As recession bites, Minnesota hospitals struggle with unpaid bills

Phyllis Jaeger thought her job was secure until her position at Abbott Northwestern Hospital was terminated in October 2008.

"I was stunned. How could that be?" said Jaeger, who at the time was an outpatient clinic manager with 33 years of nursing experience.

Throughout 2008, monthly hospital management meetings increasingly focused on rising hospital and clinic expenses, particularly uncompensated care costs, Jaeger said. And although she learned of pending workforce reductions in early September, she never thought her clinic would be affected — it was productive, heavily supported by donations and had met its end of year revenue projection.

Jaeger is one of hundreds of Minnesota hospital and clinic employees laid off within the past eight months, largely because of rising costs of uncompensated care.

From 2003 to 2007, uncompensated hospital care in Minnesota nearly doubled, increasing from $128.7 million to $247.4 million, according to an analysis of data from the Minnesota Department of Health (MDH) Health Care Cost Information System (HCCIS).

"Uncompensated care is growing at unprecedented rates — some hospitals have reported 30 to 50 percent increases in the past year," said Minnesota Hospital Association President Lawrence Massa.

These increasing costs are being driven by growing numbers of people who have lost health insurance due to layoffs or employers that have dropped insurance coverage and rising numbers of people with high deductible health plans and out of pocket expenses they can't afford, Massa said.

Yet hospitals have an obligation to provide care to everyone regardless of their ability to pay — it's part of their mission and it's a federal law, Massa said.

Jobs lost
Increasing uncompensated care costs have contributed to recent workforce reductions at Allina Hospitals & Clinics, North Memorial Health Care, Fairview Health Services and Hennepin County Medical Center (HCMC). And while uncompensated care serves a critical public need — providing health care to those who can't afford it — soaring uncompensated care costs have strained the budgets of Minnesota hospitals that provide these services.

In October 2008, Allina eliminated 250 to 350 jobs, a workforce reduction of 1 to 1.5 percent, while Fairview Health Services eliminated about 200 jobs, a workforce reduction of less than 1 percent. Two months later, North Memorial Health Care eliminated about 380 jobs, a workforce reduction of nearly 7 percent. More recently, HCMC eliminated almost 100 jobs and froze capital spending on projects without binding contracts.

"The increase in overall uncompensated care is a significant factor in the financial pressures that hospitals and health systems are under," Allina spokesman David Kanihan said.

With the state struggling with its own budget shortfalls, hospitals are expecting reductions in state reimbursement rates, which are also contributing to financial difficulties. "While our business, if you will, our busy-ness, has not gone down tremendously, our ability to get paid for our services has…and to take a workforce reduction when we still have to care for patients is tough," Kanihan said.

People still get injured, they still get sick, and they still need care — and that knows no economic boundary, Kanihan said. "Meanwhile, the budget limitations [for the hospitals] are real and I think they're going to be with us for a long time."

'It was a miracle'
Beth Sanchez understands the value of uncompensated care. Sanchez, who works in sales and can't afford health insurance, was uninsured when pelvic pain started that persisted for months. Despite fears of cervical cancer, she postponed medical care — concerned she couldn't afford the bill. But her worries finally disappeared when her pain was evaluated at no cost to her. She had qualified for charity care.

"Several times I felt grateful that I could get the care I needed even though I was not insured," Sanchez said. "It was a miracle."

Uncompensated care, which includes charity care and bad debt, is care hospitals provide without receiving payment. Charity care is care provided without the expectation of payment. Bad debt is care provided for which the hospital expected but did not receive payment.

Hospitals report charges for charity care and bad debt to MDH each year. Since charges are typically higher than the actual cost incurred by the hospital to provide the service, numbers reported in this analysis were adjusted to more accurately reflect the cost of providing care.

In 2007, Minnesota hospitals provided $101.2 million in charity care and $146.2 million in bad debt. Although charity care grew more than twice as fast as bad debt from 2003 to 2006, this trend has recently changed. From 2006 to 2007, bad debt grew more than twice as fast as charity care — bad debt increased 25.5 percent compared to charity care that increased 11.0 percent.

