Studies question hospital operations on tax breaks, service to poor and underinsured
Are hospitals paying their fair share? Are they more focused on profits instead of meeting their core mission of serving all patients, including those who don't have the money to pay for care?
Two studies raise these questions. However, some hospital officials and industry observers say the studies are highly flawed, and if you want proof, just look at who funds them.
Hospitals not living up to their mission
The Lown Institute, a nonpartisan health care think tank in Needham, conducted a fair-share spending study that concluded some nonprofit hospitals aren't fully living up to their mission of serving the poor and underinsured.
Lown calculated the fair-share spending of roughly 2,400 nonprofit hospitals nationwide, using the IRS form 990 filed by hospitals in fiscal year 2021. Roughly 80%, including four in the UMass Memorial Health system, have a fair-share deficit. That means the estimated value of its tax breaks, including its exemption from paying property taxes, is more than what they spend on financial assistance for patients and community health programs.
UMass Memorial Medical Center — University Campus in Worcester had the third-highest fair-share deficit ($130 million) of the 44 Massachusetts hospitals in the Lown study.
Mass General Hospital ($193.9 million) topped the list of Massachusetts hospitals with a fair-share deficit. In second place was Brigham and Women’s Hospital ($149 million). Rounding out the top five was Baystate Medical Center in the fourth spot ($69.7 million), followed by Beth Israel Deaconess Medical Center ($62.9 million).
Judith Garber, a senior policy analyst at Lown, said people who pay their taxes, including property taxes, expect nonprofits to give back to the community as much as they receive in tax breaks.
“To pay their fair share and give back as much as the tax break, that’s really important,” said Garber.
Garber noted the study showed University Campus spent .83% of its budget on community investments, compared to 3.8% for hospitals nationwide. “That’s pretty low for Massachusetts and the U.S.,” she said.
Four UMass Memorial Health hospitals had fair-share deficits. Besides University Campus, others included UMass Memorial HealthAlliance Clinton Hospital — Leominster Campus (-$11.4 million), Marlborough Hospital (-$10.9 million), and UMass Memorial Health — Harrington Hospital (-$5.5 million).
Two hospitals in North/Central Worcester County owned by Heywood Healthcare had fair-share deficits, including Heywood Hospital in Gardner (-$3.8 million) and Athol Hospital (-$337,000).
Milford Regional Medical Center had a fair-share surplus of $2.5 million. That means the hospital’s spending on financial assistance and community investments topped the estimated value of its tax exemption.
'Complicated topic'
Brian Huggins, senior vice president of finance at UMass Memorial Health, called fair-share spending a “complicated topic” that can’t be boiled down to a single number.
The $130 million deficit at University Campus occurred during the COVID-19 pandemic, Huggins said, when the hospital received substantial financial support from the federal government to help meet its expenses. If the hospital had spent $130 million on community investments during that period, it would have operated at a substantial loss, said Huggins.
There are other factors missing in the Lown report that show it doesn't tell the whole story, said Huggins. One is the health care system is built on regulations that UMass must follow. Also, UMass has a significant number of patients on Medicare and Medicaid, government-sponsored insurance plans that don’t cover the full cost of care. The breakdown includes 66% of revenue from Medicare and Medicaid at University Campus, 73% at HealthAlliance Clinton, 66% at Marlborough Hospital and 68% at Harrington.
Garber said that government reimbursements aren't in the report because they don't directly impact the health of the average person in the community.
Huggins disagrees.
He said UMass is a safety-net system that must take all patients, regardless of whether they can pay. Since Lown doesn’t consider free care and low Medicaid and Medicare reimbursements, Huggins said the report doesn’t give a full scope of UMass’ impact in the community.
“I disagree with (Lown’s) method. There are better ways to measure what a nonprofit provides than doing math computations. There’s a misperception UMass is not providing a benefit to the community. We are.”
Lown’s recommendations to improve hospital transparency and accountability include reporting more information on financial assistance for patients and collection actions for patients that owe medical bills, report the value of the hospital's tax exemption to the IRS, set a minimum amount for spending on health care in the community, and give residents more say in how a hospital develops its Community Health Needs Assessment and how it's implemented. The assessment is legally required every three years.
How about a PILOT?
