expects to receive $24.9 million, accounting for 5.4 percent of expenses.

But at Wishard, it’s not just an issue of gobbling up taxpayer dollars or financial strain, but also figuring out how to handle all the patients.

According to Matthew Gutwein, chief executive officer of the Health and Hospital Corp., which operates Wishard, patient admissions have climbed about 12 percent since 2004. Wishard’s inpatient units now typically run at 98 percent of capacity, Gutwein said, and a hospital is considered “full” at 80 percent of capacity because of the need to have spots available for new patients.

KDHHS Form 990

The following links are for the IRS Form 990 reports for Kings Daughters Hospital and Health Services which are required to filed and made available for public review by all “non-profit” organizations.

Kings Daughters Hospital Health Services 2003 Form 990

kdhhs-2004-form-990

kdhhs-2005-form-990

kdhhs-2006-form-990

kdhhs-june-30-2008-bond-disclosure1

Jefferson County Local Candidate Forum Oct 28, 2008

Last night’s local candidate forum was quite informative although somewhat sparsely attended.  It was filmed for Channel 15 so I would certainly encourage folks to watch it if possible.

Madison School Board — I think there are a lot of great choices for Madison school board — most of the candidates appeared to be quite passionate about education, the need to focus on the kids, and support for rural schools.  There are six or seven candidates for the two seats which is helpful as choosing only one would be very difficult.  I was particularly impressed by Elizabeth Winters, who I knew nothing about prior to the forum.  She was very well spoken, focused and passionate about education including the need for art, phys ed and music in the elementary schools.

Judge — I was impressed by Allison Frazier’s focus on instituting a drug court to deal with substance abuse issues and her straightforward manner.  Hensley emphasized his trial experience and recited a long list of his experience which I really didn’t find very helpful. (sorry Foobar I didn’t see your request before the forum)

County Council — I also was quite impressed by Matthew Drake a R candidate for County Council. He is young, a veteran of the first gulf war, manages military sales for Grote and seemed very passionate.  The incumbent County Council members sure seemed proud of the fact that they had not taken a raise for next year.

County Commissioner –  I thought Julie Berry was much more engaging and passionate about her work as a Commissioner than a dour Dan Carter.  Mark Cash and Greg Sinders both made good presentations.

State Representative – Dave Cheatam made a good case for staying in office and committed to work to eliminate property taxes for those 65 and over.  The final candidate to appear, perennial candidate Republican Floyd Coates who is running this time for the State Rep seat held by Dave Cheatam, provided comedic relief (unintentional) with his own unique style of public speaking.

The Host — Intentional comedic relief was provided by Dr. Kevin Watkins, the host, who did a great job introducing everyone, and supplying interesting and funny political quotes and quips during the process.

NY Times Op-Ed: Candidates Healthcare Plans

The following is an op-ed published in the New York Times on Tuesday, October 30 comparing and contrasting the healthcare care plans for the two major party presidential candidates.  The following is a link to the article on the New York Times website:  http://www.nytimes.com/2008/10/28/opinion/28tue1.html?hp;

The Candidates’ Health Plans

The nation’s health care system is desperately in need of reform — as far too many Americans know from grim, personal experience. In this election, Barack Obama and John McCain are offering starkly different ideas for how to fix that system.

There is no shortage of problems:

¶ Some 45 million Americans lack health insurance, limiting their ability to get timely care.

¶ The costs of medical care and health insurance are rising much faster than household incomes, making it increasingly difficult for people to afford either.

¶ People can’t carry their insurance from one job to another, limiting their mobility. Outside the workplace, it is hard to find affordable insurance.

¶ Despite the wealth and technological prowess of this country, the quality of medical care often lags behind that available in other industrialized nations.

Both candidates have largely accepted the prevailing expert wisdom on ways to improve quality and lower health care costs over the long run, such as relying more on electronic medical records and better management of the chronically ill. But they have very different ideas on the best way to make insurance available and affordable for all Americans.

