Are nonprofit hospitals truly not for profit?
Tax breaks rankle some critics, who ask: "What are you giving the community?
July 31, 2010|By Linda Shrieves, Orlando Sentinel
When FloridaHospital and United Healthcare started their public wrangling over a new contract this summer, each side pointed to the other company's profits.
Both companies are health-care behemoths. Minnesota-based United Healthcare is the largest health insurer in the United States, with profits of $3.8 billion in 2009. Adventist Health System, which operates FloridaHospital system, is the largest nonprofit Protestant health-care provider in the nation, operating 37 hospitals in 12 states and generating $363 million in profit in 2009.
But in the high-dollar world of health care, what does it mean to be a nonprofit hospital that makes big profits?
"If you go back 100 years, these were charity hospitals. They took care of the poor," said Frank Sloan, a professor of health-care economics at DukeUniversity. "But as health care has grown, they've become commercial. Now these nonprofits are in a big business."
Today's nonprofit hospitals — which make up slightly more than half of the nation's 5,000 community hospitals — are trying to juggle the demands of making money with being a charitable organization.
"You're supposed to show a good bottom line, but at the same time you're supposed to show that you lost tons of money by giving charity care," said Jessica Berg, a law professor at CaseWesternUniversity who has studied the nonprofit-hospital system and its tax structure. "We're used to thinking of churches and religious organizations as nonprofits — whoever thinks of a for-profit church?"
For legislators across the country, there's growing tension that massive nonprofit-hospital organizations don't pay any taxes.
"The question is: What is the nonprofit doing that for-profits are not? We're giving them a huge tax benefit," Berg said. "So what's the trade-off? You're not paying taxes, so what are you giving the community?"
Charity care
For nonprofit hospitals, much of the community benefit is measured in two ways: through charity care and "community-benefit programs," which can range from health fairs to glaucoma screening. At FloridaHospital, those programs also include a diabetes-prevention program among Hispanics in east OrangeCounty and a congestive- heart-failure clinic for those with Medicaid or no insurance.
Charity care — the free care that hospitals provide to those with no insurance or the amount of a bill they write off because the patient is unable to pay — has come under more fire from legislators across the country as questions arise about how much the hospitals are writing off.
In 2008, in documents provided to the state of Florida, FloridaHospital reported spending $442 million — or 7 percent of its patient revenues — on charity care. Its competitor, nonprofit Orlando Health, spent $213 million — or 4 percent of its patient revenues —on charity care.
FloridaHospital accepts more Medicaid patients than any hospital system in the state except Jackson Memorial in Miami, said Richard Morrison, FloridaHospital's regional vice president for governmental relations.
Yet the amount of charity care the hospitals are providing is unclear, said Becky Cherney of the Florida Health Care Coalition. If the hospital performs an appendectomy on an uninsured person, she said, hospital officials may write off the "full price" of the care at $11,000, but insurance companies, which negotiate rates, pay about half that. So what's the real cost to the hospital?
"When they do their charity care, they take the whole $11,000," Cherney said.
And everybody in the business, said Berg, "knows that that's a make-believe number."
Hospitals on a spree
Though for-profit hospitals send their profits back to shareholders, nonprofit hospitals can pump those profits into community-health programs, charity care and financing new technology and buildings.
The hospital system has invested in liver- and heart-transplant programs, which are not moneymakers, Morrison said. And, to support the new University of Central Florida medical school, FloridaHospital has expanded the number of medical residents it accepts — at its cost.
"You put money into services that the community needs, but that are not necessarily something you would invest in ordinarily," Morrison said.
In the past decade, Central Florida's two competing nonprofit-hospital systems have been on a building spree, trying to gain market dominance.
FloridaHospital has increased the size of several of its existing hospitals — for example, the recent 300-bed expansion at Florida Hospital Orlando — and expanded its reach into other counties with its network of 18 hospitals. In June, FloridaHospital executives signed a five-year operating agreement with BertFishMedicalCenter in NewSmyrnaBeach with an option to buy the hospital. In the Tampa area, FloridaHospital is negotiating to buy three hospitals and a long-term-care center.
Orlando Health operates six hospitals and partially owns two more, one in OsceolaCounty and another in LakeCounty.
"These are turf wars," Cherney said. "We have two competing systems, so they both want to be sure they're in the right place. And FloridaHospital is very aggressive about the turf war."
The problem, she said, is that nonprofits such as FloridaHospital and Orlando Health also are buying doctors' practices and lab services, squeezing out competition.
"They're not just buying hospitals," Cherney said. "They're buying doctors' practices that operate in these hospitals — and then that's a true monopoly."
Hospitals in such an arms race "probably overbuild, over-technologize, and quality often will go down," said Gerard Anderson, director of the JohnsHopkinsCenter for Hospital Finance.
Once they invest in expensive technology like robotic surgery systems or MRIs, hospitals have to use the machines frequently or raise rates.
"Unless you use it all the time, you're going to have to charge more for it," Anderson said.
Customer satisfaction
In recent years as local nonprofit hospitals have expanded, their new wings look less like old-fashioned hospitals and more like high-end hotels. That may rankle critics, but experts say that hospitals — even nonprofits — are competing for customers.
"From an economic point of view, they're doing exactly what they should be doing," said Anderson at Johns Hopkins. "The flat-screen TVs and fancy buildings attract patients. And since the patient doesn't really have to pay more for the flat-screen TVs" — because the rates have been negotiated — "they are going to go to them."
And, because Medicare scores hospitals — in part — on patient satisfaction, a hospital with the latest amenities may come out ahead.
"Nobody wants to be sick and stuck in a tiny little room — and people don't like sharing rooms, either," said FloridaHospital's Morrison. "So the standards for room size have changed over the years."
That conflicts, however, with the old-fashioned notion of nonprofits, Berg said.
"We're a very torn society when we think about health care," she said. "We don't like to accept that it's a business, but we fundamentally insist that it's a business model."
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