For some community health centers, serving the poor brings big surpluses

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DARLINGTON, SC — Just off the deserted town square, with its many shuttered businesses, people lined up at the walk-in pharmacy window of Genesis Health Care, a federally funded clinic.

Drug sales provide the bulk of revenue for Genesis, a nonprofit community health center treating about 11,000 mostly low-income patients at seven South Carolina clinics in 2020 and 2021.

Those sales helped Genesis achieve a $19 million surplus on $52 million in revenue — a 37% margin — in 2021, according to its audited financial statements. It was the fourth year in a row that the center’s surplus exceeded 35%, records show. The industry average is 5%, according to a federally funded report on the financial performance of health centers.

Genesis attributes its wide margins to excellent management and says it needs the money to expand and modernize its services while being less dependent on government funding. The center benefits financially through the use of a government drug discount program.

Yet Genesis’ sizable surplus stands out among federally qualified nonprofit health centers, a central part of the national safety net for treating the poor.

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In 2021, the federal government pumped over $6 billion [nachc.org] in core funding grants to 1,375 centers across the country, which provide primary care to more than 30 million low-income people. That same year, the American Rescue Plan provided an additional $6 billion over two years for covid support.

These community health centers must take all patients regardless of their ability to pay, and in return they receive annual government grants and higher reimbursement rates from Medicaid and Medicare than private physicians.

Analysis by KHN found that a handful of centers have had surpluses of 20% or more in at least three of the past four years. Health policy experts say the surpluses alone should not cause concern if health centers plan to use the money for patients. But they add that the high markups suggest the need for more federal scrutiny of the industry and whether its money is being spent fast enough.

“Nobody knows where all their money is going,” said Ganisher Davlyatov, an assistant professor at the University of Oklahoma who has studied health center finance.

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The Federal Health Resources and Services Administration, which regulates the centers, has limited authority under federal law over how much the centers spend on services and how they use their surpluses, James Macrae said. , an associate director.

The goal of the federal funding is to help the clinics meet the health needs of many of the country’s poor.

“They are expected to take any profit and reinvest it in the center’s operations,” he said. “It’s definitely something we’re going to look at and what they’re doing with those resources,” he said of KHN’s findings.

But Ge Bai, a professor of accounting and health at Johns Hopkins University, questioned why some centers should achieve surpluses of 20% or more in consecutive years.

A center with a high margin “raises questions about where the surplus went” and its tax-exempt status. “Centres have to provide enough benefits to earn their public tax exemption, and what we’re seeing here is a huge amount of [surpluses],” she says.

Bai said centers need to be able to answer questions about “why aren’t they doing more to help the local community by expanding their reach of service.”

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Health center officials defended their healthy surpluses, saying the money allowed them to expand services without relying on federal funds and helped them save for big projects, such as constructing new buildings. They pointed out that their operations are overseen by boards of directors, of which at least 51% must be patients, ostensibly for the operations to meet the needs of the community.

“Health centers should have operating reserves to be financially viable,” said Ben Money, senior vice president of the National Association of Community Health Centers. Surpluses are needed “as long as health centers plan to spend the money to help patients,” he said.

Some center officials have noted that profit margins can be skewed by large contributions earmarked for construction projects. Grants and donations appear as revenue in the year they are awarded, but the costs of a project are spread in the financial statements over a longer period, often decades.

The base annual federal grant for the centers is about 20% of their funding on average, according to HRSA. Subsidies have more than doubled over the past decade. Federal grants to the centers are awarded on a competitive basis each year based on a complex formula that takes into account the need for services in an area and whether the clinics provide care for specific populations, such as the homeless. , agricultural workers or residents. of public housing.

The centers also receive reimbursements from Medicare and Medicaid that can be up to twice what federal programs pay private physicians, said Jeffrey Allen, partner at consulting firm Forvis.

Additionally, some health centers like Genesis also benefit from the federal 340B drug rebate program, which allows them to purchase drugs from manufacturers at deeply discounted rates. Patient insurers typically pay centers a higher rate and clinics keep the difference. Clinics can reduce out-of-pocket expenses for patients, but they are not required to do so.

For its analysis, KHN began with research by Davlyatov which used the centers’ IRS tax filings to identify the two dozen centers with the highest profit margins in 2019. KHN then reviewed the financial statements audited these centers for the past four years (2018 to 2021), and found nine that had margins of 20% or more for at least three years.

Northern Mississippi Primary Health Care was one of them.

“We don’t take unnecessary risks with company assets,” said Christina Nunnally, quality manager at the center. In 2021, the center had nearly $9 million in surplus on $36 million in revenue. More than $25 million of that revenue came from the sale of drugs.

Nunnally said the center is building a financial cushion in case the 340B program ends. The drugmakers have asked for changes to the program.

The center recently opened a school health program, a new dental clinic and clinics in neighboring counties.

“That kind of margin may not be achievable one day,” she said. If the center is going through tough times, it won’t want to “have to start cutting programs and staffing levels.”

Outside Los Angeles, Bahram Bahremand, CEO of Friends of Family Health Center, said its high margins were the result of California’s extensive Medicaid coverage for low-income residents and good management.

The center – whose profit margins exceeded 25% from 2018 to 2020 – opened a $1.9 million facility in Ontario last year and purchased the building that houses its main clinic, in La Habra, for 12 .3 million with plans to expand it, he said.

Bahremand added that the center is also reducing administrative costs by focusing on having more providers in relatively fewer locations.

“You shouldn’t ask yourself, ‘Why are we making so much money?’ You should ask yourself, ‘Why are other clinics not making so much money?’ Bahremand said.

In South Carolina, Genesis started as an independent clinic and was sometimes barely able to make the payroll, said Tony Megna, CEO and general counsel of Genesis. The conversion to a federally licensed health center about a decade ago brought federal funding and a stronger foundation. It recorded a surplus of more than $65 million from 2018 to 2021.

“Our attitude towards money is different from most because it’s so ingrained in us to wonder if we’re going to pay our bills,” said Katie Noyes, special projects manager at Genesis.

The center is spending $50 million to renovate and expand its aging facilities, Megna said. In Darlington, a new $20 million building that will more than double the facility’s space is set to open in 2023. And its strong results are helping the center pay all of its workers at least $15.45 a year. hour, more than double the state minimum wage. , he said.

Megna received nearly $877,000 in salary and bonuses in 2021, according to Genesis’ latest IRS tax return, an amount nearly four times the industry average.

Genesis board chairman-elect David Corry said in a memo to KHN that part of that compensation compensated for several years when Megna was inadvertently underpaid. “We determined early on that providing Mr. Megna with ‘average’ compensation like that of other FQHC CEOs was not what we wanted. Mr. Megna’s extensive legal experience and education as well as his institutional and regulatory knowledge set him apart from the rest.

Megna said her base salary was $503,000.

Genesis officials said the financial security provided by the center’s surpluses has enabled them to provide additional services to patients, including foot care for people with diabetes. In 2020, Genesis used $2 million to create an independent foundation to help families with food and utility bills, among other needs.

Most of Genesis’ revenue comes from the 340B program, according to its audited financial statements. Many prescriptions filled at the clinic’s pharmacy are for expensive specialty drugs, which treat rare or complex conditions such as cancer.

Megna, 67, a former bankruptcy lawyer, said maintaining the financial security of the center was vital to keeping it open for patients.

“We’re very careful how we spend our money,” Megna said.

KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism on health issues. Along with policy analysis and polling, KHN is one of the three main operating programs of KFF (Kaiser Family Foundation). KFF is an endowed non-profit organization providing information on health issues to the nation.

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