For a few community health centers, serving the poor brings big surpluses

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DARLINGTON, SC – Just off the deserted town square, with its many boarded-up businesses, people lined up at the pharmacy window next to Genesis Health Care, a federally funded clinic.

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

Those sales helped Genesis turn a $19 million surplus on $52 million in revenue — a 37 percent margin — in 2021, according to its audited financial statement. It was the fourth year in a row that center vacancies had exceeded 35 percent, the data showed. The industry average is 5 percent, according to a federally funded report on the financial performance of health centers.

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

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

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

These community health centers must see 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.

A KHN analysis found that a handful of centers recorded surpluses of 20 percent or more in at least three of the past four years. Health policy experts say surpluses alone should not be a concern if health centers plan to use the money for patients. But they add that the high margins suggest a need for greater federal scrutiny of the industry and whether its money is being spent fast enough.

“No one is tracking where all their money goes,” he said Ganisher Davlyatov, an assistant professor at the University of Oklahoma who studied health center finance.

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of Federal Health Resources and Services Administrationwhich 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 Macrae, an associate administrator.

The purpose of the federal funding is to help the clinics meet the health needs of the nation’s very poor.

“They are expected to take any profit and put it back into running the center,” 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 Universityasked why some centers should have surpluses of 20 percent or more in consecutive years.

A center with a high margin “raises questions about where the surplus went” and its tax-exempt status. “Centres must provide sufficient benefits to merit their exemption from public taxation, and what we are seeing here is a large [surpluses],” she said.

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

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Officials at the health centers defended their strong surpluses, saying the money allows them to expand services without depending on federal funding and helps them save for major projects, such as building new buildings. They emphasized that their operations are overseen by boards of directors, at least 51 percent of whom must be patients, ostensibly so the operations meet the needs of the community.

“Health centers are expected to have operating reserves to be financially viable,” said Ben Money, a senior vice president at the National Association of Community Health Centers. The surpluses are necessary “as long as health centers have plans to spend the money to help patients,” he said.

Some center officials noted that bottom line profit margins could be skewed by large contributions earmarked for construction projects. Grants and donations are shown as income in the year they are given, but the costs of a project are spread over the financial statements over a longer period, often decades.

The annual federal base grant to the centers averages about 20 percent of their funding, according to HRSA. Grants have more than doubled over the past decade. Federal grants to the centers are offered 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 to specific populations, such as people who are homeless, agricultural workers or residents of public housing.

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

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

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

Primary Health Care of North Mississippi was one of them.

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

Nunnally said the center is building a financial cushion in case the 340B program ends. Drug manufacturers have requested changes to the program.

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

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

Out of Los Angeles, CEO of Family Friends Health Center Bahram Bahramand said its high margins are the result of California’s broad Medicaid coverage of low-income residents and good management.

The center — whose profit margins hit 25 percent from 2018 to 2020 — opened a $1.9 million facility in Ontario last year and bought the building that houses its flagship clinic, in La Habra, for $12.3 million with plans to expand it, he said.

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

You don’t have to ask, ‘Why are we making so much money?’ You have to ask, ‘How come other clinics aren’t making so much money?'” Bahremand said.

In South Carolina, Genesis started as a stand-alone clinic and sometimes barely made payroll, said Tony Megna, CEO and general counsel of Genesis. Conversion to a federally qualified 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 toward money is different than most because it’s so ingrained in us to worry about paying our bills,” said Katie Noyes, Genesis’ chief of special projects.

The center is spending $50 million to renovate and expand its aging facilities, Megna said. In Darlington, a new $20 million building that will 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, on more than double the minimum wage in the state, he said.

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

David Corry, chairman-elect of Genesis’ board of directors, said in a memo to KHN that some of that compensation was being paid for several years when Megna was inadvertently paid. “We determined early on that giving Mr. Megna an ‘average’ compensation like those 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.”

Megna said his base salary is $503,000.

Genesis officials said the financial security provided by the center’s surplus has allowed them to offer 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 things.

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

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

“We are very careful in how we spend our money,” Megna said.

KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism about health issues. Along with Policy Analysis and Survey, KHN is one of the three main operational programs in KFF (Kaiser Family Foundation). KFF is a non-profit organization equipped to provide information on health issues to the nation.

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