Is Non-Profit Business An Oxymoron?

An April 4 article in the Wall Street Journal, entitled "Nonprofit Hospitals, Once For the Poor, Strike It Rich" has prompted a slew of comments
on wsj.com. I think they are worth reading and do not intend to
summarize them here. Some accused the Journal and the quoted
politicians of grandstanding. Others said the story was right on target.

issue of the type and degree of benefits provided by non-profit
hospitals is a legitimate and important one. Our institutions are given
certain privileges by the government, and the government has a right to
supervise our performance in carrying out our public service functions.
Recently, the Massachusetts Attorney General announced a review
of certain of these activities, those relating to community benefits.
This is a healthy step, in that as times change, the standards of
behavior and reporting should likely change, too.

The WSJ’s
story contained examples of non-profit behavior that many will find
excessive. I think some examples chosen are unusual and not reflective
of most hospitals. But I imagine that a detailed review of
Massachusetts hospitals would find some items of a more modest level
that at least some people would find troubling.

On Running a Hospital, I have written posts on several of the
commercial aspects of running a hospital — for example, one on the growth imperative, another on advertising.  I have also told about what it was like
when this hospital was very close to closure because of a failure to
mind its financial ways. Finally, you have seen posts on the special
role of our Board of Directors in setting standards for a non-profit institution like ours.

reviewing this issue, it seems to me that there is not always a bright
line between the business behavior of a non-profit and a for-profit
company. Both need to operate in the black to carry out their purpose.
Both need to determine how to compete in a marketplace to achieve that.
The strategies employed to do that might look quite similar. Both need
to attract qualified people in both supervisory and line positions. The
salaries and benefits offered, therefore, might be somewhat similar.
Both depend on the vigilance of a Board of Directors to monitor
management’s performance and behavior. So the structure and functions
of the boards overlap in several ways (but not totally, given the
pertinent legal requirements). And, as a final level of control, both
have regulators to ensure that appropriate community standards are
maintained and enforced.

But there is a fundamental difference.
The non-profit does not have shareholders who benefit financially from
its operations. Its fundamental constituency is the community it
serves. For a small community hospital, it is literally the local
community. For an academic medical center like BIDMC, it is the local
community, but it is also a regional, national, and indeed
international community that benefits from the research and educational
programs of the hospital.

Is this a difference without a
distinction? I think not. I know that our Board and I would be making
very different decisions about patient care, research, and training
expenditures if we operated under a for-profit rubric. While we always
have to be prudent about which services we offer, many more areas that
do not generate a profit or that result in perpetual losses would
likely be cut or eliminated if we were not a non-profit. As a matter of
strict business, many of these could be jettisoned and provided by
others outside of our hospital. But we believe that we owe to our
patients and to the nurses and doctors who we are training to offer
these as part of our public service mission.

As health care
costs continue to rise and consume a greater percent of our national
economy, we can expect further debates on these issues. Those debates
are normal and appropriate and help hold all parties accountable to
their constituencies.

Paul Levy is the CEO of Beth Israel Deaconness Medical Center in Boston and a frequent contributor to THCB. You will find more of his expert commentary on the art and science of managing a major non-profit hospital at his personal blog: "Running a Hospital"

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13 replies »

  1. Many scientists and engineers spend much of their lives writing, debugging, and maintaining software, but only a handful have ever been taught how to do this effectively after a couple of introductory courses, they are left to rediscover (or reinvent) the rest of programming on their own.
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  2. But when I see non-profit Blue Cross Blue Shield giving their CEO a retirement package while he still holds a multi-million paying position at the company, the was commenter have very valid points. Doubly so when my premiums go up or more every year and before you correct me, you said non-profit business not non-profit hospital, although I think such distinctions are irrelevant. I’am the one who ends up paying for both.
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  3. How perverse of a reimbursement system do we have? MedPac reported last year that specialists’ fees have climbed in part because Medicare has relied too heavily on physician specialty societies (trade associations) to make recommendations about how much specialists should be paid for particular services (as goes Medicare, so goes the privates). These groups have a financial stake in the process and thus little incentive to identify over-valued services.

