Hospitals said they lost money on Medicare patients. Some made millions, a state report finds.

Reviewed by Emily Henderson, B.Sc.Oct 25 2022

Atrium Health, the largest hospital system in North Carolina, has declared publicly that in 2019 it provided $640 million in services to Medicare patients that were never paid for, by far the largest "community benefit" it provided that year.

Like other nonprofit hospitals around the nation, Atrium logs losses on the federal health insurance program for seniors and people with disabilities as a community benefit to satisfy legal requirements for federal, state, and local tax breaks.

But for the same year that Atrium's website says it recorded the $640 million loss on Medicare, the hospital system claimed $82 million in profits from Medicare and an additional $37.2 million in profits from Medicare Advantage in a federally required financial document, according to a report released Oct. 25 by the North Carolina state treasurer's office.

The lack of clarity about whether health systems like Atrium gain or lose money treating Medicare recipients reflects how loosely the federal government regulates the way hospitals calculate their community benefits.

As a result, the analysis of North Carolina hospitals' financial data concluded, what taxpayers get from local nonprofit hospitals in return for tax exemptions worth billions of dollars a year is unclear.

"There is no transparency, no accountability, and no oversight," said North Carolina State Treasurer Dale Folwell, a Republican who is critical of Atrium and other hospitals' business practices. "With the hospital cartel, it is always profits over people."

Atrium did not make officials available for an interview. In a statement, spokesperson Dan Fogleman said the hospital system reported $85 million in services to Medicare patients that weren't paid for in its most recent cost report to the Centers for Medicare & Medicaid Services.

"And, as labor, equipment, supplies and inflation continue to drive health care costs higher, the gap between Medicare payments and costs incurred to deliver the quality care we provide has grown in the post-Covid inflationary environment," Fogleman said.

More than half of the hospitals in the United States are nonprofits or government-run. The federal government requires them to operate emergency rooms open to all patients regardless of their ability to pay, accept patients insured by Medicare, and use surplus funds to improve facilities and patient care to demonstrate they are giving back to the community.

Even though their tax-exempt status is based on charitable acts, nonprofit hospital systems sat on more than $283 billion in assets from stocks, hedge funds, venture capital, and private equity and other investments in 2019, according to a 2021 KHN analysis of IRS filings.

The hospital systems used most of that to produce income and classified only $19 billion, or about 7% of their total investments, as principally devoted to their nonprofit missions, the analysis found.

The new North Carolina report describes how hospitals' self-reported Medicare profit margins differed from the financial picture they provided to the public through IRS records, annual reports, and community benefit documents.

Although most hospitals have complained of significant Medicare losses, the analysis of data from more than 100 North Carolina hospitals found that most made profits on Medicare from 2015 to 2020.

IRS audits are supposed to protect the public from fraud and abuse, but the system has major gaps, said health economists and federal watchdog groups.

Federal law requires the IRS to review community benefit activities at least once every three years. Yet the agency did not "have a well-documented process to ensure that those activities are being reviewed," said a 2020 report from the Government Accountability Office.

In response to GAO recommendations, IRS leaders updated the system last year to help ensure the agency could identify cases in which hospitals were suspected of not meeting requirements.

The IRS referred nearly 1,000 hospitals nationwide to its audit division for violations of the Affordable Care Act from 2015 to 2019, but the IRS could not identify if they were related to community benefits, the GAO said.

The tax agency has no authority to determine what activities hospitals must perform to comply with the law, the GAO said. An analysis of IRS data found 30 hospitals that reported no spending on community benefits in 2016, "indicating potential noncompliance," the report said.

"Perhaps this is the result of the IRS being underfunded," said Vivian Ho, a health economics professor at Rice University in Houston, who worked on the North Carolina report. "They don't have the resources to reconsider what information they should seek."

It is critical that the government collects accurate information from hospitals because the data affects all patients, Ho said.

Federal law forbids IRS employees from discussing tax information submitted to the agency by people or organizations, IRS spokesperson Anthony Burke said in response to questions about how effectively the government monitors hospitals.

Hospitals have long used what they report as losses on Medicare to justify charging patients with private insurance higher prices. According to a study released in 2021 by the Rand Corp., a nonprofit research organization, hospitals across the nation charge private insurers more than what they receive from Medicare for the same services.

In the Affordable Care Act, federal lawmakers mandated that to maintain their tax-exempt status, nonprofit hospitals must conduct a community health needs assessment, maintain a written financial assistance policy, set billing and collections limits, and set a limit on charges.

In written responses to KHN, the North Carolina Healthcare Association, which lobbies on behalf of hospitals, said hospitals provided $1.2 billion in charity care in 2020. It added that those community benefits can include a lot of different activities, such as covering the gap between how much a procedure costs and what a provider is reimbursed, volunteering by staff, and paying for medical outreach programs.

"Providing care to vulnerable populations is part of their nonprofit mission," the statement said.

Atrium spends millions of dollars per year to provide care to people who need behavioral health care "but have no safety net — even from the state," the association said.

Fogleman, the Atrium spokesperson, said an advisory commission has consistently told Congress that Medicare payments do not cover the full costs of services at most hospitals, including Atrium's.

In North Carolina, large hospital systems received $1.8 billion in tax breaks in 2020, according to the state treasurer's office.

The same year, lobbyists for North Carolina hospitals reported collectively losing $3.1 billion on Medicare, according to the office's report. Other data shows they made $87 million in profit.

From 2015 to 2020, the report concludes, 35 hospitals posted profits from Medicare each year.

Other hospitals listed in the report did not respond to requests for comment.

The American Hospital Association contends that the federal government reimburses providers significantly less than it costs to care for Medicare recipients. Unlike private insurers, the federal government does not negotiate prices with hospitals. Medicare bases the amount it pays on hospitals' locations, labor costs, and other factors.

Melinda Hatton, the association's general counsel, said in a statement that "underpayments" totaled more than $75 billion in 2020. "These data show that few, if any, hospitals break even much less make a profit on the basis of Medicare payments," she said.

But Glenn Melnick, a health economics and finance professor at the University of Southern California who reviewed the North Carolina data, said no one is certain how nonprofit hospitals are calculating their numbers.

"The nonprofit hospital systems are getting so big, we need greater transparency," Melnick said. "Health care is amazingly expensive, and it will bankrupt us if we don't get it under control."

Nonprofit hospitals receive significantly more in tax breaks than they spend on community investment or charity care, according to a report released this year by the Lown Institute, a think tank in Needham, Massachusetts.

Using 2019 data from the IRS, researchers found that out of 275 hospital systems across the country, 227 spent less on community investments or charity care than they got in tax breaks. The deficit totaled more than $18 billion, the report said.

Leah Kane is a senior attorney for consumer protection at the Charlotte Center for Legal Advocacy, a nonprofit that provides civil legal assistance to people who cannot afford an attorney. She said her agency receives calls from people who were not offered charity care from hospitals.

She said her group is worried that hospitals are offering charity care to uninsured patients but not to other people, like the underinsured, who don't have the income to pay thousands of dollars for treatment not covered by their insurance plans.

"People are angry and stressed out," Kane said. "They don't know what this [debt] will mean for their lives."

KHN correspondent Aneri Pattani contributed to this report.