Payment in lieu of taxes is another Lown recommendation to help make up lost revenue for cities and towns due to nonprofit hospitals' exemption from paying property taxes.
The legislative Joint Committee on Revenue is studying a PILOT bill filed by state Rep. Erika Uyterhoeven, D-Somerville. It would give municipalities the option to have large nonprofits, including hospitals, pay 25% of the local commercial property tax rate. Payments could be made in cash or a combination of cash and other community benefits.
Huggins said the bill, if approved by the Legislature, would add more cost to the health care system and create a challenge of where to find the money to cover the costs. Hospitals are operating on thin margins, said Huggins, with inflation contributing to rising health care costs.
“I think there would be pushback at the end of the day,” said Huggins of the pending PILOT bill, because patients and the state would be asked to cover the higher costs.
Another consideration is UMass Memorial Health doesn't own University Campus, the health system's largest property. The state owns the land and UMass leases it. UMass said state-owned land isn't subject to any legislative bills regarding PILOT payments by nonprofits, because cities and towns already get payments from the state on those properties.
Are hospitals reaping large profits?
An interactive tool developed by the Alliance for Integrity and Reform of 340B shines the spotlight on hospital finances.
Hospitals with a high proportion of uninsured and low-income patients are eligible for 340B. Those that qualify are called covered entities, and they buy drugs at a discount from pharmaceutical manufacturers participating in Medicaid. The drugs are strictly used for patients on an outpatient basis. Prescriptions are filled at pharmacies that contract with the hospitals, called contract pharmacies.
The Alliance for Integrity and Reform of 340B believes hospitals, contract pharmacies and pharmacy benefit managers are reaping enormous profits from the system, which was never the program’s intention. Established in the early 1990s, 340B was intended to give covered entities the ability to use savings from discounted drugs to serve their communities with much-needed health programs.
The Pioneer Institute in Boston provided data for the alliance’s interactive tool. Bill Smith, a senior fellow and director of Pioneer Life Sciences Initiative, believes hospitals are generating billions of dollars by billing Medicare and commercial insurance companies for the list price of the drugs after buying them at a discount. While discounts reportedly fall in the 25% to 50% range, Smith feels it's closer to 50% to 75%.
"We know for a fact that Medicare is billed billions for 340B drugs. Many studies have been done. It's a fact," said Smith.
U.S. Sen. Bill Cassidy, R-La., is seeking information from major contract pharmacies as part of his investigation into how health care entities generate revenue from the 340B program. According to a January press release from the U.S. Senate Health, Education, Labor and Pensions Committee, which Cassidy sits on, the Department of Health and Human Services Office of Inspector General questions the exploding number of contract pharmacies, the integrity of the 340B program and whether patients are getting the intended benefits.
Smith also takes the position that hospitals are benefiting from savings on discounted drugs while cutting investments in community health programs. The institute's data shows the number of hospitals and contract pharmacies in the 340B program have skyrocketed while hospital investments in free and reduced care have declined over the years.
When 340B started in the early 1990s, there were roughly 40 hospitals in the program, according to the Pioneer Institute. Today, there are more than 3,800, plus more than 17,000 contract pharmacies.
As for charity care, the institute's numbers show a decline in the average charity care ratio over the life of the 340B program. The ratio is charity care spent to a hospital’s operating expenses.
Today the ratio is 2.28%, compared to 4.11% in 2012.
“The point I’m making is there has been explosive growth in the program while charity care has declined,” said Smith. “With Medicaid expansion due to the Affordable Care Act, if there is more government support for the uninsured, why is the program growth so great?”
UMass Memorial Health said its audited financial statements show its charity care increased from more than $35 million in fiscal year 2021 to more than $45 million in fiscal year 2023.
Meanwhile, tax-exempt hospitals participating in the 340B program provided $84.4 billion in total benefits to their communities in 2020, the most recent year the information is available, according to the American Hospital Association. In 2019, total community benefits for 340B hospitals was $67.9 billion.
'Invaluable for us'
Meetali Desai, director of pharmacy business services at UMass Memorial Health, said, "340B is invaluable for us," because the savings on drug purchases helps UMass Memorial Health pay for numerous community programs. Desai gave examples, including services in mental health, substance use, pediatric asthma, and healthy-eating programs. None are reimbursed by insurance.
“We could not sustain the same level if the 340B savings are not available,” she said.
