Unpaid Bills, Debt Collection, and Hospital Profits

Carlos Ortiz. Photo credit: Wall Street Journal

Carlos Ortiz underwent tests last year at Mary Washington Hospital in Fredericksburg for dizziness stemming from an inner-ear problem. When the 65-year-old uninsured gardener couldn’t pay his $15,000 bill, the nonprofit institution took him to court. Mary Washington was suing so many patients that day that the circuit court had cleared the docket to hear all the cases.

As it turns out nonprofit hospitals are more likely than for-profit hospitals to garnish patients’ wages to collect their bills, according to a study of Virginia hospitals published Tuesday in the Journal of the American Medical Association and reported upon by the Wall Street Journal. In 2017 Virginia nonprofits filed 20,000 lawsuits against patients for unpaid debt.

Remarkably, the study found, nonprofits are more likely than for-profits to file lawsuits against patients for unpaid debt. These numbers do raise fundamental questions about Virginia’s social compact with its nonprofit hospitals. But hasty judgments are not in order.

The Affordable Care Act, which created subsidized insurance offerings and expanded Medicaid, was enacted with the expectation that it would relieve hospitals of much of their social burden in the form of charity care and unpaid bills. But if the aggressive pursuit of unpaid bills for people like Carlos Diaz are any indication, little has changed.

Mary Washington patients receive a 30% across-the-board discount, a Mary Washington Hospital spokesperson told the Journal. Plus, the hospital provides millions of dollars in uncompensated care. “We go to court because we want to get patients to engage with us,” she said. “We do have to pay our bills as a nonprofit.”

The Virginia Health Information website provides data that puts Mary Washington’s bill collection efforts in context.

In 2017, the most recent year for which data is available, Mary Washington reported the following:

“Gross patient revenue” is a totally fictitious revenue number (as it is with all Virginia hospitals). It reflects hospital charges before any “contractual allowances” — discounts negotiated by private health insurers, Medicare, and Medicaid — are applied. We can see from these numbers that, collectively speaking, insurers get a 64% discount on billings. The insanity (actually, one of many insanities) of the our health care system operates is that hospitals are incentivized to boost their charges in a way that bears no connection whatsoever to the cost of actually providing the services as apart of their ongoing negotiations with insurers.

The big losers in this process are the uninsured, who have no bargaining power to negotiate discounts on their bill. Although Mary Washington may provide a 30% across-the-board discount, that’s only half of what Medicare, Medicaid and private insurers collectively get. (As a generality, Medicaid gets the biggest discount, private insurers the least.)

Mary Washington does provide $38.6 million in charity care and it does write off $48.1 million in bad debts: a total of $86.1 million in uncompensated care. If I understand these numbers correctly, these numbers do not reflect costs incurred, they reflect hospital charges. Even assuming that a 30% discount was applied, the charges are probably inflated 30% to 40% over actual costs. A realistic number for actual costs incurred for uncompensated care would be in the $50 million range.

How does that compare to profitability? Mary Washington profits (“operating income”) amounted to $14.5 million, a profit margin of about 3.5% of revenue. That is not an inordinate number. Even nonprofits need to generate an operating profit in order to reinvest in their core business enterprises. And the sum is a drop in the bucket compared to the “nonprofit” VCU Health System, which generated FY 2017 profits of $237.4 million, a profit margin of 15.1%.

As compensation for its uncompensated care, Mary Washington Hospital pays no taxes. How much is that status worth? Hard to say. For an order-of-magnitude idea, let’s look at CJW Medical Center, a major for-profit provider in the Richmond region. CJW paid $56.4 million in taxes in 2017, comprising 8.9% of its total expenses. An equivalent tax-to-expense ratio for Mary Washington would be $36 million. Without the tax break, one could argue, Mary Washington might have lost money.

As a hospital with a thin profit margin, Mary Washington can make a defensible case that it needs to both maintain its nonprofit status and collect unpaid bills in order to maintain its profitability, which in turn is necessary to meet the needs of a growing Fredericksburg-area population. Meanwhile, some nonprofit hospitals, especially in rural areas, are losing money, while others, mostly in metropolitan areas, are phenomenally profitable. The question of whether nonprofit status and aggressive bill collections are warranted needs to be made on a case-by-case basis.

It will be interesting to see if Medicaid expansion has any effect on Mary Washington Hospital’s numbers. Unfortunately, due to delays in reporting financial data, we won’t know for another couple of years.

