HFMA VIEWS

Scott MacStravic, PhD

Not-for-profit hospitals and other healthcare organizations have long been required to devote a significant amount of effort and funds to “community” benefit activities. This has been defined as their essential “charitable purpose,” and necessary to justify the exemption from local, state and federal taxes they enjoy. But despite the long history of this special treatment, it has also been the source of years, if not decades of controversy.

What constitutes “community benefit” activities and expenditures? How shall expenditures be calculated to ensure that all HCOs do it the same way and in a manner that accurately reflects real costs and expenses, rather than accounting tricks? How much is enough to warrant the exemption from taxes, given the amount that HCOs save and governments lose as a result?

HCOs have been asked to help states meet the matching requirements for Medicaid funding, since they benefit when more federal funds are made available to cover the costs of treating the poor. Recently, state efforts to decrease the numbers of uninsured citizens in their domains have proposed taxing hospitals as sources of funds to be used in extending insurance coverage. After all, HCOs will gain financially if the number of uninsured patients they serve is reduced, just as they do when Medicaid funds are more widely available.

The California proposal that calls for a 2% tax on physicians’ and 4% on hospitals’ revenues is one example, and one likely to be followed by other states as they act in the absence of the federal governments coming up with any “solution” to the growing numbers of uninsured. Needless to say, this tax is not popular among providers, though most will avoid the 4% payroll tax in lieu of health insurance for their workers, since most providers offer such coverage. Whether the increase in collections from serving more insured citizens will make up for the added provider tax is yet to be seen, of course, since providers vary widely in terms of the numbers of uninsured they treat.

A Better “Tax”?

The argument can be made, however, that neither community benefit requirements nor taxes on revenue to cover care to the uninsured is likely to make a significant dent in the burgeoning costs of hospital and physician care. A better option might be to require hospitals, at least, to both devote a significant amount of their efforts and achieve significant results in reducing the incidence and prevalence of disease throughout the populations they serve, through proactive efforts that have been proven to have such effects.

These efforts may range over any of eight proven ways to save sickness care expenditures:

• End-of-life management, planning and managing the most dignified and cost-effective dying experiences possible, while reducing futile and expensive interventions
• Chronic disease management, that reduces the crises, complications, and worsening of conditions that already exist
• Acute disease case management, that reduces the costs and improves the outcomes of severe acute cases by managing the entire care experience or episode, rather than narrow care events
• Disability management, that reduces the length of time people spend recovering from illness or injury through integrating all services relevant thereto, and working with employers to speed up return to work accommodations
• Demand management, that ensures people are seen at the best time, in the best place, by the best sources of care for the problems they have, as contrasted to over-use of ER and other expensive care, and delayed use of necessary care
• Risk condition management, that reduces the incidence and prevalence of such conditions where possible, while controlling or “reversing” them, rather than waiting for them to become acute or chronic diseases or injuries
• Risk behavior management, that reduces the incidence and prevalence of risky behaviors known to lead to risk, acute and chronic conditions, by preventing them, reforming them, and replacing them with healthier alternatives
• Health/wellness/fitness promotion, that reduces general risks of illness and injury, speeds recovery therefrom, and reduces risks and negative side effects of life events such as pregnancy and menopause, as well as treatments such as cancer therapy

What could make such investments palatable to governments rather than taxes or traditional community benefit investments would be the fact that they all are known to reduce the overall need, demand, and expenditures for sickness care. This will necessarily also reduce hospitals’ and physicians’ sickness care revenue and profits, of course, but that will happen anyway under current proposals. But by demonstrating that these investments have. not merely theoretically should have reduced sickness care expenditures, providers can make a strong case for being exempt from taxes because of the at least equivalent value they are producing.

Engaging in any of these eight proactive health management activities could be cost-saving for hospitals as well. Managing the end-of-life to avoid futile, expensive medical care can also save hospitals the losses when DRG-based payment fails to cover the costs of heroic treatments. Managing the health and demand of frail elderly to keep them out of hospitals where DRG payments are typically less than costs can also create financial benefits for hospitals, as has already been proven by a number of institutions.

Proactive health efforts aimed at their own employees and dependents covered by insurance or self-insured programs can save hospitals costs, just as it does for employers in general. While it will reduce sickness care utilization by their own employees, the net effect is likely to be entirely positive, with costs saved far greater than any revenue foregone, in terms of productivity gains, absence and presenteeism reductions, etc. Moreover, with increasing pay-for-performance bonus revenue on the horizon, increasing revenue is also likely since healthier employees perform better.

Finally, engaging in whichever of these eight proactive health activities they can effectively compete in can enable providers to add significant revenue from employers, even insurers and governments, who will be able to afford far more generous payment when they are saving money as a result than as compared to sickness care, which is pure cost. If, when, and because hospitals become masters of both the delivery of illness and injury reduction and promotion of health – and more particularly of measuring the total positive impact thereof on their own, employers’ and insurers’ financial performance, they may prove to be formidable competitors to the health plans and vendors already marketing proactive health.

The combination of forgiveness from taxes and other financial burdens with internal cost reduction and external revenue additions can only be estimated at this stage. It will be up to each organization to determine whether, and how, it can make such an alternative work. But it is at least an alternative worth considering.