Healthcare Matters

We’ve given a great deal of attention to how the Affordable Care Act continues to drive consolidation in healthcare. But a recent article on the same subject, written by David Whelen for Forbes, still caught my attention, because he asks a few directed questions that suggest some possible unintended outcomes that would be highly significant. As Whelen puts it: “The most common theory is that reform causes consolidation. But what if the effect on hospitals is even more radical? What if the legislation changes the largely nonprofit nature of the industry?”

The storyline:

• Approximately 3,600 hospitals in the U.S. are nonprofit (60%), while 25% are government-owned. Fewer than 1,000 are for profit.
• After WWII, the federal government offered subsidies to cities that needed hospitals. Getting that money required nonprofit status –which meant providing various services free of charge for “community benefit.”
• The IRS originally defined “community benefit” to mean spending 3% of operating revenue to take care of patients who couldn’t pay. That hasn’t happened. For example, the GAO found that in California, nonprofit hospitals only spent 3.5% of their expenses on average on uncompensated care for the uninsured. That means many were below the line (FYI: for-profits actually spent more!). Add-in 30,000,000 newly insured under the Act and those numbers will be further diluted making it virtually impossible for hospitals already failing to meet the standard to even get close to compliance.
• If you count all the sales, property, and income taxes that nonprofit hospitals avoid paying, Whelen’s research indicates the number would total $20 billion. That’s a big number to ignore and cities with aging infrastructures and staving off bankruptcy no longer do.
• Large, profitable, nonprofit IDNs with significant for-profit business interests continue to redefine the boundaries of creative accounting. They happily hold themselves to a lower reporting standard.

Will “ObamaCare” prove to be the straw that breaks the back of “tax exempt” status?  Could a trajectory that many people label as “socialist” actually result in driving our healthcare system closer to a market-driven economy? There are a lot of smart people out there who seem to think it’s highly possible. If/when the government begins sending nonprofits a strong enough signal indicating that they will no longer permit business as usual, there’s a growing sentiment that says that we’re going to see these systems move to become for-profits as quickly as their executives can say, “stock option.” It’s already happening in several major cities around the nation. For you Catholics out there (like me), how many of you who regularly attend Mass haven’t listened to your otherwise liberally-inclined priest read scathing letters from the Bishop about ObamaCare’s encroachment on religious freedom. Are they bluffing or is it just a coincidence that Catholic hospitals in Detroit and Miami recently sold out to for-profit hospital chains?

When the largest non-profit IDNs in this country are given the choice between doing more charitable work versus building a new transplant center or for that matter, culling their private fleet, which direction do you think they’re going to choose? In fact, the conditions are ripe for nonprofits whose exempt status may not even be questionable to voluntarily give up their status and become for-profit organizations and/or to allow themselves to become part of larger, for profit systems.

Source: David Whelan is a contributing editor at Forbes, where he was a staff writer for 8 years covering health care payers, providers and policy. He’s currently studying and working in hospital administration.

—Tom Finn