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Conventional Community Benefit Measures Miss the Big Picture

Mike Allen, for HealthLeaders Media, January 26, 2009

Editor's Note: This feature is a response to Finance Editor Philip Betbeze’s take on community benefit in a column he wrote last November entitled, Just Not Good Enough.

The truth of the issue of community benefit lies somewhere between your "just not good enough" sentiment and Sen. Chuck Grassley's views. The community benefit definition and discussion needs proper time and thought. Simply measuring community benefit by how much free or discounted care is provided by a particular hospital is missing the big picture by a mile.

Your Wal-Mart analogy is not that far-fetched, although one key difference is that Wal-Mart exists for the benefit of, and returns all profits to, the shareholders. Benefiting the community is just a vehicle for that to happen. Our community-based healthcare model, and that of most community health systems, turns that model upside down. We exist to serve the healthcare needs of our community, and we use the resources we generate to accomplish that. If there is anything left over at the end of the day it is required by law to remain with the organization and further its mission. Wal-Mart does not sell to anyone who doesn't pay. Also, if Wal-Mart's customers do pay by check and that check is returned for insufficient funds, they won't sell to them again. So the community benefit from Wal-Mart ends when the funds are gone.

Defining community benefit
Back to defining what community benefit is for a nonprofit health system. Having one definition—and getting that definition right—are both critical to understanding not only community benefit, but how the healthcare system really works. The biggest mistake we hospitals and health systems make regarding community benefit is not properly accounting and reporting it. I would guess that a majority of nonprofit systems already meet any reasonable definition of community benefit but fail to account for it and report it well.

Sen. Grassley's preferred definition seems heavy on accounting for charity care and Medicaid underfunding. Those two elements are certainly cornerstones of community benefit. There are other items that rightfully should be in the discussion about community benefit, but Grassley, for one, doesn't appear to want to consider those ideas. Those two big items are Medicare underfunding and bad debt costs. Here is why both are relevant:

Medicare is a government-mandated program. To fulfill our mission we need to serve those covered under the Medicare program. I'm not sure that Wal-Mart would continue to sell to a certain population if payments from that population were mandated by the government and were 20% below cost. Wal-Mart might come up with another way to do it, and maybe we have to as well, but that's another story. So we should at least get community benefit credit for the fact that we take everyone regardless of their ability to pay or the level of payment that we receive. In the case of our small system, we experience about $4.5 million a year in Medicare underfunding—about 4.5% of our annual revenue.

Bad debt, likewise, is not viewed as community benefit, but if you peel back a few layers of the onion, you start to understand that we carry more bad debt than any for-profit business would ever tolerate. Why is that? Part of the reason is that it is our mission, and part of it is that we are prevented from trying to collect a bill in the same manner that a for-profit business would.

Some of our bad debt should be charity care, but we are not always able to gather enough information from the patient to make that determination—either they don't want to provide it, or they are too proud to put themselves into a category of "charity." We also work with individuals on payment plans, and do so without charging interest. Except for the rare small-town mom-and-pop business, who does that? Certainly not Wal-Mart.

Far from for-profit
In Minnesota, regulations do not allow us to report someone who has the ability to pay, but does not, to a credit reporting agency. So guess what people figure out? They figure out that if they don't pay the hospital, it won't show up on their credit report. Guess what that does to the desire to pay?

What we also can't do is refuse needed service if someone hasn't paid their previous bills. Again, that's not going to happen at Wal-Mart. So, a good portion of our bad debt happens because of our mission or regulations that limit our ability to collect. A for-profit business would not operate this way.

In Minnesota, we also pay significant "taxes" and "surcharges" as well. Our Minnesota Provider Tax (as a nonprofit) amounts to about $1.1 million per year, and the Medicaid Surcharge is about $900,000 per year. In addition, our local taxing bodies don't recognize some of our organizations' work to be exempt from property tax, so that counts for another $100,000 per year.

So if you add it up for us, the traditional calculation of community benefit (according to Grassley's definition) equals about 3.9% of our net revenue. Medicare underfunding adds another 4.5% to that and bad debt another 2%. That totals more than 10% of our net revenue. If our organization were a for-profit business that was not entangled in healthcare regulation, I could eliminate probably 8% of our costs.

It's not that simple, but you can also see it isn't as simple as just free and discounted care or the Wal-Mart model either.


Mike Allen is chief financial officer at Winona Health in Winona, MN. He can be reached at MAllen@WinonaHealth.org .
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