  4. “Sorry for the ramble, but the for vs. non-profit arguments are not that relevant to what is wrong with our system.”
    I agree – the behavior of both non and for-profit institutions are a symptom of a perverse reimbursement system.
    While non-profits like to claim that they re-invest “profits” in services needed by their communities (and they do…to some extent), the reality is that many primarily re-invest in services that will allow them to compete favorably in the market (for and non-profits): new imaging technology, new cardiac wing, Gamma knife, etc, etc.
    It’s a never ending cycle that will ever yield enough “extra” money for so-called non-profits to truly support their stated community missions.
    Most non-profits should cut the hypocracy and re-write the mission statements along the lines of:
    “The mission of X hospital is to achieve revenues in excess of costs in order to invest in maintaining competitive advantage.”
    For-profits would simply add “and provide returns for shareholders” at the end.

  5. Uwe Reinhardt has long pointed out that the term “non-profit hospital” became an oxymoron the day they were allowed to sell bonds on Wall Street.

  6. At the risk of generalizing, the above comments show a marked underappreciation of the complexity of healthcare reimbursement and the tremendous cross-subsidization of services. In short, a hospital must have services that produce a positive margin to offset those with negative margins. Basic nursing care for medical patients, the staple of the average hospital, loses money in a big way when fully costed. You don’t see physicians building pneumonia specialty hospitals for a reason. A side issue is that our policy-makers and insurers have systematically decimated the mental health sector for the last two decades. Making money in mental health has become an oxymoron for most facilities. In my state, about a decade ago individual health insurance cost about $120 pmpm, and mental health costs (IP and OP) comprised about $6 of that total. Now, the same coverage is well over $300 pmpm, while mental health coverage is probably worth $10-11 pmpm. So any acute care hospital with psych beds is truly fulfilling its non-profit mission, because they are definitely not making any money on that service.
    The real difference between non and for-profits should be seen in how the gains from operations (profits) are spent. In the for-profits, much is returned to stockholders, and the capital is reinvested in those fancy MRIs and robots. Some of those are necessary in all hospitals to offset the losers–but responsible non-profits acknowledge the public health needs of their communities and reinvest to improve health in areas where they do not get paid. This is easier in a sole-provider community. If you are a non-profit that is located down the street from a for-profit, the chances are much higher that the non will end up acting like the for so it does not lose the competitive advantage. As the writers above point out, sometimes the nons become better at the game than the fors. This is a natural outgrowth of our “market” driven healthcare system that has been pushed by Washington. In the end, all hospitals and docs are slaves to a payment system that drives relentless volume increases in every healthcare service, and results in sometimes bizarre investments in high-tech, low-volume services. Sorry for the ramble, but the for vs. non-profit arguments are not that relevant to what is wrong with our system.

  7. For some years, specialty physicians have been taking the easiest and most profitable cases out of the community hospital and putting them in their doctor-own specialty hospitals.
    Of course, community hospitals worried about losing patients whose fees subsidized money-losing services (ER and care for the poor). They could not stand by and watch these specialty physicians take whatever profitable veins there were in their institution.
    At first, community hospitals were denying privileges to these doctors for diverting too many profitable patients to there for-profit specialty hospitals. Then, community hospitals started to take a page out of the specialty hospital play book and began building their own specialty wings attached to existing structures.
    If you ever read “Selling cancer chemotherapy with concessions creates conflicts of interest for oncologist,” I’m sure the gastroenterologist presented in the paper would be empathetic to the complaints about not having some psych beds.
    Medicare had cut his reimbursement for colonoscopies from $400 to $108, while two medical oncologists in the large, multi-specialty internal medicine group were making a killing running their in-office retail pharmacies.
    I agree, a non-profit hospital is not a meaningful distinction from a for-profit hospital, and many good services that may not generate a good profit or may result in some losses are never implemented. Crunch! Crunch!

  8. “It all comes down to numbers-crunching! What makes the most profit.”
    Then, please, let’s stop pretending that “non-profit hospital” is a meaningful distinction.
    If it were about community service and not profits we’d see some psych beds, wouldn’t we?

