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For Hospitals, Prestige Leads To Profits

By Kaiser Health News  
   August 01, 2016

Many of the hospitals best-positioned to earn profits are non-profits. They are the largest hospitals, and the ones with the most prestige.

This article first appeared May 2, 2016 on the Kaiser Health News website.

By Shefali Luthra

When it comes to hospitals, which benefit most from high health care prices? It may sound counter-intuitive, but a group of not-for-profit hospitals appear to be among those doing the best business.

At least, that’s the idea in a study published Monday in Health Affairs. It analyzes how hospitals make money and ranks the nation’s 10 most profitable ones — those making hundreds of millions of dollars through their inpatient and outpatient care. Seven were nonprofits, including the top four.

The findings are based on Medicare cost reports from fiscal year 2013, analyzing almost 3,000 acute-care hospitals. About 60 percent were nonprofit, while one in four were for-profit. The rest were public, or government-owned.

The top three were nonprofits. Gundersen Lutheran Medical Center, part of the large Wisconsin-based health system, made the most money: $302.5 million just on its patients. California-based Sutter Medical Center, also part of a large system, came in second. Stanford Hospital, also in California, was third.

Those hospitals share a key attribute, the authors argued. Whether because of their size, their prestige or their influence in the community, they have more power to negotiate prices, meaning they can charge insurers more for the care they give.

“They are the only provider — or they are clearly the dominant provider — and the insurers in that community are relatively weaker, and there are a lot of them,” said Gerard Anderson, director of the Johns Hopkins University Center for Hospital Finance and Management, and one of the study’s authors. “[The hospitals] can take advantage of their market position. And they do.”

The researchers looked only at profits made from actual medical care, meaning they didn’t factor in the often substantial amount of money hospitals make from sources like investments, grants, donations, parking fees and property rentals. The idea was to focus on what hospitals make from patients alone, said Ge Bai, the study’s primary author. Bai is currently an assistant professor of accounting at Washington and Lee University, though she’s joining the faculty at Johns Hopkins’ Carey Business School in the fall.

Most hospitals — particularly nonprofits — don’t actually earn money from patient care. Rather, a large market share or inclusion in a big health system — like Gundersen — better predicted how well hospitals would do.

“Many of the hospitals best-positioned to earn profits are non-profits — they’re the ones often that have the most prestige, they’re the largest hospitals,” said Paul Ginsburg, the director of the Center for Health Policy at the Brookings Institution and director of public policy at the University of Southern California’s Schaeffer Center for Health Policy and Economics.

Ginsburg, an expert in health economics, wasn’t affiliated with the study.

Market muscle matters in bargaining with insurers. That may be driving the hospital industry trend toward consolidation.

In recent years, many hospitals have merged to form larger health networks. They argue that doing so leads to better service to patients — for instance, care can be coordinated across more locations. In addition, they say they can then better negotiate with insurance companies. The study notes that in markets dominated by insurance companies, hospitals were less likely to profit from patient services.


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Kaiser Health News is a national health policy news service that is part of the nonpartisan Henry J. Kaiser Family Foundation.

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