Nonprofit Hospitals Hardly Unprofitable––A Bad Time to Find Out Hospitals Are Making Big Money

Senator Charles Grassley (R-IA) has for years been complaining that non-profit hospitals have lost their way--that the tax benefits they get, originally intended to help pay for their charity care, simply aren't going to charity care anymore.

Last Friday, the Wall Street Journal ran a front page story on the enormous profits many of the nonprofit hospitals are recording. The article made a number of points:

• The combined net income of the 50 largest nonprofit hospitals increased nearly eight times to $4.27 billion between 2001 and 2006.
• At least 25 nonprofit hospitals each now earn more than $250 million a year in profits.
• Nonprofit hospitals are more often profitable than for-profit hospitals--77% of the 2,033 nonprofits are profitable while 61% of for-profits made money last year.
• Nonprofit hospitals received $12.6 billion in annual tax exemptions on top of another $32 billion in federal, state, and local subsidies the entire industry receives.
• "One reason for hospitals soaring profits is the gradual increase in Medicare reimbursements" in recent years.
• Hospital profits have also increased because of consolidation and increases negotiating leverage with payers, demanding upfront payments from patients, hiking list prices to "several times their actual cost," selling patients debts to collection companies, focusing on expensive procedures, and issuing tax exempt bonds and investing that cash in better yielding securities.

The article cites at least two specific cases where the hospital's tax benefits are multiples more than the charity care they provide. The story also cites the salaries of nonprofit hospital CEOs and lists 10 executives paid between $3.3 million and $16.4 million a year.

The WSJ article also makes clear that many hospitals, particularly inner city hospitals with substantial numbers of low income patients, are having a tough time making it.

But clearly, most community hospitals and major medical centers are well into the black.

The growing data about the wealth of these nonprofit hospitals may kill the golden goose by giving the Congress permission to take away or modify their tax status. Just think of the incentive these hospitals would have to provide charity care if they actually paid taxes and could deduct the cost of their services to the uninsured.

But all of this publicity will have another very important effect.

We are about to start the 2008 budget debate as we face a looming 15% Medicare physician fee cut on top of an emerging problem in funding both Medicare and Medicaid in the coming years. The Bush budget calls for Medicare and Medicaid cuts for both hospitals and doctors. The providers respond that it is the Medicare HMOs and their "over payments" that should take the hit.

We are about to see a major "food fight" between hospitals, doctors, and HMOs over whose hide Medicare and Medicaid cuts will come out of. Each of them will be pleading their own version of poverty.

News that the nonprofit hospitals are not so nonprofit comes at exactly the wrong time for them.