If you read the Bruce Bodaken interview referenced in my other post today you’ll see that he complains about a certain hospital organization pricing too aggressively and being cut out of part of the CalPERS HMO network that Blue Shield runs. That unnamed organization is of course Sutter Health, which has used it’s local oligopoly power gained by a series of quasi-mergers in the mid-1990s to raise its prices and its profits considerably.
Now I’m not clever enough to really understand who is accountable for what in a big non-profit hospital, and by the time you add into that mix a "system" made up of all types of different management and ownership arrangements, without any clear stockholding ownership, then I’m lost completely. Back in the mid-1990s when it joined Sutter, Cal Pacific medical center was bleeding money. I speculated to my clients back then that I wasn’t sure that other parts of the Sutter system would have bailed it had it gone under. But Sutter took advantage of its bargaining power to push up costs, and the plans took it in the shorts for a few seconds until they realized that they could turn round and stick that cost onto their clients, and still make record profits. (Actually that’s not exactly how this long 2003 article on Sutter’s integration describes Sutter’s strategy, so you might read it for a more balanced view!) So everyone was happy.
Or almost everyone. Now Cal Pacific is making too much money. So much that the City of San Francisco, which I assume is pretty broke given the way it comes after me for egregious property taxes and parking tickets, and is increasing bus & train fares for its poorest residents again, is revoking its non-profit classification and is going after Cal Pacific for property taxes.
Which leads us to the old age question of, what exactly is non-profit about wealthy hospital systems that throw off a ton of margin? Or for that matter similarly profitable health plans? I suspect this question will come back again. But don’t worry guys, my in-depth analysis of oil companies seems to indicate that you won’t have to pay any tax on all those profits anyway.