We believe that Mr. McCain’s plan, which relies on reshaping the tax code, is far too risky. It is likely to erode employer-provided group health insurance and push more people into purchasing their own insurance on the dysfunctional open market, where insurers often reject applicants with pre-existing conditions.

Mr. Obama has focused primarily on extending coverage to a big chunk of the 45 million uninsured Americans by expanding existing private and public programs with the help of federal subsidies and mandates. His boldest innovation would be a new federally regulated exchange where Americans not covered at work would be able to choose — as federal employees currently can — among a variety of private group policies. He would also create a new public program to compete with the private insurers.

Mr. Obama’s plan is a better start than Mr. McCain’s. But it is still not likely to help all Americans who need and deserve affordable, high-quality medical care.

As voters weigh their choice for next Tuesday’s election, we offer this detailed review of the two candidates’ plans.

THE MCCAIN PROPOSAL Mr. McCain’s main idea is to change the tax code so that workers would have to pay income taxes on the value of their employer’s contribution to their health insurance. In return, all Americans, whether currently insured or not, would receive a tax credit of $2,500 for an individual or $5,000 for a family to buy health insurance, either through their employer or on the open market.

Mr. Obama has derided this plan as giving tax credits with one hand and taking them away with the other. But the tax credits are initially so generous that a great majority of workers would end up ahead: their tax credit would exceed the tax they would have to pay on their employer-provided insurance.

They could stay in the same health plan at work and have extra money that could be applied to other health care costs. Or they could buy policies in the open market. As good as that sounds, a $5,000 credit would not go very far toward buying a typical $12,000 family policy but might well suffice for the young and healthy, who get preferable rates.

Mr. McCain correctly recognizes that there are disadvantages to linking insurance to jobs — as thousands of laid-off American workers already are discovering — and that there is an intrinsic inequity in the current tax code that favors those who have employer plans over those buying individual coverage.

The great danger is that Mr. McCain’s plan will fragment the sharing of risks and costs — the bedrock of any good insurance plan — by enticing young, healthy workers to bail out of their employers’ group policies to seek cheaper insurance on their own. Their older or less healthy colleagues would be left behind, which would drive up premiums at work. The rising costs could lead many companies to drop their health coverage entirely.

The proposal also offers little protection for older and sicker people forced to buy policies in the open market. Mr. McCain says the federal government would help underwrite high-risk pools like those operated by many states to cover such patients. But the subsidies his aides have talked about — some $7 billion to $10 billion a year — would fall far short of the amount needed.

Mr. McCain would loosen state regulations on insurers by allowing companies to sell across state lines. Some states require insurers to accept all applicants and provide specified standard benefits, and they limit the ability of companies to base premiums on health status. In the name of promoting competition, Mr. McCain’s plan would free companies from those terms. Anyone who lost insurance as a result would have to seek coverage through the high-risk pools.

THE OBAMA PLAN Mr. Obama would do far more than his opponent to address the nation’s shameful failure to provide health coverage for all citizens. He would require all parents to get coverage for their children and expand Medicaid and the State Children’s Health Insurance Program. He would also require large and midsize companies to offer health insurance to their workers or pay into a kitty to subsidize coverage elsewhere — a provision that Senator McCain castigates as a “fine” but that really is their fair share of the burden.

Mr. Obama says the government would provide subsidies to encourage small employers to offer coverage and to help low-income people buy insurance. This is not a government-run program — as Mr. McCain claims — but it does give the government a much bigger role than it now has by expanding public programs and creating a new national plan.

Mr. Obama would also greatly increase government regulation of the insurance industry. He would require insurance companies to take every applicant and meet a minimum standard of benefits, and he would prevent them from charging higher premiums based on an applicant’s health. Some states have similar requirements now and insurance companies still sell policies there.

COVERAGE Some experts estimate that the McCain plan would reduce the number of uninsured only modestly because millions of people would drop or lose employer coverage, and not many more than that would buy policies outside of work. The nonpartisan Tax Policy Center estimates that the McCain plan would lower the number of uninsured by a mere two million in 2018, out of a projected 67 million uninsured in that year. The Obama plan would cut the number by 34 million, the center says, but still leave nearly 33 million uninsured.