This recent change in bad debt may reflect increasing numbers of people who are underinsured, Kanihan said. As insurance covers less, people pay more for their health care. "And they're not able to do it," Kanihan said. But whether charity care or bad debt, it's all the same — an unpaid bill.

HCMC, a safety net hospital for low income, uninsured and vulnerable populations, is the state's largest provider of uncompensated care. In 2007, uncompensated care at HCMC totaled $48.8 million — accounting for nearly 20 percent of Minnesota hospital uncompensated care costs and more than doubling since 2003.

"That's a substantial impediment to the viability of our institution or any other institution that would have numbers of that magnitude," said Mike Harristhal, HCMC vice president of public policy and strategy. "We live on a razor thin margin … so when you have an increase in uncompensated care, that means we are already at the tipping point."

Focus on HCMC
HCMC is the largest provider of uncompensated care for several reasons: its location in an urban area where people without resources tend to live, a huge outpatient system with charity care and sliding fee services that allow anyone to access care, a reputation that HCMC is able to handle any kind of illness or injury and the limited ability of other Minnesota hospitals to incur uncompensated care costs, Harristhal said.

Uncompensated care was 2.1 percent of Minnesota hospital operating expenses in 2007, an increase from 1.6 percent in 2003. But the highest was at HCMC, where uncompensated care was 9.5 percent of 2007 operating expenses, an increase from 5.6 percent in 2003. "Uncompensated care is a big challenge…and the fact that it's increasing is particularly formidable," Harristhal said.

Undercompensated care is another significant issue, particularly low reimbursement from the Medical Assistance program, Minnesota's Medicaid program for low income families with children, seniors and people with disabilities. Current inpatient Medical Assistance reimbursement rates are paid at rates from the mid-1990s, Harristhal said. This is challenging since about 45 percent of patients at HCMC are on Medical Assistance, compared to a statewide average of 11 percent, Harristhal said.

"We can't be unthoughtful about eliminating programs [at HCMC]…by definition, the reason these programs exist and have a sizable following is because the private sector is unable or unwilling to provide these services," Harristhal said.

Yet eliminating programs or reducing services may be necessary to preserve the institution. For example, even though HCMC historically has served the entire state, it may need to limit some clinic services for people who reside outside Hennepin County, Harristhal said.

Ultimately, patients are the ones who will suffer because of increasing uncompensated care costs and other financial pressures. Either access to care will be limited or patients will have to wait longer for services. And  patients may put off getting health care until they have a catastrophic illness, Harristhal said.

Although HCMC is not the only Minnesota hospital carrying the burden of increasing uncompensated care costs, these costs are concentrated among a small number of hospitals. In 2007, five hospitals accounted for more than one third of total uncompensated care costs. The top five were HCMC, Regions Hospital, University of Minnesota Medical Center-Fairview, Saint Marys Hospital and North Memorial Medical Center.

Allina Hospitals & Clinics, the Twin Cities' largest medical group with 10 Minnesota hospitals, spent $33.5 million on total uncompensated care and $15.6 million on bad debt in 2007. This accounted for 13.5 percent of Minnesota hospital uncompensated care costs.

Growing pressures
Minnesota hospitals face a dismal financial situation. Net income fell from a positive 4.8 percent in third quarter 2007 to a negative 2.5 percent in third quarter 2008, according to the Minnesota Hospital Association. And yet Minnesota hospitals are critical to the overall health of this state. "The health care that [hospital systems] provide to our citizens is crucial to the quality of life in Minnesota," Massa said. In addition, as large employers within communities, hospitals contribute to the overall economic strength of the state, Massa said.

Historically, increasing uncompensated care costs were shifted to people with private health insurance through higher premiums. But we have nearly exhausted this option. "So then the only things hospitals can do is begin to eliminate other programs in order to be able to focus on their core missions," Massa said.

Growing financial pressures have resulted in changes at many Minnesota hospitals. In addition to workforce reductions and administrative restructuring, some hospitals have eliminated home care and chemical dependency treatment programs, Massa said. Other changes may be necessary, such as hospital consolidations and closures.

"[Although] hospitals are really trying to protect care at the bedside…I think we're running out of places to cut that's not going to impact patient care," Massa said.

Kay Schwebke is a physician and a health journalism graduate student at the University of Minnesota School of Journalism and Mass Communication.