Community health centers’ large profits raise questions about federal oversight

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

Drug sales provide the bulk of revenue for Genesis, a nonprofit community health center that treats about 11,000 mostly low-income patients at seven clinics across South Carolina.

Those sales helped Genesis record a $19 million surplus — a margin of 37% — on $52 million in revenue in 2021, according to its audited financial statements. It was the fourth consecutive year the center’s surplus topped 35%, records show. The industry average is 5%, according to the Federal Funding Report on Health Center Financial Performance.

Genesis attributes its large margins to excellent management and says it needs the money to expand and modernize services while remaining less dependent on government funding. The center benefits financially by using the government drug rebate program.

Still, Genesis’ large surplus stands among nonprofit federally qualified health centers, a linchpin in the nation’s safety net for treating the poor.

The federal government last year pumped more than $6 billion in basic funding grants into 1,375 privately run centers across the country, which provide primary care to more than 30 million mostly low-income people. In 2021, the American Rescue Plan Act provided an additional $6 billion over two years for Covid-19 care.

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

Yet a KHN analysis found that a handful of centers recorded profits of 20% or more in at least three of the past four years. Health policy experts say the surpluses alone should not raise concerns if health centers plan to use the money for patients.

But they added that the high margins suggest a need for greater federal scrutiny of the industry and whether that money is being spent fast enough.

“No one is tracking where all their money is going,” said University of Oklahoma assistant professor Ganisher Davlatov, who has studied health center finances.

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, said James McRae, an associate administrator.

“The hope is that they will take any profits and plow back into the center’s operations,” McRae said. “It’s definitely something we’ll be looking at and what they’re doing with those resources,” he added of KHN’s findings.

Gee Bai, an accounting and health professor at Johns Hopkins University, questions why some centers should achieve profits of 20% or more for consecutive years.

A center with a high margin “raises questions about where the surplus went” and its tax-exempt status, Bai said. “Centres have to provide enough benefits to get their public tax exemption, and what we are seeing here is a huge amount of profit,” he said.

Bai said the centers must be able to answer questions about “why they are not doing more to help the local community by expanding the scope of their services”.

Health center officials have defended their strong surplus, saying the money allows them to expand services without relying on federal funding and helps them save for big projects like building new buildings. They noted that their operations are overseen by a board of directors, of whom at least 51% must be patients, ostensibly so the operations meet the needs of the community.

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

Some officials at the Center pointed out that bottom-line profit margins could be skewed by the large contribution earmarked for project construction. Grants and grants appear as revenue in the year they are awarded, but a project’s costs are allocated to the financial statements over a long period of time, often decades.

‘We don’t take unnecessary risks’

Annual federal base grants for centers make up about 20% of their funding on average, according to HRSA Donations have more than doubled in the past decade. These federal grants to the centers are awarded on a competitive basis each year based on a complex formula that takes into account the service needs of an area and whether the clinics provide care to specific populations such as the homeless, farm workers or residents. Public housing.

The centers also receive Medicare and Medicaid reimbursements that can double what federal programs pay private doctors, said Jeffrey Allen, a partner at consulting firm Forvis.

In addition, some health centers, like Genesis, also benefit from the 340B federal drug discount program, which allows them to buy drugs from manufacturers at deeply discounted rates. Patients’ insurers typically pay the centers at a higher rate, and the clinics keep the difference. Clinics may reduce out-of-pocket costs for patients but are not required to.

For its analysis, KHN started with Davlyatov’s research that used centers’ tax filings with the IRS to identify two dozen centers with the highest profit margins in 2019. 2021) by subtracting total expenses from total revenue, which yields that year’s surplus, and then dividing by total revenue. Funds paid by donors for restricted use were excluded from revenue. After examining the centers’ finances, KHN found nine that had margins of 20% or more for at least three years.

North Mississippi Primary Health Care was one of them.

“We don’t take unnecessary risks with corporate assets,” said Christina Nunnally, the center’s chief quality officer. In 2021, the center had a surplus of about $9 million on $36 million in revenue. More than $25 million of that revenue came from drug sales.

