Balancing Revenue and Mission: Hospitals Revise Billing and Collection Practices for Uninsured Patients

Balancing Revenue and Mission: Hospitals Revise Billing and Collection Practices for Uninsured Patients

Issue Brief No. 99 -- October 2005 -- Andrea Staiti, Robert E. Hurley, Peter J. Cunningham

A barrage of media coverage about aggressive hospital billing and collection practices, along with a wave of lawsuits alleging hospitals overcharged uninsured patients, has put hospitals under a harsh national spotlight. In the wake of a campaign by hospital associations to encourage hospitals to create formal policies for billing uninsured patients, many hospitals have revised their billing and collection practices for low-income, uninsured patients, according to the Center for Studying Health System Change's (HSC) 2005 site visits to 12 nationally representative communities. Almost all hospitals that adopted more generous charity care policies reported that expenses previously classified as bad debt have shifted to charity care write-offs. To date, these changes have had minimal impact on hospital bottom lines, and the impact on access to care for uninsured people remains uncertain.

Hospital Billing and Collection Practices Draw National Scrutiny

Escalating healthcare costs, rising health insurance premiums, a growing population of uninsured people, and increasing patient cost sharing are generating higher levels of medical debt among Americans, with uninsured individuals nearly twice as likely to face medical debt problems as insured individuals. In recent years, national media attention has spotlighted certain hospitals' aggressive billing and collection practices for uninsured patients, resulting in increased scrutiny by policy makers. Among the more extreme measures to collect overdue debts, some hospitals have placed liens on patients' homes.

Under the federal Emergency Medical Treatment and Labor Act (EMTALA), all Medicare-participating hospitals with emergency departments must provide stabilizing care to patients with emergency conditions, regardless of the patient's ability to pay. However, the law does not provide payment for services delivered to uninsured patients or govern how hospitals bill and collect for care provided under EMTALA. Furthermore, the scrutiny of hospital billing practices extends well beyond emergency care.

Hospitals in more than 50 health systems were named as defendants in class-action lawsuits led by prominent plaintiffs' attorney Richard Scruggs -- who had led the legal battle against the tobacco industry -- alleging that not-for-profit hospitals were "profiteering" by charging uninsured patients full billed charges while other payers, including private insurers, Medicare, and Medicaid, received substantial discounts from billed charges. Other lawsuits, separate from the Scruggs cases, were also filed against both not-for-profit and for-profit hospitals on similar grounds.

Half of the 12 nationally representative communities in HSC site visits had at least one hospital named in the class-action suits. Virtually all federal court suits against hospitals were dismissed without merit. In some cases, judges chastised plaintiffs' attorneys for trying to use the courts to solve the problem of uninsurance in America. However, state court action on these cases remained possible.

Hospital Associations Promote Billing and Collection Reforms

Collectively, U.S. hospitals in 2003 provided $24.9 billion in uncompensated care, or 5.5 percent of all hospital costs, according to the American Hospital Association (AHA). Uncompensated care encompasses charity care provided to poor uninsured patients and debts from individuals and third-party payers that hospitals never collect. With an estimated 44.8 million uninsured Americans, hospitals treat uninsured patients daily. Many uninsured patients are poor and unable to afford care, while others may have the resources to pay, leaving hospitals the task of assessing who is genuinely financially needy.

As scrutiny of hospital billing and collection practices intensified in 2003, the AHA asserted that federal regulations made it difficult for hospitals to provide discounts to uninsured patients. Pending clarification from regulators, the AHA issued guidance in December 2003 outlining how hospitals could assist low-income patients in paying for hospital care. The recommendations broadly covered communicating with patients effectively, helping patients qualify for coverage, ensuring hospital policies are applied accurately and consistently, making care more affordable for low-income patients, and maintaining fair billing and collection practices.

In some cases, state and local hospital associations developed guidelines to assist member hospitals. For example, the Hospital Association of New York State recommended that hospitals offer discounts for patients with incomes up to 200 percent of the federal poverty level and that discounts should generally reflect prices similar to those paid by insured patients. Most individual hospitals interviewed in the 12 HSC sites reported current or planned compliance with these types of guidelines.

In 2004, upon request from the AHA, the U.S. Department of Health and Human Services clarified that Medicare regulations do not prohibit hospitals from providing discounts for uninsured or underinsured patients. Congressional hearings were also held to examine hospital billing practices for the uninsured.

Community Reactions and Hospital Responses

In general, HSC site visits revealed minimal local pressure for hospitals to change their billing and collection practices. Market observers perceived that the issue had not garnered much attention among the general public in most HSC communities, with some exceptions, particularly in communities with a history of consumer involvement and advocacy.

However, most hospitals reported that media attention and encouragement from state and local hospital associations persuaded them to voluntarily adopt guidelines for providing free or reduced-cost care to uninsured patients. In every HSC community, most hospitals had either recently changed their pricing, billing, and collection policies or worked to improve the clarity of information provided to patients. Most of the hospitals interviewed had raised the income threshold for full charity care or discounted services. It became common practice for hospitals to provide charity care to uninsured persons with incomes below 200 percent of poverty and offer sliding-scale discounts beyond that level, in some cases up to 400 percent or 500 percent of the poverty level.

Other hospital responses included prompt-pay discounts for self-pay patients -- at any income level -- with the most generous discount for payment at the time of service. Hospitals varied in how their discounting policies were applied. Often, discounts were taken off of full charges and might bring prices down to levels negotiated with major private insurers or government programs, thus extending a sizeable discount to uninsured patients.

