America’s Not-For-Profit Hospitals: Caught in a Haphazard Model

The financial situation of America’s not-for-profit hospitals reflects the chaos and twisted thinking of our American healthcare industry. On the one-hand they are absolved from paying federal and state taxes, amounting to about 66 billion dollars/year, in exchange for providing care for the poor and improving health in their communities. On the other hand, they lose significant sums caring for Medicare and even more with Medicaid patients (Ref.1). This is because federal and states set reimbursement rates by fiat, disregarding any price signals or market forces.  To avoid bankruptcy, hospitals must then negotiate with employer funded private insurance to have reimbursements at about twice Medicare rates (Ref.2).  This is a hidden tax on workers as their insurance subsidizes these two government programs. To increase their negotiating power with private insurance companies and obtain these increased reimbursements, most hospitals have undergone significant consolidation and have pursued locations that contain a high number of privately insured patients, “a favorable payer mix” (Ref.3).  Every business organization to survive must receive more income than its operating costs. Most call this profit. Not-for-profit and for-profit hospitals use this excess cash to modernize their facilities, keep up to date by buying new equipment, keeping pace with competitive salaries for staff and rainy-day funds.  For profit hospitals take a portion of this profit and return it to stockholders as dividends. Not-for-profit hospitals, in lieu of their tax breaks, are supposed to spend that portion of their profits promoting better health in their community and free care to those who cannot afford to pay. However, these hospitals pay their CEOs far in excess of other not-for-profits (Ref.4).

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    Recently a series of articles in the Wall Street Journal have demonstrated that this distinction between for profit and not-for-profit hospitals is frequently blurred, except for taxes. Investigative reporting has demonstrated that for-profit hospitals deliver MORE charity care then not-for-profits (Ref.5). They have also documented that many hospitals are gaming the 340B government program designed to provide discounted drugs to safety-net hospitals by obtaining then selling these drugs to the well insured at a high price (Ref.6). Unfortunately, there was no mention in these articles about the financial stress of hospitals serving mostly government funded patients.
    Federal and state government expenditures for healthcare programs, along with employer payments funding employee health coverage, far exceeds the amount of funds needed to provide care for all Americans. Amazingly the system has evolved so that about one third of the expenditures are spent on the bureaucracy (Ref.7). This is because the system developed haphazardly in multiple layers over the past century with no overarching conceptualization of an efficient yet humane, patient directed healthcare system. In almost all situations individual patients do not know the overall cost of their care. With private insurance they do have to deal with deductibles and co-pays. An American solution would be to greatly SIMPLIFY the system by patients having direct control of their healthcare funds that would be deposited by employers or the government into an expanded health account. From this account individuals would pay cash for most care and nationally available catastrophic insurance for high priced items. A state plan with these features for Medicaid recipients was extremely successful in the past (Ref.8).

1. Rick Pollack, Financial Math Doesn’t Add Up for Hospitals, WSJ, January 2, 2023, available at: https://www.wsj.com/articles/hospital-budget-association-reimbursement-11672680916 (accessed January 3, 2023)
2. Samantha Liss, Private insurers pay hospitals more than double Medicare rates, HeathcareDive, May 10, 2019, available at: https://www.healthcaredive.com/news/private-insurers-pay-hospitals-more-than-double-medicare-rates/554543/ (accessed January 4, 2023)
3. Melanie Evans, Max Rust, Tom McGinty, Big Nonprofit Hospitals Expand in Wealthier Areas, Shun Poorer Ones, WSJ, December 27, 2022, available at: https://www.wsj.com/articles/nonprofit-hospitals-deals-tax-breaks-11672068264?mod=newsviewer_click (accessed January 2, 2023)
4. Vikas Saini, Judith Garber, Shannon Brownlee, Nonprofit Hospitals CEO Compensation: How Much Is Enough? Health Affairs, February 10, 2022, available at: https://www.healthaffairs.org/do/10.1377/forefront.20220208.925255 (accessed January 5, 2023)
5. Anna Wilde Mathews, Tom McGinty, Melanie Evans, Big Hospitals Provide Skimpy Charity Care – Despite Billions in Tax Breaks, WSJ, July 25, 2022, available at: https://www.wsj.com/articles/nonprofit-hospitals-vs-for-profit-charity-care-spending-11657936777?mod=article_relatedinline (accessed January 2, 2023)
6. Anna Wilde Mathews, Paul Overberg, Joseph Walker, Tom McGinty, Many Hospitals Get Big Drug Discounts. That Doesn’t mean Markdowns for Patients, WSJ, December 20, 2022, available at: https://www.wsj.com/articles/340b-drug-discounts-hospitals-low-income-federal-program-11671553899?mod=article_relatedinline (accessed January 2, 2023)
7. Corey Olson, Study: Bureaucracy Eats Up One-Third of Healthcare Costs, IHeartMedia, January 27, 2020, available at: https://ktrh.iheart.com/content/2020-01-24-study-bureaucracy-eats-up-one-third-of-healthcare-costs/#:~:text=It%27s%20no%20secret%20that%20the%20price%20of%20healthcare,like%20government%20agencies%2C%20insurance%20companies%2C%20billers%2C%20administrators%2C%20etc. (accessed January 4, 2023)
8. Avik Roy, Obama Administration Denies Waver for Indiana’s Popular Medicaid Program, Forbes, November 11, 2011, available at: http://bit.ly/2t4vNUH  (accessed November 30, 2011)