This article, Hospitals Give Until It Hurts, first appeared in California Healthcare News on April 10, 2018.


“The formula ‘two and two make five’ is not without its attractions.” — Fyodor Dostoevsky

A 2005 report surveyed 1,771 personal bankruptcy filings, half of which cited medical expense as the cause.  For those suffering from an illness that preceded bankruptcy, individual out-of-pocket medical expenses averaged close to $12,000, and those qualifying as “medical debtors” were 42% more likely to experience lapses in health insurance coverage. This serves as the backdrop to what is commonly known in health care as “charity care” or “hospital fair pricing policies.”  Consumer advocates blamed hospitals as the cause of this financial epidemic, fueled by the absence of any law or regulation regarding the prices that uninsured and underinsured consumers/patients paid for health care, not to mention the collection practices employed by those entities insisting upon payment for services rendered.

Health Care By Robin Hood

Fundamentally there should be nothing wrong with accepting from those patients without financial means less money than wealthier patients for similar services. Certain laws are inconsistent with this medical benevolence, such as one federal statute that prohibits health care providers from submitting a bill for payment substantially in excess of that entity’s usual charges for these items or services.  The penalty for violating this law, 42 U.S.C. § 1320a-7(b)(6), is possible exclusion from Federal health care programs such as Medicare and Medicaid. The California Court of Appeal, Fifth District, offered another reason why hospitals should refrain from such generosity, specifically after the seminal 2014 decision in Children’s Hospital of Central California v. Blue Cross of California (226 Cal. App. 4th 1260). After decades of fighting between non-contracting providers and insurance companies, the best advice the judicial system had to offer in defining “reasonable value” was past agreements to pay and accept a particular price.

Nevertheless, legislators believed the ways in which hospitals should bill the uninsured could not be left to chance, and in 2005 California passed Assembly Bill 774 which required hospitals to develop a policy specifying how it will determine financial liability for services rendered to financially qualified patients and those patients without any insurance.  In part, AB 774 (1) placed limitations on billing and collection practices for hospitals as well as their billing agents, (2) required hospitals to submit to the Office of Statewide Health Planning and Development (OSHPD) their plan to comply with the new obligations, and (3) charged the Office of the Attorney General with enforcing transgressions.

Health Care By Chicken Little

Supporters of the new law acknowledged the legal obligation hospitals had under EMTALA (the Emergency Medical Treatment and Labor Act) to stabilize any patient presenting in the emergency department but feared these same hospitals would charge the uninsured and underinsured patients much higher prices than those with health care coverage. Some noted that 30 to 60 days did not provide enough time for a patient to make the financial arrangements and pay the hospital bill.

Opponents, on the other hand, understood the health care sky was falling, but took issue with such a law unfairly placing the burden of a dysfunctional health care system on the shoulders of hospitals, and that the punitive measures included therein failed to address the underlying factors that created the growing plight of the uninsured in a failing system.

Finding, and then Losing, the Charity in Charity Care

Founded in 1751 by Dr. Thomas Bond and Benjamin Franklin, Pennsylvania Hospital in Philadelphia is the self-declared first “hospital” in the United States. Funded solely by donations from the people in the community, its mission was “to care for the sick-poor and insane who were wandering the streets of Philadelphia.” Its seal, borrowing from the words of the Good Samaritan from the Gospel of Luke, beseeches those within to “Take Care of Him and I will Repay Thee.” Even before Pennsylvania Hospital, in 1736 a New York City Almshouse designated six bedrooms as a “ward” that would eventually grow to become Bellevue Hospital, closely followed that same year by what would later be known as Charity Hospital in New Orleans, Louisiana.

Throughout the 1800s, however, the delivery of care rendered by the few hospitals in cities like New York, Boston and Philadelphia far exceeded the treatment one would expect from a local almshouse or charity ward, although service in these elite health care institutions went hand-in-hand with status in society. As an example, the Constitution of the Philadelphia Lying-In Charity (the model of care preceding the maternity wards of today) stated as part of its mission to “discriminate between the deserving and the undeserving.” The need to provide health care for an entire nation was strong, however, and increased organization would play a crucial role by the turn of the twentieth century. With fewer than 200 hospitals in 1873, that number grew to nearly 5,000 by the 1920s, including mental institutions. With this expansion, the hospital became a national institution in America. Medical facilities began to appear in towns across the country, bringing with them advances in technology and a dramatic growth in the number of able practitioners.

Understandably, such a shift in the practice of health care from home to hospital came with a price. Although the health insurance market had been expanding since the 1930s, hospitals found themselves with few limitations when it came to charging patients a “usual and customary” amount. While collection of payment was not always guaranteed, there were minimal restrictions on the ways in which a hospital bill could be calculated. Slowly, hospitals were beginning to find themselves not only places where the sick went to be treated, but burgeoning businesses where there was money to be made.  Not surprising, support for charity care declined.

As the shape of American hospitals began to change, the external influences governing their practices also evolved. A precursor to Medicare, in 1946 Congress sought to influence the distribution of health care nationwide through the Hospital Survey and Construction Act (the “Hill Burton Act”) which disbursed approximately $3.7 billion to hospitals so they could meet the needs of citizens across the country by expanding while incorporating advances in medicine. With the goal of creating 4.5 hospital beds per 1,000 people nationwide, the Hill Burton Act established specific criteria for states to meet in order to receive funding, such as non-discrimination as well as necessity and viability of the state’s health care systems (sometimes two very inconsistent ideas as the poorest, least sustainable areas in a state almost always were in dire need of such funding). Eventually, Congress would come to require participation in Medicare and Medicaid as a condition to receive monies under the Hill Burton Act.

