The (Non)-Profit Motive

From today’s Wall Street Journal: "Nonprofit Hospitals, Once For the Poor, Strike it Rich."

It has long, and often, been argued here on THCB and so many other places, that if we simply ‘take the profit motive out’ of health care, the system will get better, people will be healthier, costs will go down, and cats and dogs will no longer fight.

Others have called for a “Hill-Burton Act” for health care technology, in reference to the federal law which gave favorable treatment to hospitals.

Here is my favorite quote, from the end of the article:

"Nonprofit is a misnomer — it’s nontaxable," says Sacred Heart Hospital’s Mr. Novak. (No relation to me, BTW) "When you’re making hundreds of millions of dollars a year, how can you call yourself a not-for-profit?"

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17 replies »

  1. “Non-profit” only relates to non-taxable nothing more, no one is wiling to work without a mission, that’s the underlying truth.Good point of discussion.Keep up!

  2. Matt-your point is legitimate–but the answer is not to abandon the non-profit concept. If we do that, you can be assured that no one anywhere will perform those low-margin services for people lacking resources. If our payment system could be changed, we might actually be able to provide less expensive, more timely healthcare interventions in a non-acute environment that could prevent or ameliorate disease, and actively improve community health. Until the system is changed, our hospitals-for and non-profit– and docs will keep crankin’ out the RVUs faster than the Feds and states can reduce reimbursement. This is a broken, but perfectly predictable system.

  3. “No margin, no mission” is a common justification for why “not for profits” behave as for-profit entities. And the leadership of “not for profit” hospitals, especially ones that operate in markets where they have the luxury of competing for high margin, well-insured patients, have taken this mantra to heart.
    The thinking goes that by maximizing profitability (i.e. focusing on profitable services and patients…and aggressively “managing” accounts receivables) that these “well-managed” organizations will have more resources to fullfill their (stated)community missions.
    But – too often – the means to “margin” undermines the ultimate goal of supporting the most pressing (and often unmet) needs of the community (the stated “mission”). Most areas do not “need” more resources to support heart surgery, imaging, ortho, oncology, and other high margin services. And those who “need” the most attention in terms of AR are often the ones most in “need” of help from the community (i.e. the uninsured).
    Many of the services that would impact the health of the community the most happen to also be services that don’t have high margins. And many of the people in communities most in need of services are the ones least able to pay high margins for those services.
    We’ve seen (from the WSJ article and elsewhere) that many “not for profits” don’t get around to focusing on their mission, even when margins increase. Just as focusing on their margins undermines their missions, focusing on their missions undermines their margins.

  4. Our local “non-profit” hospital was $40 million in the black last year. It also received almost $25 million in state and federal grants because of it’s non-profit status and the fact that they have to handle some illegal immigrants in their ER. However,it paid no taxes. My neighbor is the CFO of one of the subsidiaries this Hospital and he just got his $200,000 BONUS at the beginning of the month. He’s 33 years old, knows nothing other than massive salaries and profits for himself and is very happy the state and federal gov’t are giving them millions in grants and “aid” while the execs strip out millions for themselves.

  5. Couple of quick points:
    1. There are has been a TON of research done on the various aspects of not-for-profit vs. for-profit hospitals. Making blanket statements with perceived quality or other deficiencies without referring to medical literature is pretty bush league.
    2. IRS has made a number of important rulings in the past few years on this issue including how “community benefit” is defined for NFP hospitals. Additionally, there have been a few really important court cases in this area the past two or three years. WSJ article would have been a lot better if it actually dug a little deeper.

  6. I don’t think we should overlook botetourt’s idea. After all, our income tax is basically a redistribution from the rich to the less wealthy; why shouldn’t rich hospitals subsidize their poorer brethren as their “charity” care? This may have more effect than searching for poor people to help in their affluent suburban locations, so they can say they gave charity care. I know, I know – there are a thousand reasons why this might not work. But give it some thought, guys.

  7. Seems the solution is to make all hospitals public/community non-profit with imposed universal budgets. That way the “non-profit” execs are not looking across the street trying to keep up with their for profit friends. All seems to come back to universal single-pay doesn’t it.

  8. The so-called nonprofit and not-for-profit non-goverment hospitals have been operating like investor-owned hospitals and hospital chains since the late 1970s, when they realized that they had to make money to survive.
    Profits are good, and tax-exempt hospitals have their places, but they should stop pretending they are better than the investor-owned hospitals and that their executives and physicians are any less interested in making money than anybody else.
    Physicians, of course, are all for profit providers. None work for nothing. If they work for lower than market salaries, that’s their choice, but they’re still making a living and practicing medicine one way or another.
    The Journal’s story struck me as a Murdoch piece of sensationalism marked by poor editing and, despite Novack’s warning that there are no nonprofit hospitals, the journal used the “nonprofit” word to draw attention to the front page editorial.
    There is no question that the reporters had an attitude, oppose investor-owned hospitals and think it’s wrong for hospital executives to make more than they do.
    In my experience, my family and I have received better care at the HCA hospitals in Denver than we’ve received in the tax-exempts in Chicago and elsewhere.
    Anybody who tries to say care is better at the tax-exempts doesn’t know much about heatlh care or hospitals.