The McCain campaign makes an optimistic prediction that up to 30 million of the uninsured might take out policies using their tax credits. If so, those policies would probably be meager — with high deductibles, large co-payments and limited benefits — and unlikely to provide much help in a crisis.

COSTS Despite all the Republican warnings about high-spending Democrats, McCain’s plan could be a lot more expensive than Mr. Obama’s, at least in the early years, and possibly in the long term. This is because the generous tax credits would drain federal revenues faster than the tax on employer policies would replenish them.

The Tax Policy Center estimates that the McCain plan would cost the federal government $1.3 trillion over 10 years, and the Obama plan $1.6 trillion. Using different assumptions, the Lewin Group, a consulting firm, estimates that the McCain plan would increase federal spending by $2.05 trillion over 10 years, compared with $1.17 trillion for the Obama package.

Neither candidate has persuasively explained how he would pay for his plan. Mr. Obama says he would apply the money saved by rescinding Bush-era tax cuts for the wealthy and hoped-for savings from reforming the health care system, but there is considerable doubt those savings will materialize quickly.

Mr. McCain also counts on cost-containment measures but is mostly relying on market forces to reduce the cost of health insurance and health care. He expects that people who buy their own coverage will shop for cheaper policies and make more careful choices about what medical care they really need. Among the dangers is that chronically ill people may forgo needed treatments.

Mr. Obama’s plan is the better one because it would cover far more of the uninsured, spread risks and costs more equitably and result in more comprehensive coverage for most Americans. We fear Mr. McCain’s plan would jeopardize employer-based coverage without providing an adequate substitute. At a time when so many employers are reducing or dropping coverage, that is not a risk that the country can afford to take.

NY Times Article: A Town saved by food

Uniting Around Food to Save an Ailing Town

Published: October 7, 2008

HARDWICK, Vt. –THIS town’s granite companies shut down years ago and even the rowdy bars and porno theater that once inspired the nickname “Little Chicago” have gone.

Facing a Main Street dotted with vacant stores, residents of this hardscrabble community of 3,000 are reaching into its past to secure its future, betting on farming to make Hardwick the town that was saved by food.

With the fervor of Internet pioneers, young artisans and agricultural entrepreneurs are expanding aggressively, reaching out to investors and working together to create a collective strength never before seen in this seedbed of Yankee individualism.

Rob Lewis, the town manager, said these enterprises have added 75 to 100 jobs to the area in the past few years.

Rian Fried, an owner of Clean Yield Asset Management in nearby Greensboro, which has invested with local agricultural entrepreneurs, said he’s never seen such cooperative effort.

“Across the country a lot of people are doing it individually but it’s rare when you see the kind of collective they are pursuing,” said Mr. Fried, whose firm considers social and environmental issues when investing. “The bottom line is they are providing jobs and making it possible for others to have their own business.”

In January, Andrew Meyer’s company, Vermont Soy, was selling tofu from locally grown beans to five customers; today he has 350. Jasper Hill Farm has built a $3.2-million aging cave to finish not only its own cheeses but also those from other cheesemakers.

Pete Johnson, owner of Pete’s Greens, is working with 30 local farmers to market their goods in an evolving community supported agriculture program.

“We have something unique here: a strong sense of community, connections to the working landscape and a great work ethic,” said Mr. Meyer, who was instrumental in moving many of these efforts forward.

He helped start the Center for an Agricultural Economy, a nonprofit operation that is planning an industrial park for agricultural businesses.

Next year the Vermont Food Venture Center, where producers can rent kitchen space and get business advice for adding value to raw ingredients, is moving to Hardwick from Fairfax, 40 miles west, because, Mr. Meyer said, “it sees the benefit of being part of the healthy food system.” He expects it to assist 15 to 20 entrepreneurs next year.

“All of us have realized that by working together we will be more successful as businesses,” said Tom Stearns, owner of High Mowing Organic Seeds. “At the same time we will advance our mission to help rebuild the food system, conserve farmland and make it economically viable to farm in a sustainable way.”

