Hospital Role 2: Guide to Communities Considering Hospital Conversion in the Carolinas

Community Benefits: Access
Uncompensated Care
Uncompensated care may include the provision of charity care to low income/uninsured individuals, as well as hospital bad debts, which is the collective result of partial or no payment of individual bills generally absorbed by a hospital. Not-for-profit hospitals have historically viewed the provision of uncompensated care to all persons in their community as a major part of their mission. Some advocates of the not-for-profit sector charge that hospital conversion to for-profit ownership will cause a drop in charity care, placing both uninsured and underinsured individuals at a greater disadvantage.

* A large number of studies have shown that public and teaching hospitals account for a disproportionate share of uncompensated care, but have reached conflicting results about the whether not-for-profit facilities do more than for-profit hospitals. These inconsistent findings reflect differences in definitions, methods, geographic areas and time periods studied. On balance, any differences between not-for-profits and for-profits are minor. Not-for-profit hospitals do provide somewhat more uncompensated care and do admit more uninsured and Medicaid patients than their for-profit counterparts, but for-profits also tend to locate in areas where there is less uncompensated care to provide.15 When not-for-profit and for-profit hospitals serve the same area, differences in serving uninsured patients disappear. There also is evidence that the overall hospital ownership mix in a market area is important, with the presence of multiple for-profit hospitals in an area leading to less provision of uncompensated care.

In short, there is mixed evidence that not-for-profits provide more uncompensated care than for-profits: on balance, these hospital types appear more similar than different. What occurs following conversion has been much less studied.

* An early study of Florida hospitals showed that charity and bad debt declined almost 20 percent in hospitals that converted.7 The study did not indicate whether this resulted from improved collections or reflected a reduction in care provided to indigent patients. A much more recent study of not-for-profit to for-profit conversions in California found no significant difference in the amount of uncompensated care following conversion. Of equal importance, compared to not-for-profit hospitals that did not convert, those that were sold had a significantly lower level of uncompensated care prior to the sale.

Hospital Losses as A Community Benefit

In measuring community benefits provided by a local hospital, there are three types of hospital losses to consider: charity, bad debts and Medicare/Medicaid losses. Conceptually, charity care is care provided free or on a sliding scale basis to patients recognized in advance as being unable to pay fully for their own care; there is universal agreement that charity care should be included among the community benefits provided by local hospitals. In contrast, bad debts are uncollected charges for patients presumed to be able to pay for their care (and hence billed for it). However, there is little consistency in accounting practices across hospitals, so that currently, more than half of bad debts is either from individuals who are uninsured or known to have low incomes.1 Thus, bad debts might be viewed as a mix of amounts patients are unable to pay and unwilling to pay. Finally, there are Medicaid and Medicare contractual allowances, which are the difference between what hospitals charge to these public programs and what they actually are paid.
Since charges virtually always are set higher than actual costs, all three measures potentially overstate the actual cost to the hospital of providing these uncompensated services. So, for example, if a hospital's costs are 75 percent of charges and Medicaid reimbursement is 80% of charges, it will show a "loss" (contractual allowance) of 20% even though Medicaid actually paid more than the cost of care for its patients. Thus, a more accurate (though more difficult) way of measuring such community benefits is to use the difference between actual costs and net patient revenues for a given group of patients rather than the difference between charges and payments.

The latter study illustrates the difficulties of trying to determine the impact of a conversion. If the converting facilities had been compared to similar facilities only after conversion, one might have mistakenly assumed that the lower observed amounts of uncompensated care could be attributed to the conversion itself.

* Due to lack of data to measure hospital uncompensated care in North and South Carolina hospitals following conversion, we examined changes in uncompensated care in Tennessee hospitals instead. In the period from 1990-96, no meaningful change in access to hospital services by uninsured patients was observed following the conversion of not-for-profit hospitals in Tennessee to for-profit status. These results were mirrored by a consensus in the 10 case study interviews that access of uninsured patients to hospital services had not changed following conversion.

