Some Not-For-Profit Hospitals Are Making a Killing – But at Whose Expense?

The Truth About Hospital Write-Offs & Bad Debt

I preface this with my belief that we need excellent tertiary care systems in this country for research, teaching, and tertiary level care; I am not anti-hospital. One of our many healthcare problems, however, is that hospital systems have purchased and employ 70% of primary and secondary care providers and facilities in this country and charge hospital prices (2 to 3 times higher than prices for the same care with an independent doctor or facility) for that care. Another of our problems is discussed below.

Profits Over People

So-called non-profit hospitals have historically enjoyed a bevy of state and federally-sanctioned benefits including subsidies and tax breaks such as exemptions from paying property taxes. For most people, that sounds like a good thing. After all, non-profit hospitals provide valuable, life-saving healthcare services to the communities that they serve - or so the thinking goes.

However, recent studies show that while hospitals have flourished, the communities that they serve have not. In spite of record profits realized by hospitals, most institutions cut their direct charity care spending. A report by Politico shows many big-name hospitals have experienced unprecedented revenue growth coupled with stunning cuts to charity care, or health care provided for free or at reduced prices to low-income patients. Cleveland Clinic, for example, saw revenue increase over 10 percent from 2013 to 2015. Within the same time frame the venerable institution, which is regularly named in the top three of all hospitals in the United States, decreased charity care by 60 percent. The UCLA health system saw revenue skyrocket nearly 20 percent while slashing charity care more than 75 percent. The same pattern holds true for many brand name institutions.

While the Affordable Care Act (ACA) provided hospitals across the nation with 20 million more paying customers since 2010, hospitals have, in return, done little to help the low-income and urban neighborhoods in which many of the most profitable non-profit organizations reside.

According to a 2016 study, 7 of the 10 most profitable hospitals in America are in fact "not-for-profit" hospitals. These seven hospitals raked in $33.9 billion in 2015 - a 15 percent jump from 2013. Meanwhile, despite already spending less than 2 percent of revenue on direct charity care for low-income patients, the same seven hospitals reduced their total charity spending by an additional 35 percent.

In other words, non-profit hospitals are receiving enormous revenues under the ACA while simultaneously spending less on charity care.

Where Does All the Money Go?

A logical question any observer would ask is: if community spending of many hospitals has either remained stagnant or drastically declined, where has all the revenue money gone?

Part of the answer is right in front of our eyes. Hospitals are spending money hand-over-fist on shiny new buildings, expensive renovations, and, perhaps surprisingly for non-profit, executive pay. That’s right, just because a hospital is technically a non-profit doesn’t mean that it doesn’t operate like a for-profit corporation. While doctors remain highly compensated, a study performed by The New York Times shows that executives and hospital administrators made the lion's share of the money.

According to a study by the Commonwealth Fund, a full quarter of hospital spending is dedicated to administrators. Cutting administrative spending levels in US hospitals to those seen in Canadian hospitals, which spend 12 percent on administration, would save nearly $300 billion.

According to the law, hospitals are required to demonstrate that they are giving back to their communities to maintain their tax benefits. However, many of the so-called “community benefits” that hospitals cite as the basis for their ongoing non-profit status do little or nothing at all to benefit the communities they ostensibly serve. Education, mostly the training of the hospitals' own residents, fellows, and medical staff made up the largest portion of so-called “community benefits” costs claimed by hospitals.

After the ACA expansion took effect, hospitals further shrunk the percentage of their annual spending that was dedicated to outreach programs and direct financial assistance. The overwhelming majority of charitable spending was dedicated to educating their employees and writing-off Medicaid and Medicare shortfalls.

While writing-off Medicaid and Medicare shortfalls might look charitable on paper, it is in practice no more than a devious accounting trick on the part of hospital administrators. Medicaid and Medicare shortfall write-offs are nothing more than the difference between the list price for healthcare services as stated by providers and the actual amount of money reimbursed by the federal government. As we know, these so-called list prices are entirely untethered from market realities and are purposely inflated to account for negotiated discounts to both insurers and other third-party payers. No healthcare insurer or government program pays close to the prices quoted on a hospital's chargemaster or master list. Yet when writing off Medicaid and Medicare shortfalls, administrators often refer to the inflated list prices for their calculations of charitable spending.

