Nonprofit Hospital Profits and Medicaid Expansion

Every year Virginia’s hospitals cry poverty as justification for expanding Medicaid, and every year their profits just grow bigger.

Admittedly, hospital profits did decline 0.6% in 2015. But hospitals more than made up the difference in 2016. According to an annual update on Virginia hospital profitability by the Thomas Jefferson Institute for Public Policy (TJI), hospital profits increased 13.9% that year. Over the past four years, Virginia hospital profits have increased 36%. 

Some hospitals are more profitable than others, of course, and it’s true, as the Virginia Hospital Association reminds us, that some hospitals lose money. Twenty-eight Virginia hospitals ran deficits in 2016 compared to 42 in 2012, reports TJI, but that’s not the problem it might seem. Some money-losing hospitals are new, and their losses are temporary as they build market share. Other hospitals, typically rural, are part of larger health systems; while they may operate at a deficit, they funnel patients to larger tertiary-care hospitals where the real money is made. And at least one, Sheltering Arms in the Richmond area, has a business model that relies heavily upon philanthropy.

Remarkably, most of the industry’s $2.15 billion in profits come from the non-profit sector. For-profit Hospital Corporation of America (HCA) accounts for $244 million of the industry’s profit. Other for-profits have a negligible market presence in Virginia. The vast majority of profit comes from the non-profits. Here are the top earners:

Let’s be clear: I’m not attacking hospital profitability. We want our hospitals to be financially healthy. Who wants to have surgery in an institution that’s always cutting corners, can’t hire competent staff, and lacks the capital to reinvest in new technology and best practices?

But it is a legitimate question to ask, especially of nonprofit hospitals, how much profit is enough? The state grants nonprofits exemption from property taxes, corporate income taxes, and other taxes worth hundreds of millions of dollars to support their public mission. What is that public mission, if not providing medical care to the community at large — and especially to the poor?

The Virginia Hospital Association, I hear, will propose to finance Medicaid expansion by means of a hospital bed tax. That gambit will have the political virtue of avoiding a highly visible general tax increase, such as the state income tax or the sales tax, and embed the tax all-but-invisibly in your hospital bill where you likely will never take notice of it because hospital bills are indecipherable and your insurance company is covering most of it anyway. The proposal also will have the practical effect of transferring wealth from paying patients to nonpaying patients. Paying patients are being dunned already through opaque hospital bookkeeping to support the existing Medicaid program, which notoriously pays less than Medicare or private insurance. With a bed tax, paying patients will be dunned again.

But hospitals will retain their revenue surpluses to spend as they please.

Democrats feel terrible that some 240,000 low-income Virginians are stuck in what the center-left Commonwealth Institute think tank calls the health care coverage gap: States a recent paper: “They are unable to get quality, affordable coverage through the federal insurance marketplace because they don’t make enough money, and they can’t qualify for Medicaid because they make too much.”

We’ll see how Democrats propose funding the Medicaid expansion, but the money has to come from somewhere — either from taxpayers generally or the hospital bed tax. If past is prelude, Dems will have few qualms about shifting the burden to either one. After all, as Governor Ralph Northam opined yesterday, Medicaid expansion is “a matter of basic economic justice.” Unfortunately, economic justice, as we have learned from years of experience, is for the poor, not for middle class taxpayers and insurance payers.

In my taxpayer-friendly view of economic justice, perhaps we should be asking Virginia’s hospitals what the public is getting for nearly $2 billion in nonprofit profits. The press doesn’t cover hospital board meetings to report on how that money is disposed of. It doesn’t have the resources to do so. Perhaps the Joint Legislative Audit and Review Commission could determine how much nonprofit hospitals are getting in state and federal tax breaks and how hospitals are redirecting the money. I’d sure like to know before Governor Northam and his friends in the legislature salve their social-justice consciences by sticking it again to the middle class.