Access for Public Patients
Hospitals accepting payment in the form of Medicare and Medicaid sometimes are not fully reimbursed for the care that they provide. In addition, hospitals are experiencing the effects of declining reimbursement for these public programs. Any financial losses resulting from providing care to such patients may be seen as a benefit provided by the hospital to the community. In the conversion decision, consideration should be given as to whether an acquiring entity will continue to offer the same level of access to Medicare and Medicaid as provided previously by that facility. Covenants in the agreement may also spell out acceptable continued levels of care.

* An early study of Florida conversions found that hospitals changing ownership increased their Medicaid caseloads slightly and expanded the number of Medicare patients twice as quickly as hospitals not converting. The same pattern was seen in hospitals acquired by for-profit chains except that Medicaid caseloads declined somewhat.7
* Our statistical analysis examined the Medicaid share of hospital inpatient admissions before and after conversion. Contrary to what many would expect, the Medicaid share of total admissions went up by 18% in not-for-profit or public hospitals converting to for-profit status. There was no significant change in the Medicare share of admissions after such conversions.
* This is consistent with the Carolinas case study interviews, in which key informants typically did not report any drop in Medicaid or Medicare access following conversion.

Provision of Unprofitable Services
Due to their high cost or low volume, services such as burn centers, AIDS clinics and 24 hour, physician-staffed emergency rooms or trauma units are often expensive to operate and unprofitable for a hospital to provide.1 For many years these necessary services have been provided as a community benefit by not-for-profit hospitals, often at a loss to the hospital. In contrast, the mission of for-profit hospitals raises the prospect that profit motives may be placed above the needs of the community.

* Our statistical analysis found very few changes in the provision of hospital services after hospital conversion from not-for-profit or public to for-profit ownership. After conversion, hospitals changing from not-for-profit or public to for-profit status were found to be less likely to have skilled nursing facility (SNF) beds or provide open heart surgery (counter to what many would expect). There were no meaningful decreases in the provision of AIDS services, community health, patient education, home health or rehabilitation services among hospitals converting from not-for-profit or public to for-profit status. As expected, such hospitals were more likely to have a sports medicine clinic, a profitable service believed to attract a clientele more likely to have private health insurance.
* In addition, our analysis examined changes in the number of deliveries and visits to the hospital's emergency room after a not-for-profit or public to for-profit conversion. The number of emergency room visits in such hospitals actually increased slightly. The average number of deliveries that hospitals performed after converting from not-for-profit or public to for-profit status decreased slightly. However, both of these changes were so small that they do not represent a very important change in access to care within the community.
* An early study of hospital conversions in Florida showed no changes in the average service mix in converting hospitals relative to others, but more rapid change in the physician mix, suggesting that converted hospitals sought to attract more patients by adding new physician specialties.7 A more recent study of not-to-profit to for-profit conversions in California found no significant effect on emergency room availability following conversion.19
* The Project Hope case studies showed that hospitals which prior to conversion had been providing community services such as 24-hour emergency rooms, obstetric services, and trauma care continued to do so after conversion.11

Patient Access to Physician Care
Hospitals can play an important role in affecting patient access to care, both positively and negatively. For example, conversion may result in greater access if more physicians are attracted to the community due to improved services resulting from conversion. Conversely, if minority physicians are excluded from network arrangements, this can have an adverse effect on access for minority patients. At minimum, buyouts can affect physician referral patterns, which may adversely affect continuity of care and patient freedom of choice.

Until the end of 1997 the strategy of investor-owned hospitals such as Columbia/HCA has been to increase market share by allowing physicians to invest in the system. In addition, hospitals are purchasing physician offices and creating a system in which the physicians are hospital employees. This particularly may be the case at the earlier stages of conversion engagements, as hospitals interested in the purchase of the converting hospital may seek ownership of area practices in order to gain remaining leverage in longer-term sale negotiations. This activity may be magnified by competition for patient share between competitive area hospitals and the purchasing entity.

In seeking to regulate the effects this situation may have upon health services in a community, the converting hospital should inquire whether health care providers will be allowed to invest in a purchasing hospital system and vice versa, and address conflict of interest issues.

* In several case study hospitals, improvements following conversion resulted in greater numbers of physicians or more services in the community. Yet in several other instances, the opinion was expressed that the purchase of physician offices by the new hospital had disrupted the continuity of health care within the community.