Cooperation takes many forms. Vermont Soy stores and cleans its beans at High Mowing, which also lends tractors to High Fields, a local compositing company. Byproducts of High Mowing’s operation — pumpkins and squash that have been smashed to extract seeds — are now being purchased by Pete’s Greens and turned into soup. Along with 40,000 pounds of squash and pumpkin, Pete’s bought 2,000 pounds of High Mowing’s cucumbers this year and turned them into pickles

For the past two years, many of these farmers and businessmen have met informally once a month to share experiences for business planning and marketing or pass on information about, say, a graphic designer who did good work on promotional materials or government officials who’ve been particularly helpful. They promote one another’s products at trade fairs and buy equipment at auctions that they know their colleagues need.

More important, they share capital. They’ve lent each other about $300,000 in short-term loans. When investors visited Mr. Stearns over the summer, he took them on a tour of his neighbors’ farms and businesses.

To expand these enterprises further, the Center for an Agricultural Economy recently bought a 15-acre property to start a center for agricultural education. There will also be a year-round farmers’ market (from what began about 20 years ago as one farmer selling from the trunk of his car on Main Street) and a community garden, which started with one plot and now has 22, with a greenhouse and a paid gardening specialist.

Last month the center signed an agreement with the University of Vermont for faculty and students to work with farmers and food producers on marketing, research, even transportation problems. Already, Mr. Meyer has licensed a university patent to make his Vermont Natural Coatings, an environmentally friendly wood finish, from whey, a byproduct of cheesemaking.

These entrepreneurs, mostly well educated children of baby boomers who have added business acumen to the idealism of the area’s long established hippies and homesteaders, are in the right place at the right time. The growing local-food movement, with its concerns about energy usage, food safety and support for neighbors, was already strong in Vermont, a state that the National Organic Farmers’ Association said had more certified organic acreage per capita than any other.

Mr. Meyer grew up on a dairy farm in Hardwick and worked in Washington as an agricultural aide to former Senator Jim Jeffords of Vermont. “From my time in Washington,” Mr. Meyer said, “I recognize that if Vermont is going to have a future in agriculture we need to look at what works in Vermont, and that is not commodity agriculture.”

The brothers Mateo and Andy Kehler have found something that works quite well at their Jasper Hill Farm in nearby Greensboro. At first they aged their award-winning cheeses in a basement. Then they began aging for other cheesemakers. Earlier this month they opened their new caves, with space for 2 million pounds of cheese, which they buy young from other producers.

The Vermont Institute for Artisan Cheese at the University of Vermont is helping producers develop safety and quality programs, with costs split by Jasper Hill and the producers. “Suddenly being a cheesemaker in Vermont becomes viable,” Mateo Kehler said.

Pete Johnson began a garden when he was a boy on his family’s land. Now his company, Pete’s Greens, grows organic crops on 50 acres in Craftsbury, about 10 miles north of here. He has four moveable greenhouses, extending the growing season to nine months, and he has installed a commercial kitchen that can make everything from frozen prepared foods and soup stocks to baked goods and sausages. In addition he has enlarged the concept of the C.S.A. by including 30 farmers and food producers rather than just a single farm.

“We have 200 C.S.A. participants so we’ve become a fairly substantial customer of some of these businesses,” he said. “The local beef supplier got an order for $700 this week; that’s pretty significant around here. We’ve encouraged the apple producer who makes apple pies to use local flour, local butter, local eggs, maple sugar as well as the apples so now we have a locavore apple pie.”

“Twelve years ago the market for local food was lukewarm,” Mr. Johnson added. “Now this state is primed for anything that is local. It’s a way to preserve our villages and rebuild them.”

Like Mr. Johnson, Mr. Stearns of High Mowing Organic Seeds in Wolcott, who is president of the Center, knew he wanted to get into agriculture when he was a boy. His company, which grew from his hobby of collecting seeds, began in 2000 with a two-page catalog that generated $36,000 in sales. Today he has a million-dollar business, selling seeds all over the United States.