Asked how much UMass Memorial Health makes from 340B and how the money is spent, the health system said savings from the program allow UMass to provide and sustain essential programs for low-income patients and underserved communities throughout Central Massachusetts. UMass Memorial Health said it provided $175 million in uncompensated care in fiscal year 2022, while experiencing a $99 million Medicare shortfall in the same fiscal year.
Savings from 340B helped UMass fund its community benefit program that reached 39,000 people in fiscal 2022, according to officials. That program targets ethnically diverse, low-income patients who are medically underserved.
340B also helped fund medical research and educational programs for hospital staff, according to UMass.
Despite the savings from discounted drugs, UMass Memorial Health said it’s not enough to cover the cost of its community programs, citing a –1.2% operating margin last quarter, “due in large part to providing these loss-generating, but absolutely essential, services as a safety-net institution.”
Suspicions
Smith at the Pioneer Institute suspects hospitals are engaged in financial dealings outside the scope of the 340B program. Those include selling discounted drugs to nonhospital patients, profiting from duplicate discounts by billing for a Medicaid rebate after getting the original drug discount, and profiting from penny price drugs bought for a penny and subsequently charging insurance for the much higher list price.
UMass said it has controls in place to ensure discounted drugs aren't used for nonhospital/non-340B patients. Internal controls also stop any risk of duplicate discounts. More controls come from the federal Health Resources and Services Administration, which oversees the 340B program. UMass said the agency conducts about 200 audits of 340B-covered entities yearly.
As for penny price drugs, UMass said it follows all applicable 340B billing requirements.
On the contract pharmacy front, UMass Memorial Medical Center works with 219 such pharmacies, the fourth-highest number in the state, according to the Pioneer Institute. Cambridge Public Health Commission holds the top spot in Massachusetts with 380 contract pharmacies.
More than half of UMass Memorial Medical Center's contract pharmacies are located in Massachusetts. The rest are spread out across the U.S., including five in Texas, four in California and one in Hawaii.
Smith said he doesn't understand why the hospital system has so many contract pharmacies in other states.
Desai said certain drugs can only be filled by specialty pharmacies. Many are located outside of Massachusetts, and the directive to fill prescriptions at those pharmacies comes from prescription department managers and insurance companies, according to Desai.
Agendas drive criticism of 340B
Biased and misleading information circulated and funded by pharmaceutical companies is intended to erode 340B, said Desai.
The Alliance for Integrity and Reform of 340B list several pharmaceutical companies as members, including Eli Lilly and Company, Pfizer, Genentech, Johnson and Johnson Innovative Medicine and Baxter Healthcare.
The Pioneer Institute's funding comes from pharmaceutical companies, foundations and individuals, said Smith. His résumé includes 10 years working at Pfizer and as a consultant to major pharmaceutical, biotechnology and medical device companies.
When told that the Pioneer Institute is funded by drug companies and could be perceived as a mouthpiece for drug companies that want to cut the discount drug program, Smith said it's not a valid argument because the facts show hospitals are unfairly profiting from the 340B program.
The Massachusetts Hospital Association noted 340B reform is powered by the Pharmaceutical Research and Manufacturers of America and some of the world’s biggest drug companies. Their goal, according to the association, is to cut drug discounts to boost their corporate balance sheets.
Lown’s fair-share report is funded by Arnold Ventures, a private philanthropy that the Massachusetts Hospital Association said has a history of criticizing hospitals.
“Unfortunately, we have seen a wave of special interest groups use this fragile moment in health care to undermine the role of hospitals in pursuit of their own agenda,” said Michael Sroczynski, the Massachusetts Hospital Association's senior vice president and general counsel, in a prepared statement.
“The 340B program is an invaluable lifeline for patients in need of affordable medications and allows providers to reinvest even more into their communities," continued Sroczynski. "What’s more, it is helping many hospitals remain viable at a time of tremendous financial upheaval. As attempts to weaken the program intensify, the question becomes whether these resources are better off supporting the daily operations of local health systems or simply being transferred back to large pharmaceutical companies. We think the answer is clear.”
Contact Henry Schwan at henry.schwan@telegram.com. Follow him on X: @henrytelegram.
This article originally appeared on Telegram & Gazette: Studies question hospital operations on tax breaks, service to poor