Update: In the aftermath of the American Medical Association report, Mary Washington Healthcare has suspended the practice of aggressive collecting unpaid bills. The nonprofit says it will review its collection processes from top to bottom, reports the Free Lance-Star.

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6 responses to “Unpaid Bills, Debt Collection, and Hospital Profits

  1. Jim,

    Whatever happened to the concept of “reasonable and customary” charges? I would submit that the “customary” charge is some sort of average of what the insurers and medicare/caid pay, not the inflated rack rate. If I’m right, why wouldn’t debtors succeed in defending against the lawsuits by hospitals as to the amount owed. In Carlos’ case, he wouldn’t owe $15000, but probably something more like $700-800.

  2. Keep writing on this, you or somebody. Key questions: When the hospital sues for its list cost (more than any insurer would pay), is the judgement adjusted down or for the full list amount? How is that judgement then collected – you mention wage garnishment but I remember 35 years ago seeing all the liens on houses from Roanoke Memorial Hospital noted in the property books, and there are other ways to collect on a debt. There’s been plenty of focus on housing costs making and keeping people poor, but this is another major element of the poverty story.

    We’ll see the frustration with this on full display when the Democrat presidential candidates make all their “Medicare for All” promises tonight and tomorrow night. It may be the wrong solution, but there is no doubt about the reason it is so popular.

  3. “Even nonprofits need to generate an operating profit in order to reinvest in their core business enterprises.”

    I don’t know why you keep saying that. Profits are stated after depreciation. Depreciation is the allowance for the non-cash use of assets. For example, the hospital might buy an MRI machine for $1m and depreciate it on a straight line basis for 10 years. That charge would reduce profits by $100k per year. However, that charge has no cash impact for the current period. It is an accounting entry only. A hospital making no profit could still have fine cash flow based on non-cash expenses like amortization, depreciation, etc. That cash flow can be used to reinvest in their core business expenses.

    It seems to me that any entity making an accrual profit (as defined in the tax code) ought to pay taxes on that profit.

  4. Apparently Mr. Trump’s recent executive order on hospital cost-shopping transparency is expected to go no-where — https://www.modernhealthcare.com/payment/trump-transparency-order-puts-shoppable-healthcare-hhs-hands
    — but perhaps events will prove otherwise. Any ideas here?

  5. I am wondering why Mr. Ortiz did not have Medicare… or MedicAid….

    Just FYI – Obamacare and the Medicare Expansion are paid for with earmarked taxes not general fund money like Medicare and Medicaid are.

    Part of what has happened – that no one is really addressing is that ObamaCare did MUCH MORE than provide subsidize insurance for people – it mandated that NO insurance could turn down pre-existing conditions nor could they cap them on an annual or lifetime basis.

    This is how many insurance companies were able to limit how much they paid out and thus keep their premiums under control.

    Once the law changed to recover them to cover pre-existing conditions and not be able to cap annual and lifetime payouts per patient – things got way out of control.

    Don’t blame the hospitals – All they are trying to do is not go bankrupt like the rural hospitals with higher percentages of uncompensated care are and to not have to increase prices on even more on folks who can pay to cover those that cannot.

    ALL insurance – does ration health care – whether it be Medicare or Medicaid or ObamaCare or Employer-provided – OR universal coverage care in other industrialized countries.

    There are differences between how – say Canada or France rations care and how we ration care.

  6. Posted on behalf of RD Mathews:

    I just read your post, Unpaid Bills, Debt Collection, and Hospital Profits and I didn’t know if you were aware of “Disproportionate Share Hospital” payments. It is allocated to hospitals to assist with covering the costs of providing care to uninsured patients. Mary Washington is on the list of eligible hospitals. It has significantly decreased for ALL hospitals with the implementation of the ACA because of the expectation that more people would become insured.

    Because this hospital is a recipient this means they also have to provide “Free Care” for those who who have incomes less than 200% below the Federal Poverty Guidelines. I also found their financial policy online which is not consistent with what was reported in the Journal.

    VCU/MCV has one that is similar. What patients often do is not go through the Financial Screening process to determine eligibility because they are not aware, ignore all their bills or don’t receive them because they move, etc. MCV/VCU will put a lien on their TAX returns to collect their money after 12 months of unsuccessful attempts.

    HOWEVER, I do agree with you about MW being aggressive with their collection techniques. My “guess” is they make little or no effort to make their patients aware of the financial policy that offers assistance whereas organizations such as Bon Secours have this information posted not only in all their hospitals but ANY provider/facility associated with them as well as on their billing statements.

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