Striking the Right Balance At Home 

To be sure, charity care is not something with which California has struggled alone.  The State of Washington prohibits hospitals from reducing proportionately its patients who have no third-party coverage, who are unable to pay for hospital services, as well as implementing admissions policies that include estimate lengths of stay as a determining factor (70 Public Health and Safety § 70.170.060).  Oregon, like other states, handsomely rewards hospitals that serve a higher share of low-income patients with special needs through a disproportionate-share payment (Oregon Administrative Code § 410-125-0150). Twelve years after AB 774, California Health & Safety Code § 127405 established hospital discount payment and charity requirements as well as eligibility criteria, including:

  • Each hospital must maintain an understandable written policy regarding discount payments for financially qualified patients as well as an understandable written charity care policy.
  • Uninsured patients or patients with high medical costs who are at or below 350% of the federal poverty level remain eligible to apply for a discount.
  • Each hospital’s discount payment policy clearly state eligibility criteria as well as include an extended payment plan to allow payment of any discount over a period of time.
  • Hospitals must establish a written policy defining standards and practices for the collection of debt, and that when considering eligibility, hospitals refrain from targeting retirement or deferred compensation plans, the first $10,000 of a patient’s monetary assets, or 50% of a patient’s monetary assets after the $10,000 threshold.
  • Hospitals reimburse patients any amount actually paid in excess of the amount due under the law.

The Age of Reform

The 2010 Patient Protection and Affordable Care Act, in part, intended to create opportunities to purchase affordable health insurance by those previously priced out of the market. Through subsidies, rebates, mandates and tax credits, at best the Affordable Care Act was charged with reducing the number of individuals for whom hospital fair pricing policies applied, although health care reform was not intended to replace or modify the ways in which hospitals interact with those patients qualifying for a discount.  Indeed, the federal and state laws are somewhat symbiotic, and state laws even contemplate a discount and/or payment plan for the $12,700 out-of-pocket obligation an underinsured hospital patient may have under a so-called Bronze Plan obtained through a health insurance exchange.

Rightfully so, hospital fair pricing policies establish a safety-net for the totality of patients who may qualify, but there is no obligation under these same laws that a hospital provide an aggregate financial benefit in the form of a discount. Such an obligation would force hospitals to increase the obligatory discount amount for each patient whenever a previously uninsured patient obtains coverage in the modern era of health care reform. At the same time, there is no limitation on the charity care obligations a hospital must expend for those qualifying individuals, much like there is no limit on the number of patients a hospital must treat under EMTALA. A patient presenting at a hospital emergency department, regardless of insurance status or ability to pay, must be stabilized, and the expansion or elimination of a state charity care policy will not compromise these obligations under EMTALA.  In fact, 32 years after Congress passed EMTALA the requirements thereunder remain sacrosanct to most hospitals without any obligation to patrol the local communities searching for patients without health care insurance who are in need of emergency medical treatment.

The Economic Realty of Charity

A recent anomaly to hospital fair pricing policies has blurred the lines between what a hospital must do, what a hospital can do, and what the community would like a hospital to do.  Before AB 774, since 1996 California has required the Office of the Attorney General to approve the sale, transfer, lease, exchange, option, conveyance or other asset disposition by a nonprofit corporation operating or controlling a health facility to a for-profit entity or another nonprofit entity. Twenty-four years ago, the health care industry anticipated an increase in the number of non-profit hospital conversions to for-profit enterprises, and the Office of the Attorney General has done its best to protect the nonprofit hospital model.

Proponents of regulatory oversight for such conversions identified the substantial and beneficial effect nonprofit hospitals had on providing uncompensated care to uninsured low-income families and under-compensated care to the poor, elderly and disabled as part of their charitable mission. Others questioned whether or not these new laws would have a chilling effect on hospital transactions, injuring both the charitable and for-profit interests alike. Institutional consolidations and outright hospital closures have in many ways defined health care these past two decades, with financial instability serving as a driving force for both.

What may have been a harbinger in 1996 is a reality today, although state agencies are typically mindful of the dangers in creating financial obligations that can shutter a business, or in this case, a hospital. Conditions to approving a nonprofit hospital sale to a for-profit entity can include very specific charity care obligations that may be inconsistent with the general tenets of hospital fair pricing policies, but still serve as a reminder that all hospitals within the state have certain obligations to the community outside those statutes and regulations governing operations.  This is sometimes known as “police power,” which includes the rights of states to enforce order within its boundaries for the betterment of the health and safety of its residents.

Health Care’s Free Lunch

What a hospital is required to do by the exercise of state police power and what the community demands from its hospital often places health care in a constitutional crossfire, with the first casualty typically being that what a hospital is able to do. Like it or not, in some instances the hospital is simply not able to meet the needs of a community, and rigid standards demanding otherwise do little to advance the idea of charity care. When a hospital unfairly bears the burden of a dysfunctional health care system, those in the surrounding communities stand more to lose than just a discounted bill.

Sadly, little can be done to extricate partisan politics from health care, and the inherent complexity in the health care system creates vulnerability to attack based in rhetoric rather than reality. Transparency and simplicity, two key mandates in the Affordable Care Act designed to maintain balance still remain outside the nation’s reach, delaying any real understanding of the hospital institution as well as the value society places on its services. As a result, states must legislate health care needs and hospital limitations while answering to those who fail to understand both. Punishing hospitals in proportion to the success of the Affordable Care Act will not increase long-term community benefit spending, at least not by the hospitals. Such a mandate will only survive if the municipalities pick up the pieces from the lost hospitals that once served their communities.