  9. Greg, why don’t psyche beds contribute to the hospital’s bottom line? Could it be that insurance doesn’t cover psychiatric illness? I might be sympathetic if RVUs were being used to offset low funding psyche patients, but they’re not. Here in NC the state is having to retake-over psychiatric care because the private sector made such a mess of it and found it easier and more profitable to under care for their patients. Anyway, cardiac care is way more exciting and looks better on TV when you try to impress hosptial donors and attract patients who lifestyle their way to their own heart attacks. Maybe if Big Macs caused brain disorders we could find some funding for them.

  10. One only has to look at the cardiac center’s contribution to the hospital’s bottom line. Surgeon productivity is directly related to hospital operating margin, but significant variation in margin contribution exists between specialties.
    While an inpatient psyche bed becomes an endangered species, it is critical to understand the surgeon’s importance to a hospital’s bottom line. An appreciation of a surgeon’s contribution to hospital profitability.
    A study in Annals of Surgery, surgeon total relative value units (RVU), a measure of productivity, were collected from operating room (OR) logs. Annual hospital margin per specialty was provided by hospital finance. Hospital margin data were normalized by dividing by a constant such that the highest relative hospital margin (RHM) in fiscal year 2004, expressed as margin units (mu) was 1 million mu.
    For each specialty, data analyzed included RHM/OR HR, RHM/case, and RHM/RVU. Results: Thoracic (34.55 mu/RVU) and transplant (25.13 mu/RVU) were the biggest contributors to hospital margin. Plastics (-0.57 mu/RVU), maxillofacial (1.41 mu/RVU), and gynecology (1.66 mu/RVU) contributed least to hospital margin.
    Relative hospital margin per OR HR for transplant slightly exceeded thoracic (275.74 mu vs 233.94 mu) at the top and plastics and maxillofacial contributed the least (-3.83 mu/OR HR vs 9.36 mu/OR HR).
    Surgeons contribute significantly to hospital margin with certain specialties being more profitable than others. Payer mix, the penetration of managed care, and negotiated contracts as well as a number of other factors all have an impact on an individual hospital’s margin (Ann Surg:2006 Nov;244(5):833)
    It all comes down to numbers-crunching! What makes the most profit. Remember the chemotherapy concession?

  11. If non-profit hospitals are about serving the community, then why in the hell can’t I find an inpatient psyche bed for my patient when I need one?
    Really, there is no more glaring need that I can see, yet another cardiac center with a robotic assisted laser superduper CT scanner seems to be what the “non profit” hospital decides to build.

  12. “But there is a fundamental difference. The non-profit does not have shareholders who benefit financially from its operations. Its fundamental constituency is the community it serves.”
    “Blue Cross doles out millions in bonuses
    State’s largest health insurer paid $7.2 million to its top executives”
    So which community is BCBS of NC serving?
    When “non-profits” operate in the same over monied and cost blotted health system as the for-profits they get caught having/wanting to pay and spend about the same to attract staff and embellish CEOs. Here in NC University of North Carolina Hospitals are not only “non-profit” but they are the State hospitals. Even with that you’d find little difference between how they are run and how their execs spend or are compensated. As well UNC enjoys having the State Office of the Attorney General as it’s collection agency. I bet if an independent audit were done we’d see how blotted the upper executive tier is populated and compensated.
    The solution is to make ALL hosptials community owned and run with universal budgets so that they are driven by service to the community and not income envy by their CEOs.

  13. An oxymoron indeed! I was just re-educated today about one of our local non-profit hospitals, where many very good ideas that may not generate a good profit or may result in some losses are never implemented, cut or eliminated just like a for-profit hospital.
    It takes advantage of community tax breaks to make more money. Having an accountant as a CEO helps a non-profit produce more money for the hospital, and for himself. Is the hospital too excessive? Even one of their surgeons admitted to me that the big elephant has gotten too big. It already finished a ten-year capital expansion and has enough on the sidelines to go another ten.
    Do they have the best physicians in the area or just those with the biggest pockets? I used to tell my wife everytime I was taking her to the medical campus, “wonder whose new Mercedes or Beemer (parked closest to the front doors) you bought for today?”