Rising bad debt not reflected in DSH formula for years

Hospitals cheered the bad-debt reduction that followed the Affordable Care Act’s implementation. Now, it’s coming back to haunt them.

That’s because the federal government is basing upcoming bonus payments to certain hospitals that serve low-income patients partly on bad-debt data from 2015.

At first blush, it doesn’t sound like a problem. But a closer look reveals that hospitals enjoyed historically low bad debt in 2015, a year when the ACA had extended coverage to millions of people through subsidized private coverage, Medicaid expansion and employer and individual mandates. The U.S. uninsured rate among those under 65 had fallen to 11.2%, a 38% decline from five years earlier, according to the Urban Institute.

Times have changed. New data show bad debt nationally has surpassed its pre-ACA levels, driven largely by the rise of high-deductible health plans that render even insured people unable to afford out-of-pocket responsibilities that run into the thousands.

In fiscal 2015, bad debt represented 5% of not-for-profit hospitals’ net patient revenue, but that ticked up to 7% in fiscal 2018, according to an analysis by analytics firm Franklin Trust Ratings. Moody’s Investors Service predicts not-for-profit hospitals’ bad debt will jump at least 8% in 2019.

Despite all that, DSH funding doled out in fiscal 2020 will still be based on fiscal 2015 numbers. That puts hospitals that rely on Medicare disproportionate-share hospital payments in a bind.

“Deductibles are changing pretty quickly so it pushes things a little bit too far back,” said Carlos Bohorquez, chief financial officer of Palomar Health, a three-hospital system based in Escondido, Calif. “It doesn’t necessarily reflect the reality of each organization, at least in our case.”

Bohorquez estimated Palomar’s bad debt has increased 20% to 25% since fiscal 2014, mostly among patients with high-deductible health plans.

The change in DSH calculations is being made so that the CMS can use uncompensated-care data that has been audited when making payment calculations, rather than using unaudited numbers that can include mistakes.

Some hospitals pushed for using audited data a few years ago, and 2015 data is the most recent available. “The hospitals want good data in there, but that data is now stale,” said John Barry, assurance partner in the BDO Center for Healthcare Excellence & Innovation.

On the other hand, it’s worse for a hospital to get a notice two years after receiving a DSH payment saying it has to repay a portion, Barry said.

“That’s kind of the risk you take if you use unaudited data,” he said.

Hospitals are reporting their uncompensated care on what’s called the S-10 worksheet within their annual Medicare cost reports. Hospitals have long filled out the S-10 worksheet, but that information hasn’t been used before to make payment determinations. Given it’s a new process, each hospital may interpret the instructions differently. The CMS is currently auditing those forms to weed out any inconsistencies.

Over time as hospitals gain experience using the S-10 in this way, uncompensated-care reporting will improve, said Michael Newell, president of Southwest Consulting Associates.

“It just lends itself to improvement of the quality of the data over time,” he said, “which then should result in improvement in the actual allocation of the dollars and they’re getting to the hospitals that are in fact incurring the most uncompensated care.”

The CMS is currently auditing fiscal 2017 uncompensated-care data with the intent of having slightly more current numbers for next year’s rulemaking process, said Jeff Norman, senior national sales and client relations manager at Southwest Consulting. “It’s a balance between, do you use current data that really shows the climate we’re operating in today? Or do you use data that’s at least partially audited to make sure it’s accurate and balanced?” Norman said.

Still, hospitals are uneasy about having the S-10 used to calculate their DSH payments. “Right now it’s kind of scary because it’s redistributive and it relies on the accuracy of filling out the form,” said Brian Potter, chief operating officer of the Wisconsin Hospital Association. “I think that accuracy is kind of questionable at this point.”

Many DSH hospitals have in recent years worked to speed up the process they use to identify unpaid bills as bad debt and have improved the consistency in applying their charity-care policies to patients who may qualify.

In doing so, they avoid wasting time and resources trying to collect on bills they’re unlikely to receive payment on, and streamline their employees’ attention toward those they might, said Mark Newton, senior vice president for revenue cycle with Kaufman Hall. And where charity care may have been loosely defined and inconsistently applied in the past, hospitals have improved their ability to identify which patients qualify.

In addition to saving time and resources, it’s also good public relations to classify eligible unpaid bills as charity care rather than continuing the collection effort, Newton said. 

“It makes for great articles and very bad publicity,” he said. “If you’re not going to get paid and the patient doesn’t have the ability to pay, then it doesn’t make sense to go ahead and pursue that.”

Newell also said he has observed hospitals getting better at recognizing right away which patients qualify for charity care, which prevents a lengthy delay while they go through the process of trying to collect payment.

“I personally think less care will be written off as bad debt,” he said. “I think more is going to be written off as charity care.”

Since both numbers factor into a hospital’s uncompensated care, such a shift wouldn’t change the total amount of uncompensated care they report, but it may affect the timing of when it is reported on the S-10, since collection efforts are required before a bill can be written off as bad debt.

That’s not everyone’s strategy, at least not yet. Palomar Health hasn’t changed its charity-care policy in years, Bohorquez said.

In Wisconsin, Potter said he’s seen some hospitals aggressively expand their charity-care policies, but even then, there’s a process required to determine whether patients qualify. On the other hand, hospitals also have to collect from patients that can afford to pay.

“Hospitals have to be good stewards of resources and try to get payment when it is due to them,” he said. “It may seem like a simple issue, but it really isn’t.”

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