By Andrew Buemi
The following piece summarizes a November 2016 report in The American Journal of Medicine detailing the growing profits of not-for-profit hospitals in the U.S. The report entitled, “Negative Secular Trends in Medicine: High Hospital Profits,” is authored by Robert M. Doroghazi, MD.
As recently as 2013, seven of the country’s 10 most profitable hospitals identified as “not-for-profit,” including the top four most profitable hospitals. The University of Pennsylvania and Stanford, for example—which identify as not-for-profit hospitals—brought in $184.5 million and $224.7 million in profits, respectively. To put this into perspective, Stanford Medical Center’s annual profit could foot the bill for all medical students within that school for the next decade.
But how can so-called “not-for-profit” hospitals be such cash cows?
Since 1956, hospitals could qualify as tax-exempt under the provision of charity care. However, in 1969, the Internal Revenue Service (IRS) revised the standard, substituting “charity care” with “community benefit,” an ambiguous term allowing hospitals to classify a wider swath of services under the new designation, thereby maximizing profits.
Beginning in 2002, the IRS undertook several initiatives to tighten the exemption, including studies resulting in new policies and eventually more amendments enacted as part of the Affordable Care Act. In doing so, the government’s goal was to ensure that at least 5% of “not-for-profit” hospitals’ revenues were spent on actual charity care.
These efforts proved unsuccessful and ended up allowing not-for-profit hospitals to maximize their revenues. By 2011, the value of tax exemptions enjoyed by not-for-profit hospitals was estimated at $24.6 billion (compared to $12.6 billion in 2002). Based on data collected in 2011 and 2012, a total of 30 executives at not-for-profit hospitals made over $4 million a year, with a mean total compensation of $650,000 (two of these executives made over $10 million each annually, while one made more than $20 million). Hospital CEO compensation was also up 24% from just 2011 to 2012. This begs the question of whether the salary of one chief executive officer should surpass that of 100 of his or her nurses.
To date, there remains an absence of substantive policies that reign in excess profits that “not-for-profit” hospitals and their executives enjoy.
The report suggests three core recommendations to begin addressing this issue:
- Congress should intervene to define a “not-for-profit” institution as one that indeed makes no profit (aside from that needed to maintain necessary operations);
- The salaries of “not-for-profit” administrators should reflect those of true and acknowledged not-for-profit organizations; and
- Competition among hospitals in the quest for profits—driving them to add expensive technology that benefits few and amenities more suited for boutique hotels—has driven up healthcare costs across the board. This behooves administrators to find ways to offer high-quality services at lower costs.