The Washington Post reports on the most profitable hospitals in the country based on their operational margins.
Seven of the top 10 most profitable hospitals in the United States are nonprofit facilities that each netted more than $150 million from caring for patients in 2013, according to a study published Monday….
The authors analyzed Medicare data for about 3,000 acute care hospitals, of which 59 percent were nonprofit, 25 percent were for-profit and 16 percent were public. After adjusting for cost of living and the types of patients served, they found that more than half of all facilities lost money on patient care services. Rural hospitals, small hospitals, and major teaching hospitals tended to lose more money than urban hospitals and larger ones….
The study’s main purpose was to determine the characteristics of the nation’s most profitable hospitals. They found that facilities that were part of a system were more profitable because they were able to dominate their local market, which gives them greater clout in negotiating higher prices from private insurers.
Some hospitals (and insurers) are effectively hedge funds with a sideline business in healthcare so those financial operations are excluded from this analysis.
From the study ** itself, market power and market concentration is a major indicator of hospital profitability:
We also examined the hospitals that were extremely profitable—those in the top 2.5 percent in terms of profit per adjusted discharge (over $2,475), after we excluded hospitals with fifty or fewer beds. These extremely profitable hospitals had an average charge-to-cost ratio of 5.8. Seventy-eight percent of them were for-profit, 88 percent were in a system, and 47 percent had regional power
System hospitals tend to be geographically clustered and they can arrange services so that there is little leakage out of the system. Furthermore, systems that are geographically clustered tend to have a high proportion of the regional hospital beds which means those hospitals have a high local HHI compared to the payer HHI. That allows them to charge more for more services.
What are the big take-aways?
We pay too much for hospital services. That is a given. Additionally, some of the most profitable hospitals are non-profits. I have long believed that tax organization does not have too much impact when the non-profit is large as the incentives to capture surplus and distribute it to internal stakeholders instead of external shareholders is strong when there is a firehose of money to sip from. Finally, market power matters. This is an area where federal administrative and executive action can bend the cost curve by having the FTC aggressively crackdown on any activity that looks to increase regional market concentration of critical providers. At the state level, state legislatures can remove barriers to entry and allow for new hospital construction that decreases regional concentrations.
***Bai, G., & Anderson, G. F. (2016). A More Detailed Understanding Of Factors Associated With Hospital Profitability. Health Affairs, 35(5), 889-897. doi:10.1377/hlthaff.2015.1193
worn
Trying to make sense of this sentence “Seven of the top 10 most profitable hospitals in the United States are nonprofit facilities…” but I am not able to.
BR
Am I remembering right that there was a TIME cover story a few years back where they pored over health care costs and concluded a lot of the total cost come down to hospital waste and overbilling and fee for service?
Richard Mayhew
@worn: 7 of the 10 most profitable hospitals in the US have an ownership and tax structure that does not allow for the distribution of profits to the owners.
Non-profit status for large entities is primarily a tax and surplus distribution choice, it does not reflect on what the actual margins are.
Kylroy
@worn: Any facility, nonproft or not, has income and expenses. Seven of the 10 facilities with the highest ratio of income to expenses were nonprofits.
Hillary Rettig
and an expose in today’s NY Times on how South Dakota is shunting thousands of disabled people who are capable of staying at home and in the community into nursing homes.
http://www.nytimes.com/2016/05/03/us/south-dakota-disabilities-nursing-homes.html
like some of the commenters to the piece, I wonder who is profiting.
gene108
Ultimately the only way the cost-curve bends is by sucking money from the pockets of healthcare providers – doctors, hospitals, pharma, equipment manufacturers, etc. – and taking those savings and reducing the cost of insurance.
I’m not sure how to do this without being supremely disruptive to the largest segment of the economy.
Because, to me, the thing is it is not good enough to say Medical Inflation declined from 10% to 3 % “yay, us!” (numbers are hypothetical, I’m not sure what the pre-post ACA medical inflation numbers look like off the top of my head), since this is still raising costs for people, who are already paying too much for too little service.
We need to have a costs go down. Period. Healthcare in 2017 should cost less than healthcare in 2016. Healthcare in 2018 should cost less than healthcare in 2017. And so on.
This is the only way for people and businesses (who cover most Americans) to feel any real change and get any actual benefit.
And doing this will hurt healthcare providers.
gene108
@Kylroy:
Another way to look it at is businesses with high operating margins are well managed. They have a surplus of cash and will continue to stay in operation, even in tough times.
I think the big issue is how the surplus is reinvested back into the hospitals or if it’s just going to line some bigwigs pockets.
Eric U.
profitable non-profits have plenty of money for executive compensation, hookers and blow
justawriter
North Dakota Catholic hospitals are consolidating Not sure if this is more a branding thing or a response to the aggressive acquisitions by the Sanford Hospital chain in the state the last few years.
jl
California recently stripped a major insurer of non-profit status because it’s behavior was indistinguishable from a for-profit enterprise.
Local and regional market power is one of the three big problems the remain with the PPACA. The others are too much remaining room for cherry picking and network games to avoid covering risky people (ha ha, told you so from the beinning), and incomplete expansion for poor (which was imposed by SCOTUS and vile GOP state governments).
Gotta figure out a way to Go Swiss! on this system to make progress in short and medium term. Problem is that Swiss institutions for managing non-competitive market structure, price setting and regulation not easily transferred to US for political or legal reasons. So Swiss have a mostly private, and mostly non-profit system with higher quality and 2/3 the cost (at the expense of high out of pocket costs, though). But nearly universal coverage and amazingly low churn (recently, I think on average, around 5 percent).
