non-profits – The Health Care Blog

The Burning Question: Who Will Foot the Bill for America’s Increasing Burn-Care Costs?

Nov 20, 2018• 1

By CELIA BELT

Each year in the United States, half a million Americans will be treated for burns so severe as to require hospitalization. The “survivors”—including more than three hundred children each day and a drastically increasing number of U.S. military members since the turn of the millennium—can be expected to undergo arduous, agonizing surgeries and painful rehabilitation lasting for years.

The emotional and physical trauma of these fellow citizens is not a pretty picture, nor is it an inexpensive one. According to estimates, patients with severe burns with no complications can expect a whopping $1.6 million bill for treatment over the cost of their lifetime. For patients who do go on to develop complications as the result of severe burns, hospital bills can run more than $10 million.

Where is that money coming from? Partly, it comes from you and me in the form of increased healthcare premiums. But oftentimes, it comes from directly people like me, the cofounder of the Moonlight Fund, a Texas-based non-profit organization for burn survivors and their families. We’re often tasked with raising funds to help with the costs of expensive procedures in addition to the emotional support and caregiver assistance our organization was founded for. Many times, I’ve reached into my own pocket—not because I’m a saint, but because I’ve been there. As a childhood burn survivor myself, scalded over 32% of my body, I’m well aware that infections resulting from burns—which occur in one out of three cases—add between $58,000 and $120,000 to treatment costs. Skin breakdown—which happens one out of two times—adds up to $107,000 more. Disfigurement and scarring? Up to $35,000 on top of that. Then, of course, there are the psychological issues associated with severe trauma. 57% of burn victims need help for these, help that costs as much as $75,000 per patient.

Let’s Do the Numbers

Aug 17, 2012• 10

By Paul Levy

Julie Creswell and Reed Abelson offer a story in the New York Times about the HCA for-profit hospital system, noting “A giant hospital chain is blazing a profit trail.” The HCA story and similar ones about other hospital chains financed by private equity force us to consider how a such firms can achieve a return on equity that satisfies investors.

The answer is that they cannot, if we think about running the business on a long-term basis. What makes it work is extracting cash and the exit strategy, the heart and soul of private equity.

As Warren Buffett might say, let’s keep this simple. A for-profit hospital system has the following disadvantages vis-a-vis a non-profit hospital system: (1) Its finances are a mixture of equity and taxable debt, both of which are more expensive than the nontaxable debt of a non-profit; (2) it pays taxes–federal and state income tax, property tax, and sales tax–on which the non-profit is exempt; and (3) it is an unattractive vehicle for charitable donations, compared to the tax-advantages offered donors of non-profits.

These are hefty financial advantages for non-profits, which nonetheless are fortunate if they are able to earn an operating margin of 3%. Admittedly, that’s 3% of revenues, not a 3% return on capital.

An equity investor in a for-profit doesn’t care about margin, strictly speaking, but rather is focused on the rate of return of his or her investment. But let’s stick with the operating margin just for a moment, and let’s just accept that a 3% margin would not generate the kind of equity return demanded by the market place: You pick the hurdle rate: 15%, 20%, 25%, more? It doesn’t matter. A three percent margin just doesn’t get you there.

The Not For-Profit / For-Profit Divide

Jul 2, 2010• 11

By PAUL LEVY

Many people involved in hospitals wonder how it can be financially prudent for investors to put their money into for-profit ventures that buy non-profit hospitals. (Examples here and here.) After all, the argument goes, the newly privatized entities will have to pay taxes, issue taxable rather than tax-exempt debt, lose the benefit of philanthropy, and otherwise be at a competitive disadvantage compared to their antecedents.

In answer, some might make the case that for-profit firms will run hospitals more efficiently. But this is an unproven and unreliable basis for such transactions. Even if there were some efficiency gains, they would be unlikely to offset the additional costs listed above.

No, the answer lies in the risk-reward expectations of equity investors and of purchasers of high-yield taxable debt.* Those expectations are quite different from purchasers of the municipal or other tax-exempt bonds that support the capital needs of non-profit hospitals. It is the difference between a forward-looking, optimistic view of the world and a backward-looking, cautious view of the world.

Let’s start with the tax-exempt debt market, one characterized by risk-averse investors focused on debt coverage ratios and other protections built into indenture agreements.

The rating agencies who serve these investors look at the past performance of the non-profit hospitals and ask, “What could go wrong in the future that might put debt service at risk?” There is a highly limited pool of people interested in such debt, and when ratings fall to near or below investor grade, the number of investors becomes smaller still.

Contrast this with people willing to risk their money in the for-profit world. They are sold on the potential for financial gain, not on the proposition of protecting principal. Those offering this paper present business plans and pro forma’s based on what might be. Sure, due diligence allows an assessment of the downside, but this pool of investors has hedged their bets by building a diversified portfolio.Continue reading…