Who Is Footing the Bill?

When a patient receives care at a non-profit hospital but can’t (or won’t) pay the bill, the unpaid account is either written-off as charity care or bad debt. Nationally these uncompensated care costs amount to $57 billion. The ACA, by providing more health insurance coverage to more people, actually shifted some of the burdens of paying for these uncompensated costs to insurers and, ultimately, the general public.

However, while big-name hospitals are making unparalleled revenues, other so-called “safety-net” hospitals are barely keeping the doors open. As it turns out, the big name hospital systems make the most money, yet spend the least on charity care. Meanwhile, small community hospitals bear the brunt of the demand for free or reduced care while only receiving a fraction of the funding of large, not-for-profit hospital conglomerates.

So who IS footing the bill?

At the front lines are small community hospitals with limited resources and underserved low-income Americans who have fallen through the cracks in the ACA. Ultimately, it’s the local community and American taxpayer who ends up footing the bill. Non-profit hospitals, particularly large hospital systems, receive enormous taxpayer support in the form of tax exemptions and other benefits. In return, these hospital systems are supposed to be providing substantial community benefits. It is clear that while profitable hospital systems are benefiting from millions in taxpayer money, they are not necessarily paying their profits back into the community in the form of community outreach or direct financial assistance. It is clear that there is a mismatch and misallocation of healthcare resources with enormous sums of community money being reinvested into projects and initiatives that do not directly benefit the communities these high-earning non-profits ought to be serving.

Ending the Boondoggle

Rising hospital price growth is driving overall healthcare price increases. Earlier this year the Health Care Price index rose 2.2 percent thanks to strong price growth in the hospital sector.

Hospitals represent nearly a third of all healthcare spending. Thanks to the increase in the insured population vis-a-vis the ACA, as well as price increases for goods and services, hospitals have recorded record revenues in recent years.

Despite the jump in revenue, evidence shows that the increased cash flow isn’t finding its way back into communities in need. Instead, the money is being used to acquire more assets, like new buildings or local hospitals, and being paid out to executives and administrators. World famous Mayo Clinic, for example, has consolidated its facilities and services in many midwestern rural areas forcing residents to drive many more miles to get the services they need from a new, “destination medical center.” A leaked transcript from a Mayo Clinic internal event obtained by the Minnesota Star Tribune exposed the CEO telling staff that the hospital system would prioritize patients with private insurance over those with public insurance and, presumably, those without any protection at all.

To address the problem of rich hospital systems using up a community's tax money without giving it back in the form of community benefits, some have suggested a floor-and-trade program. With a floor-and-trade program, all hospitals are required to provide a base level of charity care, or a floor, for low-income patients. Hospitals would then buy and sell charity care credits as needed. This effectively distributes resources from high-income non-profit hospitals to safety-net institutions who can then deliver better, more effective care to those in need.

Another argument for reducing US healthcare spending and putting a lid on healthcare costs is to end the tax exemptions afforded to hospitals by removing their non-profit status. Afterall, why should hospital systems that rake in hundreds of millions of dollars in profits every year without providing their communities or the general public comparable health benefits be given favorable tax treatment?

The whole point of non-profit status is to advance the public good. However, when non-profits behave like for-profit corporations, should they still enjoy the benefits and protections non-profit status provides?

In fact, revoking a hospital's non-profit status, although rare, is not without precedence. In 2015, the IRS revoked the non-profit status of a “dual-status” 501(c)(3) hospital operated by a “local county governmental agency” thereby subjecting that hospital to income, property, and other taxes. The unnamed hospital had failed to comply with requirements for performing basic community health needs assessments (CHNAs) required under the ACA.

Revoking non-profit statuses of hospitals would be a bold move indeed. The reality is the current healthcare status quo simply cannot be sustained. Bold moves are what it will take to change America’s healthcare system for the better.