HealthLawProf Blog

Editor: Katharine Van Tassel
Concordia University School of Law

Friday, April 4, 2008

Non-Profit Hospitals: Making Big Money

Today the Wall Street Journal has an article discussing the money made by non-profit hospitals and how it is being spent.

There’s big money in health care, even for institutions that aren’t chartered to make a profit. The combined net income of the 50 largest nonprofit hospitals in this country was more than $4 billion in 2006, up from less than $1 billion in 2001, the WSJ reports. . . . .

Some nonprofits have also started acting like profit-hungry businesses, demanding upfront payments from patients, hiking list prices, selling patients’ debts to collection companies and focusing on expensive procedures, the WSJ says.

Sen. Charles Grassley (R-Iowa) says, “Some nonprofit hospitals seem to forget that their operations are subsidized with generous tax breaks. They allow their priorities to get out of whack.” The senior Republican on the Senate Finance Committee threatened last year to introduce legislation that would require nonprofit hospitals to deliver minimum levels of charity care to maintain their tax benefits.

Take a look at Northwestern Memorial Hospital in Chicago, which has rebuilt its entire campus in the last few years, including a new women’s hospital with marble in the lobby and flat-screen TVs in birthing rooms. The hospital’s former CEO received a $16.4 million payout in 2006, the WSJ says. The hospital says much of that payment was deferred compensation and retirement benefits accrued during his long career at the hospital. . . .

Ezra Klein has some thoughts here:

Gross stuff. I'm going to outsource this bit of commentary to Maggie Mahar and her excellent book, Money-Driven Medicine:

As health care became increasingly sophisticated, neither government nor a philanthropy could keep up with the levitating costs of a high-tech industry. Meanwhile, in the early 1970s, Washington began to question what many saw as runaway hospital spending. Luckily, at about this time, the bond market decided that it would be more than happy to provide the capital that non-profits needed -- for much the same reasn that the stock market was eager to finance the first for-profit hospitals. With revenues pouring in from both Medicare and the private-sector employers who financed commercial health insurance, hospitals seemed a sure thing...By the late 1970s, nearly 50 percent of hospital financing was done through tax-exempt bonds. Ten years later, 80 percent of construction funds for not-for-profit hospitals would come from borrowing -- up from 40 percent 20 years earlier. By 1981 philanthropy and government grants funded less than 8 percent of hospital construction.

The change meant that not-for-profit hospitals had to redefine their mission. The expectations and demands of a bond investor who entrusts his savings to a hospital are, after all, quite different from the hopes and goals of a philanthropist who bids only for immortality: the bond investor expects a return on his money...This changes a hospital's priorities. In the past, when a hospital board decided how to allocate its resources, board members saw themselves as running a social service. When they looked in the mirror, they didn't see a crew of savvy entrepreneurs; they saw pillars of the community...[So] the economic reality is this: 45 years ago, the market did not set a hospital's priorities because hospitals did not rely on the market in order to survive. Today not-for-profits rely on borrowed money for more than half of their capital. And the cost of much of that money pivots on how well rating agencies like Standard & Poor's view a hospital's balance sheets.

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