Update: The Virginia Hospital and Healthcare Association objects to TJI’s methodology for calculating profits. Says spokesman Julian Walker:

“In past studies of this sort, the Thomas Jefferson Institute has miscounted, included non-hospitals in its tabulation, evaluated total margins rather than operating margins which are a truer measure of fiscal condition, factored in investments and other assets in its calculations of profit, among other calculations that have resulted in a skewed and imbalanced impression of what the actual data from VHI shows. …

From 2008-2016, the annual rate of Virginia acute care hospitals with negative operating margins has ranged from 38 percent to 23 percent. Among rural acute care hospitals, the range is 63 percent to 40 percent.”

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11 responses to “Nonprofit Hospital Profits and Medicaid Expansion

  1. Well heckfire.. why not let the GA take that over and handle it like they have Dominions profits!

    More seriously – if some hospitals make a profit and some sustain losses because of their higher proportion of charity cases.. what would you advocate doing that was a general policy as opposed to specifically targeting the hospitals that “made too much profit”?

    If all the hospitals are following the same rules for reimbursement and some of them have gotten good at efficiencies then you’d punish them ?

    and how .. you ought not to be changing the reimbursement rules.. just for some hospitals so how would you do it? Just look at their profit.. and if they make too much , take it away?

    How about this – a tax on profits above a certain level and that money goes into community clinics for the needy?

  2. How about an analysis of why hospital costs are so high? Some reports say that administrative costs are excessive. Before we soak the middle class, let’s re-examine the idea of non-profits and the profits they enjoy.
    My recent hospital bill was fascinating. In round numbers, the amount charged was $40,000. The amount approved was $20,000. The amount paid was $10,000. The amount that I paid was zero.

  3. re: ” My recent hospital bill was fascinating. In round numbers, the amount charged was $40,000. The amount approved was $20,000. The amount paid was $10,000. The amount that I paid was zero.’

    so geeze – you paid ZERO and you’re complaining?

    The interesting thing is where does the “approve” come from?

    who decides that?

    Would we have the govt decide what the amount charged should be?

    so… I’m looking at how we determine the cost of higher Ed, Dominion’s profits and Medical Costs?

    what justifies the govt looking into how much something should cost?

    we we think the govt bureaucrats KNOW what should be charged?

    Would we have the govt decide what should be charged and dictate it?

  4. “What justifies the govt looking into how much something should cost? We we think the govt bureaucrats KNOW what should be charged?”

    Isn’t that what happens in a single payer system?

  5. Good Point. It’s EXACTLY what happens in a single payer system !!

    but please note that when prices are standardized across all providers like they are in all other industrialized countries – they not only all pay much LESS than we do – they have longer life expectancies and lower infant death rates.

    In this case – I argue that we should not have the govt involving itself for SOME providers when they make “too much” profit – while not intervening in the providers that are losing money.

    but the question I asked before was WHO decides how much the reimbursement will be in the US system?

    how about it? who decides that?

  6. The government is already involved by giving $30B a year in tax subsidies to these non-profit hospital systems. What are the people getting for this subsidy?

    The largest study ever into healthcare prices in the U.S. found that not-for-profits behave identically to for-profits. ( “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured”) Their prices are equally high, and they are also likely to charge higher prices when they have monopolies or more market power through consolidation. The tax subsidy is essentially funding these systems to further consolidate (a long-term major trend) further reducing competition and increasing prices.

    Note that not-for-profits can fulfill their status requirement by using “charge master” pricing. The value of their “charity care” is calculated against high non-negotiated prices that are many times higher than what private insurance or Medicare would pay.

    We are being ripped off.

  7. Let’s go to VPAP for a look at Dick Saslaw’s top donors through the years …

    $131,481 – Medical Society of Virginia
    $105,000 – Virginia Hospital & Healthcare Assn

    His donor list is a Who’s Who of crony capitalists in Virginia.

    So, are the profits from “non-profit” hospitals subject to Virginia’s 6% corporate profit tax? I am guessing “no”. So, we have about $1.9B of profits per year from “non profit” hospitals. That comes to $114M per year in lost taxes. Do they pay the BPOL tax? In Fairfax County that’s $0.31 per $100 of gross receipts. Receipts, not profits. Assuming the “non profit” hospitals generate 5% profit they need $38B in revenue to get $1.9B in profit. Using Fairfax County’s rate as a proxy for Virginia that’s another $12M or so in lost revenue.