The impact of more generous pricing or discounting policies on access to care for the uninsured remained unclear. Market observers in some communities believed charity care was now easier to obtain and that hospitals' efforts to better identify eligible people upfront helped patients and spared them from aggressive collection practices. However, in some cases, hospitals adopted more generous pricing policies but also engaged in other activities to manage their payer mix that inhibited access for some uninsured patients. For example, Jackson Memorial Hospital in Miami and Harborview Medical Center in Seattle, both county-owned hospitals, began limiting non-emergency care provided to out-of-county residents and working to attract more private-pay patients.

Why Community Concerns Vary

Several factors appear to influence the level of concern about hospital billing and collection practices across the 12 communities. Market observers in some communities believed that state charity care laws or uncompensated care pools lessened attention to the issue. For example, Washington State requires hospitals to provide full charity care to individuals with incomes up to 100 percent of poverty and discounts for patients between 100 and 200 percent of poverty. Given these requirements, the state hospital association indicated that individual hospitals' charity care policies were likely to be less of an issue.

In Massachusetts, hospitals and health plans pay into the state uncompensated care pool, and funds are redistributed to hospitals and community health centers based on the amount of free care they provide. Uninsured individuals with household incomes up to 200 percent of poverty are eligible for full charity care, with discounts for those up to 400 percent of poverty. New Jersey has a similar state charity care pool. However, a market observer cautioned that a limitation of New Jersey's charity care law is that certain charges -- such as physician fees, anesthesiology, and radiology fees -- are separate from hospital charges and may not qualify for discounts, a circumstance likely found in other places as well.

Additionally, in communities with a major public hospital or institution serving a disproportionate share of low-income, uninsured patients, there may be less pressure on other hospitals to change billing policies. In communities with strong consumer advocacy groups -- Boston, Cleveland, and Orange County -- hospital billing and collection practices attracted more attention. In the few states with proposed legislation to govern hospital pricing, billing, or collection standards, hospitals may feel greater pressure to act.

Hospital Financial Implications

Most changes in billing and collection policies have had negligible impact on hospital finances to date. Uncompensated care comprises both bad debt and charity care. Almost all hospitals that adopted more generous charitable policies indicated that expenses previously classified as bad debt have shifted to charity care write-offs, with little effect on hospital bottom lines.

Implementing billing and collection policy changes was less costly than some hospitals anticipated. In Indianapolis, a hospital leader reported that easing collection practices reduced administrative hassles and costs. However, some hospitals incurred additional expenses by hiring more financial staff to assist patients with billing issues and help uninsured patients enroll in public coverage programs, partly to improve reimbursement.

Some hospitals appeared to be making changes quietly, possibly to avoid attracting more uninsured patients, leading some advocacy groups to criticize hospitals for failing to adequately publicize their new policies. On the other hand, some hospitals have promoted their new policies openly.

Policy Implications

Heightened scrutiny of hospitals' billing and collection policies appears to have spurred changes across the industry. For the most part, hospitals are quietly making adjustments on their own rather than being compelled by courts or regulators, and their efforts appear to have defused the relatively low level of concern evident in most HSC communities.

Although federal lawsuits against not-for-profit hospitals had been unsuccessful to date, plaintiff attorneys continued raising the issue in state courts. Moreover, renewed Congressional interest in examining tax-exempt status in the healthcare industry could revive attention to not-for-profit hospitals' activities, including their provision of charity care and other community benefits.

It is worth noting that these changes in hospital billing policies are occurring at a time when many hospitals report continued increases in uncompensated care, including in their emergency departments and outpatient services. These increases result not from changes in billing practices themselves, but from growth in the number of uninsured people and decreased access to many outpatient providers, particularly specialists. Many private physicians are reportedly more reluctant to treat low-income patients, and while hospitals may offer an open door to uninsured patients, uninsured patients cannot get care if doctors refuse to treat them.

Policy makers should not lose sight of the fact that as providers of last resort, many hospitals are absorbing the problems associated with diminished access to care for uninsured persons. Ensuring reasonable billing and collection practices is important, but it is no substitute for addressing these more fundamental problems with access to care.

Data Source

Every two years, HSC researchers visit 12 nationally representative metropolitan communities to track changes in local healthcare markets. The 12 communities are Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. In 2005, HSC researchers interviewed hospital executives, hospital associations, policymakers and advocates about state and local interest in hospital pricing, billing and collection practices for uninsured persons and recent changes made by hospitals to their policies.

Sources and Further Reading

American Hospital Association: Uncompensated Hospital Care Cost Fact Sheet — AHA data on the scope of uncompensated care provided by U.S. hospitals, including charity care and bad debt totals referenced in this research.

CMS: Emergency Medical Treatment and Labor Act (EMTALA) — Federal regulations requiring Medicare-participating hospitals to provide stabilizing emergency care regardless of a patient's ability to pay.

U.S. Department of Health and Human Services — HHS clarified in 2004 that Medicare regulations do not prohibit hospitals from offering discounts to uninsured or underinsured patients.

KFF: Key Facts About the Uninsured Population — Background on uninsured rates, medical debt burdens, and the characteristics of uninsured Americans discussed in this research.

The Commonwealth Fund: Hospital Charity Care and Financial Assistance — Analysis of hospital charity care policies, tax-exempt status obligations, and financial assistance programs for uninsured patients.