  9. One place to start would be the “joint ventures” many non-profits have made with their “for profit” docs to prevent them from taking their business to competitors or setting up across the street in physician owned enterprises. Some of the most aggressive non-profit systems have given away tens of millions in “enterprise value” by permitting docs to buy in to these deals for pennies as limited partners, and having the valuations blessed by friendly attorneys. According to McKinsey, physicians made $8 billion in profits from these partnerships and other physician ownership ventures. The feds began tightening up the rules on physician owned ventures, but have let most of the hospital jv.s alone. They make a mockery of non-profit tax status, and cost the consumer billions of dollars.

  10. Across the country there are hundreds, if not thousands of non-profits who make a modest operating margin (say 2-5%), are the ultimate safety net providers for all Medicaid, Medicare, and no-pay patients, and who are genuinely interested in promoting the health of their communities. And in my state there are a half dozen or so which are struggling to break even from operations, and remain as community safety net providers. How about a national redistribution of income from the nine-figure bottom lines to those places struggling to break even? There is little rationale for how Medicare rates vary from state to state–rural to urban–to begin with–and assuming a hospital could show that it is operating at median benchmarks for efficiency, why not spread some of those big bottom lines around. Could the AHA support that one?

  11. Why bother reading the article, my ideological friends? It interferes with the guilt-free pleasure of bloviation. According to the ARTICLE you’re all commenting on, less than a quarter of non-profit hospitals are in the red, and a lot of those were built in areas where the market could not sustain them by the very Hill Burton program mentioned. The for-profit hospital industry is actually in a slump right now; they are getting their tails kicked by better organized and better managed non-profit systems all over the country.
    Many of the urban hospitals you worry about are receiving billions in federal subsidies for “disproportional share” and “indirect medical education” expenses that, in many cases, exceed the actual cost of taking care of the uninsured. A surprising number of non-profit urban hospitals generated nine-figure bottom lines last year.
    Hospitals as a whole earned over $35 billion in profits in 2006. 85% of all hospitals are non-profit, and they are sitting on tens of billions in reserves. Reggie Herzlinger first argued years ago that the tax benefits they receive far exceed the community benefits they put back. (Reggie has been a world class nuisance in pointing out inconvenient truths like this for quite some time).
    The thrust of the WSJ article is correct. Right now, non-profit hospitals are, in fact, generating record profits and engaged in a record construction boom- the only remaining robust part of our construction industry. Hospitals are not among the hundred neediest cases, a fact that should concern them in a political season (e.g. “Where are the customers’ yachts?”) When you have Republicans like Grassley asking questions about this, you know the hounds are on the trail. Don’t expect this to last.

  12. “most non-profits are not making milions. Many operate in the red or are barely breaking even.”
    I disagree with Maggie on just about everything, but she’s absolutely right about this. The hospitals highlighted by the WSJ article are not representaive of not-for-profits in general.
    In fact, if one considers net revenue vs. expenses for patient care, well over 90% are taking a bath. In many cases, they are only able to survive through investment income generated by “profits” made 20 years ago.

  13. One of the Systems mentioned operates in St Louis. They reportedly count the salaries paid to executives and staff as part of their “charity care” mentioning that the laws allow them to still do so. St Louis is not an affluent area we have many very poor and homeless people.
    I wonder what forces have kept the FBI from investigating non-profits just as much as they have the for profits?

  14. Eric–
    As I’m sure you know, most non-profits are not making milions. Many operate in the red or are barely breaking even.
    Drive into a poor neighborhood and check out the hospital. Do you see any atriums? Any flat-screen TVs?
    Exec salaries at not-for-profits are still lower than exec salaries are for-profits.
    Some not-for-profits don’t deserve their tax breaks. I wrote about this a long time ago on this blog here https://thehealthcareblog.com/the_health_care_blog/2006/06/do_nonprofit_ho.html
    Typically, these are suburban hospitals located in very affluent areas where they are very, very few poor people to serve. (And they don’t bus them in.)
    That doesn’t in any way invalidate the idea of not-for-profit hospitals. Nor does it in any way redeem the sordid history for for-profit hospitals. I can’t think of a major for-profit chain that hasn’t at one point or another been the target of an FBI raid. And with good reason.

  15. No kidding, just because they are a “non-profit”, it doesn’t mean their execs don’t take home gigantic salaries. Especially when they are on the board of trustees. My wife works for one of these “non-profits” and believe me, they are all about the bottom line.

  16. Again, not sure what your point is Eric? Are you saying that because “non-profit” has been bastardised to be only a tax dodge and that Hill-Burton also being loop holed by unscrupulous operators means true non-profit single-pay will not work? Sounds like they just need more oversight. Here in NC BCBS is “non-profit” but everyone knows that’s meaningless. “Profits, what profits, we bury ours in bonuses.”