Woody Tasch, chairman of Investors Circle, a nonprofit network of investors and foundations dedicated to sustainability, said: “What the Hardwick guys are doing is the first wave of what could be a major social transformation, the swinging back of the pendulum from industrialization and globalization.”

Mr. Tasch is having a meeting in nearby Grafton next month with investors, entrepreneurs, nonprofit groups, philanthropists and officials to discuss investing in Vermont agriculture.

Here in Hardwick, Claire’s restaurant, sort of a clubhouse for farmers, began with investments from its neighbors. It is a Community Supported Restaurant. Fifty investors who put in $1,000 each will have the money repaid through discounted meals at the restaurant over four years.

“Local ingredients, open to the world,” is the motto on restaurant’s floor-to-ceiling windows. “There’s Charlie who made the bread tonight,” Kristina Michelsen, one of four partners, said in a running commentary one night, identifying farmers and producers at various tables. “That’s Pete from Pete’s Greens. You’re eating his tomatoes.”

Rosy as it all seems, some worry that as businesses grow larger the owners will be tempted to sell out to companies that would not have Hardwick’s best interests at heart.

But the participants have reason to be optimistic: Mr. Stearns said that within one week six businesses wanted to meet with him to talk about moving to the Hardwick area.

“Things that seemed totally impossible not so long ago are now going to happen,” said Mr. Kehler. “In the next few years a new wave of businesses will come in behind us. So many things are possible with collaboration.”

Illegal Healthcare Billing Practice

There is an interesting article in Business Week regarding the practice of healthcare providers billing patients for costs not covered by insurance.  It turns out this is against the law.  The following is a summary of the article which can be read in its entirety on Business Week’s website:

“As health-care costs continue to soar, millions of confused consumers are paying medical bills they don’t actually owe. Typically this occurs when an insurance plan covers less than what a doctor, hospital, or lab service wants to be paid. The health-care provider demands the balance from the patient. Uncertain and fearing the calls of a debt collector, the patient pays up…Most consumers don’t realize it, but this common practice, known as balance billing, often is illegal. When doctors or hospitals think an insurer has reimbursed too little, state and federal laws generally bar the medical providers from pressuring patients to pay the difference. Instead, doctors and hospitals should be wrangling directly with insurers. Economists and patient advocates estimate that consumers pay $1 billion or more a year for which they’re not responsible.”  www.businessweek.com “Medical Bills You Shouldn’t Pay”

who pays for a new hospital? We do…

There is one very essential issue that has been pushed aside in KDHHS’s rush to build a sparkling new facility on the hilltop. Who is going to pay for it?

A project of this scope ($118 million which will without doubt continue to increase with rising inflation) will require significant borrowing – I estimate something in the area of $90-100 million of money must be borrowed to fund the project and the costs related to the financing (a debt service reserve and financing costs). The balance of the funding (I have assumed $30 million from operating reserves) would be paid for from the existing cash reserves of the hospital.

The annual payments for debt of this magnitude will be approximately $6.6 million for the life of the loan (30 years) based on the current market rates for tax-exempt bonds of similar credit quality as KDHHS. If the hospital funds a greater portion of the project from their existing cash reserves (more equity and less debt), the hospital’s credit profile will be diminished which will result in higher interest rates, as bond investors require higher interest rates for projects with higher risk profiles. These annual debt service costs, which represent an increase of approximately 6.3% in KDHHS’s annual operating expenses of $105 million in 2007, can only be generated through increased revenues or significant cost cutting in order to fund these additional costs and maintain an acceptable profitability level (again, less profitable means lower credit quality and more risk to investors).