Nunnally said the Center is building a financial cushion in case the 340B program ends. Drugmakers are seeking changes to the program.

A man wearing a light shirt and wearing glasses stands near a white wooden building with a large tree in the background.
Tony Megna is CEO and General Counsel of Genesis Healthcare. The center began as an independent clinic in Darlington, South Carolina, and later converted to a federally qualified health center. The federal funding that came with that change helped the clinic gain a stronger footing. From 2018 to 2021, Genesis recorded a surplus of over $65 million.(Phil Galewitz/KHN)

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

“There may come a day when that kind of margin is no longer possible,” he said. If the center hits hard times, it won’t want to “start cutting programs and people.”

In Montana, Sapphire Community Health of Hamilton, which posted a surplus of about $3 million from 2018 to 2020 and had a profit margin of more than 24% in each of those years, wants to move from its rented quarters to a building that will cost at least $6 million to construct. “A new facility will enable us to provide services that we cannot provide due to lack of space, such as imaging, obstetrics and dental services,” said CEO Janet Woodburn.

Out of Los Angeles, Friends of Family Health Center CEO Bahram Bahremand says his high margins are the result of better management of low-income residents and California’s broader Medicaid coverage.

The center — whose profits peaked 25% from 2018 to 2020 — opened a $1.9 million facility in Ontario last year and purchased its flagship clinic in La Habra for $12.3 million, with plans to expand, he said.

Bahremand added that the center keeps administrative costs low by focusing on having more providers in fewer locations.

“You shouldn’t ask: ‘Why are we making so much money?’ You should ask: ‘How are other clinics not making so much money?’

Worries about paying bills

In South Carolina, Genesis started as an independent clinic and was sometimes barely able to pay, said Genesis CEO and general counsel Tony Megna. Converting to a federally qualified health center nearly a decade ago brought federal funding and a more solid foundation. It recorded a surplus of over $65 million from 2018 to 2021.

“Our approach to money is different than most because it’s so ingrained in us to worry about whether we’re going to pay our bills,” says Katie Noyes, chief special projects officer.

Megna said the center is spending $50 million to renovate and expand its aging facilities. In Darlington, a new $20 million building that will more than double the facility’s space is slated to open in 2023. And its strong bottom line helps the center pay all of its workers at least $15.45 an hour, more than double the state minimum wage. , Meghna said. Darlington County’s annual median household income is a little over $37,000.

A woman in a red tank top stands outside a light-colored wooden building with columns with a walking stick.  He is holding a plastic bag in his left hand.  There is a bulletin pinboard and a small customer service window at the back of the building
Sherrill Richardson, a patient at Genesis Health Care, drives 30 minutes from her home to get medication to treat her diabetes and high blood pressure. “I save hundreds of dollars a month, and the service is really good,” she says (Phil Galewitz/KHN)

Megna was paid about $877,000 in salary and bonuses in 2021, nearly four times the industry average, according to Genesis’ latest IRS tax filing.

David Corey, chairman-elect of the Genesis board of directors, said in a memo to KHN that part of that compensation was built up over several years when Megna was inadvertently underpaid. “We initially decided that paying Mr. Meghna the same ‘average’ compensation as CEOs of other FQHCs was not what we wanted. Mr. Meghna’s extensive legal experience and education as well as his institutional and regulatory knowledge set him apart.”

Meghna said her base salary is $503,000.

Genesis officials said the financial security provided by the center’s surplus has allowed them to provide additional patient services, including foot care for diabetics. 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 clinic pharmacies are for expensive specialty drugs that treat rare or complex conditions, such as cancer. Being accredited to dispense specialty drugs was expensive, Corey said, but “the money paid off because it gave our patients access to very high-value, and often life-saving, prescription drugs that many of them wouldn’t otherwise have access to.”

Megna, 67, a former bankruptcy attorney, said it’s important to keep the center financially secure in order to stay open for patients.

Meghna says, “We are very careful about how we spend our money.

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