Attention Joe CEO: Are You Thwarting Your Hospital's Charitable Mission?

HealthLeaders Media Staff, April 17, 2009

The answer is: yes, according to recent research out of the University of Connecticut.

Rexford Santerre, a professor of finance and healthcare management at the university, says his research on a data set of 30 nonprofit hospitals in Connecticut shows that incentives at most nonprofit hospitals and health systems drive the nonprofit healthcare CEO to increase the occupancy rate of privately insured patients at the expense of uncompensated care and public-pay patients. Basically, the research, at least in Connecticut, says that CEOs are much more driven by the "five Ps: pay, perquisites, power, patronage, and prestige" than they are at maximizing the hospital's charitable mission.

When I first looked at Rex's paper, I said, so what? We at HealthLeaders Media see nonprofit CEOs trying to build replacement hospitals among the well-insured suburban population every day. And when's the last time you drove by the local successful nonprofit hospital and didn't see a crane or two at work?

So what?

Well, the "so what" gets to what many in Congress see as a perversion of the supposed charitable mission nonprofit hospitals are supposed to pursue in return for generous tax exemptions at the municipal, state, and federal level. The idea, so the thinking goes, is that you, as the hospital's leader, should do a better job seeking out the underprivileged and providing them care, even to the detriment of your bottom line.

The hospital CEOs I talk to—and I've spoken with dozens of them over the nearly nine years I've been here at HealthLeaders Media—pretty much make no secret of the fact that seeking out paying patients is critical to their hospital's survival in an era in which even those covered by Medicare and Medicaid seldom pay the cost of their care. Add as many paying patients and the amenities that attract them to the mix as possible, and you just might survive—even thrive.

Rex's study is scientific. It looks for incentives that encourage nonprofit CEOs to increase the amount of charity care they provide, and doesn't find many.

"When they serve more uncompensated patients, they're paid less," he says. "So it's not surprising that they would seek to maximize their pay."

We're going to get into some economics-speak here, so bear with me. The question is: What drives their pay at the margin? CEOs, says Santerre, have to make a marginal decision on what type of action they attempt to maximize. So they focus on activities that maximize net revenues. Not profits, or margin, but revenues.

"They get pleasure out of running larger organizations," he says. "If they have more revenues, there are some discretionary places where they can spend the revenue."

As I mentioned before in this column, I'm not really surprised at these findings. It's good that someone's quantified them scientifically, but what do they mean for the real world you find yourself in—running a hospital?

I'm sympathetic to you as a nonprofit hospital CEO.

Say you do go against every fiber of your being that tells you to run a fiscally healthy, thriving organization that can afford to spend the cash you need to in order to make your hospital or health system attractive to those who are interested in quality of care and the latest technologies. Say you seek out nonpaying patients. Say you squander your carefully built investment portfolio on providing care to those patients who lose you money. Besides the fact that you'd be quickly cutting your own throat, career-wise—if you're allowed to continue this exercise, your hospital would slowly become an organization that lives at the margin. As we've seen, the government, at least up to now, isn't going to make up for all that money you're losing treating the uninsured.

So it's not your problem, it's the system. Santerre's idea is to change the system of incentives.

"You could explicitly tie their tax exemption to the community benefit they provide over and beyond some expected amount," he says, explaining that for-profit hospitals provide community benefit, too. They also provide uncompensated care.

"Look at for-profits as a benchmark," Santerre says. "So we could provide [nonprofits] a tax relief subsidy based on what benefits they provide over and above what's provided in the for-profit setting."

Now that's a potential solution that might have some legs.

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