KDHHS’s has two major sources of operating revenue currently – Medicare (46% of 2007 Revenues) and Commercial Insurance Companies (i.e., Anthem, Humana, Aetna) (38.5% of 2007 Revenues). Medicare already contributes very little to the profitability of the hospital as Medicare rates are set by the federal government and are not subject to negotiation and are not adjusted for additional capital costs. That leaves one source of additional revenue to pay the increased operating costs – commercial insurers which negotiate their rates with hospitals individually. As the hospital negotiates higher rates for its services with these insurance companies, the insurance companies will turn around and pass those costs on to the various local and regional businesses, governments, and individuals who are the primary users of KDHHS services (those in the KDHHS network). Health insurance premiums, particularly for a fairly isolated market like the one which KDHHS serves and which there is minimal competition from other hospitals, are, among other things, driven largely by the costs that the insurance provider negotiates with the “provider network”, as this is where the vast majority of the basic services will be provided to the policyholder.

• In the end, a significant portion of this $6.6 million in additional profitability necessary to fund the debt service payments for this project will end up being paid through higher private insurance premiums for the businesses and families in the immediate geographic area (Jefferson, Switzerland, parts of Ripley Counties in Indiana and Carroll and Trimble Counties in Kentucky).  In light of the economic struggles that are occurring in our community every day with rising gas prices and stagnant job growth, I have to question the wisdom of the choices that appear to made and KDH’s true commitment to this community versus the bottom line of the hospital.

What is the impact of these costs being passed through to our local economy and governments?

Healthcare is unlike many large businesses (i.e., manufacturing) which generally earn their revenue from selling their products across the country or the world. Healthcare dollars are largely spent locally and paid from local sources via insurance companies (or the state and federal government for Medicaid and Medicare). I suggest that the possible “side effects” should this project be undertaken include the following:

• When these costs flow through to our local businesses, they will be forced to make very difficult choices (incur the costs themselves, ask employees to pay higher portions of their premiums, or, in some cases, decide not to provide health insurance benefits to their employees).

• Taxpayers will not be immune either as local school corporations, city and county governments on both sides of the river will face increases in their costs of providing health care benefits which again will be passed on to taxpayers and/or employees.

• Local businesses, which have a choice, may accelerate outsourcing and the movement of jobs to other parts of the world as their personnel costs continue to rise above and beyond the already steep increases they incur each year from rising prescription drug costs and inflation generally. Even the hospital with over 1000 employees will see the costs of its benefits increase.

• The likelihood that we will have an increase in the number of uninsured individuals and families increases dramatically as healthcare premiums rise. Not only will this reduce access for these individuals to obtain quality healthcare, it will also lead to additional bankruptcies and foreclosures that occur frequently when health insurance becomes unaffordable due to higher costs. Healthcare costs incurred by the uninsured and even those with insurance whose coverage is insufficient to cover a catastrophic medical event are the nation’s leading cause of bankruptcy

More to come later….

Additional Comments on Public Info Session

Other Comments

No Economic Impact Study:  The hospital, in response to a question at Tuesday’s meeting, stated explicitly that they do intend to undertake any type of economic impact study to identify the true costs of this project on the local economy.  I suspect that may be because the answer it would provide would identify the real costs in jobs, the likely increase in the uninsured locally, and a decline in the affordability of healthcare to our community.

Manipulation of the Planning Assumptions:  It was also interesting to note some of the subtle assumptions and conclusions that were reached by the architecture firm and their impact on the comparative cost and benefits of the various options.  For example, their review of the estimated cost of reworking the downtown campus assumes that the existing parking structure is demolished and a new parking structure built in the MOB parking lot.  Take a look at a map and you can see that the existing surface lot at the corner of Presbyterian and Broadway is a larger space, would not require demolition and reconstruction of a parking structure, and could serve as the site of an addition to the existing building.   I am sure there are more instances of the information presented being steered in such a fashion to make the desired conclusion seem to be the best choice.    It only takes a few assumptions here and there to significantly alter the apparent cost-benefit analysis provided to the community.

The Real Costs of a New KDDHS Hospital

The real costs of a new KDDHS hospital are not limited to the impact on the downtown economy.  Every person in the community will bear the cost of a project like this.  Based on an estimated cost of $100 MILLION DOLLARS for a new KDHHS facility (see below), the annual increase in KDHHS operating expenses to pay the debt service for such a project would be at least $7 million per year.  This estimate is based upon the annual debt service costs for a $100 million tax-exempt bond issue (the method by which KDHHS would raise the funds for construction). Current interest rates for these bonds would be in the range of 5.75%-6.0% with a 30 year term.   This translates into annual debt service (loan) payments of $7.1 million for the next thirty years (total payments would be in excess of $212 MILLION over the next 30 years including $112 MILLION of interest on the debt).