    But if we need more roadway in NoVa the only way to get it is through $30 tolls because … there’s just not enough money! There will never be enough money as long as we keep reelecting the criminal enterprise known as the Virginia General Assembly.

    • Need to think about this in a more holistically way.

      There are people in Virginia – a lot of it rural – where they do not have access to health care and increasingly so – less hospitals/ERs.

      Should we increase our Medicaid budget and expenditures to address that issue or should we skim off SOME money from the very profitable hospitals who are selling discretionary – non-insurance-reimbursable services at whatever prices they can set according to demand?

      I’d not tax ALL of it because you want hospitals that implement such programs and cut costs to retain the motivation to do that – it has to be worth their while to do it. .. if not.. if they see it as a grab of the fruits of ALL their efforts.. they’ll stop doing it.

      so tax SOME of it.. and use that money to stand up managed care clinics in areas that don’t have access to hospital ERs.. rather than trying to subsidize entire hospitals..

      In other words – find ways to equitably fund needs but meet those needs in fiscally efficient ways.. the more fiscally efficient you are – the more you’ll have to meet unmet needs.

      Do you need govt to do this? Yes. but at the same time – govt involvement should be to NOT harm or cause existing profitable operations to shutter.

      That WOULD BE BETTER in some respects than Single Payer in my opinion in that you do get coverage for everyone but those who earn more can seek better care if they want… which is what Single Payer in other countries also allow .. i..e. you see Canadians come across the border to buy services that Canada may not cover or may not provide as high a quality level since Single Payer is a compromise where everyone can get care – the same care… and that’s not acceptable to some who earn more and would pay more.

      We have the same situation in this country with Medicare. It won’t cover a lot of things including dental, eyes or hearing.. that’s on you ..

    • Don’t know about all those specific taxes but … Non profit hospitals cannot ‘retain their revenue surpluses to spend as they please.” Spending at non-profit corporations is directed in some measure by law.

      “To qualify for Nonprofit status, your corporation must be formed to benefit: (1) the public, (2) a specific group of individuals, or (3) the membership of the Nonprofit.
      In economic terms, it is an organization that uses its surplus revenues to further achieve its ultimate objective,“… Surplus revenues, or ’profits’ must only be spent to further the particular cause stated in the corporation’s founding documents.

      “Non-profits are tax exempt or charitable, meaning they do not pay income tax on the money that they receive for their organization. They can operate in religious, scientific, research, or educational settings, … and one of the most attractive benefits of forming a nonprofit is the opportunity to receive grants from the federal government and private foundations.”

      “A nonprofit can pay salaries to officers and employees. But, in order to maintain nonprofit status, the nonprofit corporation must not distribute any profits for the benefit of directors, officers or members – for example, in the form of dividends.” All spending is directed toward achieving the stated objective of the non-profit corporation.

  8. I think hospitals in more affluent areas sell services that are not covered by most insurance… and that adds to their bottom line.

    Hospitals in economically distressed areas sell far less discretionary services and the reimbursements for the services covered are not enough to cover their costs – and that’s why we have some hospitals make profits while others are going bankrupt and close – even with extra subsidies that are not enough. Hospitals that close – go broke – they don’t close because they’re not making “enough” profit.

    It’s also why Obama Care insurance leaves those economically distressed areas if they don’t get their extra subsidy… without that extra subsidy – they lose money.. and leave.

    When we ONLY look at the hospitals that are making a profit and deduce from that – that all hospitals are are charging “too much” we’re way off track in my view.

  9. Any business needs a capital reserve. This includes nonprofits. And it’s not unreasonable for a nonprofit to bank some funds for use in future projects, to shield against foreseeable events or to pay off expensive bonds early.

    But holding billions in reserve by a tax-exempt, nonprofit is simply wrong and should be illegal. I don’t know where to draw a line, but a line needs to be drawn.

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