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Nonprofit Hospitals: Will Margin Change Mean Mission Change?

Philip Betbeze, for HealthLeaders Media, June 13, 2011
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When hospitals are unable to collect copays and deductibles, ultimately, those costs are forced back upon them. For those and other reasons, says Deloitte’s Rudish, “it’s almost laughable that there will be more money in the system,” he adds. “It just won’t happen.”

Why then, are so many for-profit hospital companies and private equity funds seeking to invest in the healthcare provider space? (See the related story on page 22.)

 Despite the fact that Rudish and Ladely don’t see hospitals and health systems as big winners under the new reimbursement regime, Rudish says a return to debates about tax exemptions is inevitable.

“I think that’s coming. Tax exemptions for nonprofits cost a lot of money, and the government at all levels needs as much money as it can get to finance healthcare in this country,” Rudish says. “The challenge of maintenance of tax-exempt status either fully or partially is going to be focused on.”

Curb your expectations

Community benefit is not composed only of uncompensated care, which receives the lion’s share of attention. Many hospitals and health systems, using guidelines developed independently by VHA Inc. and the Catholic Healthcare Association, are making efforts to publicize other efforts to improve the health of their communities and demonstrate that they are using their tax exemption in the spirit in which it was granted.

Denver-based Catholic Health Initiatives, a 73-hospital nonprofit system, is one of them. CHI owns or operates hospitals in 19 states, as well as long-term care and assisted living facilities. By its calculations, it provided almost $590 million in charity care and community benefit in 2010, including services for the poor, free clinics, education, and research.

In such a huge system, one would expect the savings from having millions more people with insurance would be substantial, but Dean Swindle, the system’s chief financial officer, says that won’t necessarily be the case.

“Right now, there’s a pretty high standard of deviation in payments from different sources. You might have managed care with very high relative reimbursement but others pay much less,” he says. “There’s a possibility that the standard deviation will narrow a bit thanks to the uninsured getting coverage. Some of the uninsured we’ll get payment on, but my projections show it won’t be sufficiently better overall than today.”

He says any increase in income for the system from the previously uninsured will likely be muted by a much lower growth rate in payments from commercial insurers and Medicare and Medicaid.

“I like the fact that standard deviation might not be as high, but total payments won’t likely go up appreciably,” he says. 

Speaking of healthcare generally, he says many organizations, including CHI, have made huge strides in becoming more efficient in the finance and back-office departments, but that the real operating improvement in the future will likely come from looking more closely at improving care at the bedside and by eliminating unnecessary duplication in medical tests and procedures.

“We’ve done a good job in back office and revenue cycle, even though there’s still opportunity there,” he says. “But few of us have touched much of how we deliver care at the bedside. With a patient today, there are different touch points they have to go through. Repeating information and fragmentation adds cost and leads to a frustrating experience for our patients.”

He expects the debate about what a nonprofit hospital is will revive as PPACA is fully implemented over the next decade or so, but he doesn’t foresee a tectonic shift in terms of how a nonprofit hospital is defined, despite the current definition’s imprecision.          

“There’s always going to be a lot of discussion on what not-for-profit is. For instance, being not-for-profit doesn’t mean we should have 10% more staff just because we’re serving our community,” he says. “For us to survive and be a leader in the industry, we have to have better operating precision. Our duty is to be as precise as any for-profit company. The key is how we utilize the profitability that we do achieve.”

Tax exemptions unfair?

Indeed, utilization of margins for charitable purposes should be the key, but at least as far as the law and government tax exemptions are concerned, it really is not. Some hospitals based in poor communities and with lower relative margins clearly spend more to benefit their communities than do some other nonprofits based in the suburbs. The converse can be true as well. Yet to a large degree, they all get very similar benefits of tax-free status.

“It’s not fair and equitable,” says Deloitte’s Rudish. “There are certain safety-net hospitals and there are those that aren’t, and they have significantly different levels of caring for the uninsured. Some need more help from government to maintain their operations.”

Over time, much of the attention on the policymaking front will likely be focused on the premise that the high cost of care in the United States is unsustainable, and many actions will take place to reduce cost.

“One of the ways to do this is to figure out what needs to be in the delivery system. Does the hospital need to be there,” Rudish asks rhetorically. “There will have to be some tough choices made in the provider space.”

Other efforts to make tax exemptions fairer are already being discussed publicly. Rick Scott, who formerly ran for-profit hospital chain HCA, is now governor of Florida. He’s made a special point of pushing for a requirement that state and local tax dollars collected to support uninsured care should “follow the patient” instead of being allocated to safety-net hospitals within the tax districts. This would have a dramatic negative effect on organizations like Miami’s Jackson Health System, which currently gets all of the $350 million in taxes Miami-Dade residents pay to support indigent healthcare.

PPACA didn’t completely leave out regulations on tax exemptions.

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1 comments on "Nonprofit Hospitals: Will Margin Change Mean Mission Change?"


Jennifer James (6/24/2011 at 1:54 PM)
On behalf of UNC Health Care, I'd like to clarify some information. The article, as written, appears to imply that UNC Health Care recently purchased Rex Healthcare. In fact, UNC Health Care purchased Rex more than 10 years ago. Since then, UNC and Rex have built an important partnership that allows the two institutions to fulfill UNC Health Care's missions of providing excellent care to North Carolinians across the state, regardless of their ability to pay, conducting cutting-edge research and training the next generation of North Carolina's physicians. Also, to be clear, Rex is not a state institution and has never received any state taxpayer funding. Jennifer James, News Director, UNC Health Care