Where does the money come from to make these loan payments? Largely from the pockets of local businesses and families, either paid directly by those who are uninsured/self-pay, or indirectly through higher health insurance premiums.  As the hospital passes on their higher operating costs through their contracts with health insurance providers (Humana, Anthem, Aetna, etc.), the insurance providers will pass them along to those companies and individuals who obtain their health insurance from these providers.  Combined with the general rise in healthcare costs related to prescription drugs and other non-hospital expenses,  we will surely see double digit increases in annual health insurance premiums.  Do local businesses — which are alreay struggling to compete with companies around the world while also dealing with rising energy prices and commodity costs — really need the financial burden of additional increases in their health insurance premiums?  The impact of these additional costs will also be felt by taxpayers generally who foot the a substantial portion of the bill for healthcare benefits for employees (and their families) of the local school districts, city and county governments — these premiums will rise even faster as the costs are passed along through higher health insurance premiums.

For those who might question my cost estimates of a new facility for KDHHS (my estimate is at least ONE HUNDRED (100) MILLION DOLLARS for a hospital with 75-80 beds versus the current 116 licensed bed capacity), I would point you to a couple of recent and local examples.  (Note that both of these projects are either in progress or recently completed and there have been significant increases in construction costs in the interim due to higher steel prices and higher energy prices generally):

• Norton Brownsboro Hospital in eastern Jefferson County (KY) which is spending $146 million for a 127 bed hospital ($1.15 MILLION PER BED)

“Officials with Norton Healthcare Inc. expect to begin construction next month on the company’s planned $146 million Norton Brownsboro Hospital, the first full-service, acute-care hospital to be built in Louisville in 25 years…..The 285,000-square-foot facility, which will be located in the Old Brownsboro Crossing development in northeast Jefferson County, is expected to open in late 2009..It has been more than a year since Norton announced that it would build the hospital, using 127 licensed inpatient beds the company relocated from its former Norton Southwest Hospital.” (from Business First of Louisville, June 2007)

• Harrison County (IN) Hospital in Corydon completed construction of a 41 bed hospital in late 2007 which cost $47 MILLION DOLLARS ( or $1.14 MILLION PER BED) including furnishings, equipment, etc.  This is a county owned hospital and they diverted $17 million from the County’s casino tax earnings to help pay for the new hospital.  (Various reports from the Louisville Courier Journal)

SIDENOTE: By the way, I am not simply pulling these numbers out of thin air.  I have been involved in hospital financing and analyzing healthcare organizations and capital projects for 20 years as an investment banker at several of the world’s largest investment banking firms including Lehman Brothers, Alex. Brown and Sons, and the late great Bear Stearns.  I also worked with the nation’s largest healthcare focused investment banking firm (Cain Brothers) for several years in Chicago.

60 Minutes on Price Gouging of the Medically Uninsured by “Non Profit” Hospitals

In March 2006, CBS’s “60 Minutes” broadcast an eye-opening segment related to the way hospitals charge the uninsured for services versus the rates paid by Medicare, Medicaid and private insurance companies.    The main message in this report is that many hospitals in the US, even not-for-profit and/or teaching hospitals whose missions explicitly include caring for the poor, often charge uninsured patients much higher fees (often 4-5 times) than those they accept from insurers (and federal programs like Medicare) for the same services.

A link to the video of the report is available here: http://www.cbsnews.com/sections/i_video/main500251.shtml?id=1364673n

If you prefer to read a transcript of the report, you can access is here:  http://www.cbsnews.com/stories/2006/03/02/60minutes/main1362808.shtml

This is another CBS News report that addresses the same issue:

http://www.cbsnews.com/sections/i_video/main500251.shtml?id=674625n