Why Your Local Non-Profit Hospital Makes So Much Money.

We are all familiar with non-profit hospitals.  They are pillars of the community.  They may provide free or nearly free care to the needy or they may do free medical research for the public good.  The one thing they don’t do is make money for themselves.  That is why they are called non-profit.  Sadly, very little of what we think we know about non-profit hospitals is true.

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Banner Health is a large non-profit hospital chain with its headquarters in Phoenix.  It operates 28 hospitals, urgent care facilities, clinics, and other health care facilities in six states.  In 2017, it had total revenues of $7.8 billion.  It is the largest employer in Arizona.  According to the Arizona Republic, Banner’s CEO earned $25.5 million in gross pay in 2017.  The year before he earned only $8.7 million.  How can a non-profit hospital chain spend so much on executive pay?  The answer is that the “non-profit” in non-profit hospital only means that it is tax exempt.  It does not mean that the hospital or hospital chain does not do everything it can to make a profit.  Almost half of the hospitals in the United States are non-profit.  According to a recent study, seven of the ten most profitable hospitals in this country are non-profit hospitals.  Somebody is making a lot of money from these non-profit hospitals.

The New York Times recently had a good piece on the reason for non-profit hospitals and the way in which they are failing to hold up their end of the bargain in return for being allowed to skip paying taxes.

When the concept of non-profit hospitals first came into being, there was a trade off.  In return for providing charity care to the neediest among us, these hospitals would be excused from the obligation to pay taxes.  At the time, it was a fair trade.  The community benefited from the free care to the needy and the hospital benefited from not having to pay taxes.  Over time, however, the charitable, community benefit obligation has become less and less important to the hospitals and the community has received less and less in return for the tax breaks it gives to the hospitals.

As we have seen in the news, supposedly non-profit hospitals are not only refusing to provide free care to the needy, they are hiring debt collectors to hound them and, in some instances, having them jailed, if they miss a court date.  Prior to a 1969 revision to the tax code, non-profit hospitals were required to provide free or reduced cost care to the needy to the extent of their ability to do so.  An amendment that year to the tax code opened up new avenues (also known as loopholes) for non-profit hospitals to earn their tax exemption.  After the revision, any spending that provided a community health benefit was enough.  Hospitals have been very creative in finding ways to claim they are meeting this requirement.

Hosting health fairs, contributing to community groups, having blood drives all qualify as community health benefits and seem appropriate.  Less understandable are those hospitals that claim the difference between what they would like to charge and what they are forced to accept from health care programs for the poor, such as Medicaid, or in Arizona AHCCCS, as part of their contribution to community health.  This is true notwithstanding the fact that the hospitals make substantial money from Medicaid patients.  Hospitals also use creative accounting to pad their alleged contributions to community health.

In spite of tax regulations that prohibit net earnings from being used for the benefit of any individual, executive pay at non-profit hospitals has been climbing at a startling rate over the last 15 years, while the pay of actual health care workers has climbed only by a few percent.  For example, executive pay at non-profit hospitals rose by 93% from 2005 to 2015.  During the same time frame, the pay of nurses at those hospitals rose only 3%.

When I represent a patient against one of these big hospital chains at trial, the hospital attorneys always find a way to remind the jury that their client is a non-profit hospital just out for the good of the community.  It is about time we hold these hospitals to that very standard and require them to fairly earn their tax exemption with real community benefits.

Posted in Fee for Service, Health Care Costs, Hospitals, Medical Costs, medical ethics, medical research, Medicare, Nurses, Secrecy |