Disappointing that neither HRC (too small bore and insistent against evidence that PPACA is enough of an improvement to be satisfactory for many people) nore Sanders (insist on single payer ??? social profit! underpants gnome game) have good plans. One is uninspiring and insistent that people should be satisfied with a very imperfect system, the other is just big talk. The danger is that the GOP might be able to sell their scam alternative. Democratic candidates’ health platforms are blots on their overall good policy portfolio, IMHO.
dr. bloor
I’m thinking that the “more than half of all facilities” that lost money would disagree with this. And you were doing so well avoiding the broad-brush statements for a while.
When Mayhew Insurance figures out how to minimize the leverage that the big players hold, will they be increasing reimbursements to the rural and teaching facilities?
jl
@gene108:
” I think the big issue is how the surplus is reinvested back into the hospitals or if it’s just going to line some bigwigs pockets. ”
Or reinvested, but continuing to go in search of high margin healthy wealthier populations to cover. It think that last alternative is what we see in SF Bay Area.
jl
@dr. bloor: There is nothing contradictory about paying too much on average and half of facilities losing money. You forget that the too high prices exist all through the supply chain. Many facilities pay to much for heir supplies. And some of the losses can be explained by the too ample room that remains for cherry picking, and their will be losers in that race to pick the cheapest people. Also the effect of some indigent care clinics losing patients who become insured.
Your objection is paints with a broad brush as well.
Punchy
I surmise that Catholic hospitals are the most prophet-able.
JustRuss
Our local hospital is expanding like crazy, which is nice, more services in more communities. They’re also buying up and building commercial real estate, which I find troubling for a non-profit.
jl
@JustRuss: I will say one thing in favor of some ‘for-profit’ like behavior of ‘non-profits’. When you look at the factor market supply chain side of the organization, Investment and financial operations of for-profits and non-profits that are necessary for competition, whether in competitive market or the more common various forms that competition take in oligopolistic provider markets, often looks the same. In some ways, for profits and non profits should be expected to act the same, especially when both are expanding and must finance the expansion, and maintain working capital and assets.
This is especially true when providers have to deal with price discrimination in the supply chain. Price discrimination can work in different ways in terms of whether the big rich guy or poor little guy gets a break. If quantity discounts are important part of price discrimination for suppliers selling to providers, the big rich buy gets the big breaks and smaller guy gets eaten alive with high prices and limited flexibility for choice of supply contract terms.
Standard theory differentiates for-profit and non-profit by what is maximized in the final project market (services provided to consumers). Is it profit, or amount of services provided to customers? On supply chain and investment side of the organization, the two act pretty much the same, especially over time when both feel they need to expand.
So, why and where are these investments being made is important to consider.
Applejinx
Who gives a flying fuck which are the most profitable hospitals?
Do they heal the sick, or not?
Jesus fucking Christ, Richard.
CONGRATULATIONS!
@Applejinx: Because a hospital that doesn’t make money is a hospital that goes away. And eventually you run out of hospitals. This has been happening in Los Angeles for quite a while.
So, hard as it may be to understand, hospitals need to be profitable.
JPL
@Applejinx: The problem is the cost of hospitalization and who benefits. IMO
Applejinx
@CONGRATULATIONS!: So why don’t they just get into real estate, then, and that can be their job?
Oh wait :P
CONGRATULATIONS!
@Applejinx: They could do that. Then who provides emergency and advanced medical care? Volunteers? Doubt they’re up to dealing with stage 4 oncology. Or cardiac stents.
Hilary
A wise friend, who also happens to be a CPA, once told me “not for profit is a tax status, not a goal.”
Applejinx
@CONGRATULATIONS!: You are describing a hostage situation. “Fork over the money, or somebody will stay hurt”.
singfoom
@Applejinx:
It’s a news story that he’s commenting on. Plenty of people think it’s interesting.
Healthcare costs money. Looking at how differently structured organizations deal with that money is offensive because money?
You want to make healthcare cheaper, you look at what works and doesn’t work. It’s not navel gazing for the fuck of it. Where’s the problem?
There’s a lot of studies out there on health outcomes. Where’s the problem?
CONGRATULATIONS!
@Applejinx: No, I’m describing Econ 101. If hospitals can’t make money, they won’t stay in the hospital business and no one can or would make them. The challenge, as Richard noted, is that in order to succeed, hospitals must make money. And we’re not the only nation in the world that operates that way, most do.
Richard is describing results of studies that can keep hospitals in business. We need to help these places get and stay profitable so they can continue to serve their communities, instead of running off and investing in hedge funds.
Tripod
Profitability in this context can (and often does) include counting things like government grants, philanthropy, and investment earnings while taking it in the shorts on patient services.
Richard Mayhew
@Applejinx: The post is building towards a longer argument that “make everything a non-profit 501(c)-3) ” is a crock of shit of an argument as large entities that can capture social surplus over and above normal economic rents will try to siphon off social surplus and divert it to rentiers, gatekeepers and senior management with as little being diverted to external stakeholders (community and share holders). This applies to hospitals, this applies to universities, this applies to insurers…. stronger regulation is most likely needed to do two things. First make sure non-market powered providers can stay in business as they are needed for both competition purposes AND critical access purposes in outlying areas. Secondly, for the providers with market power where rent extraction can and does frequently occur, find ways to decrease the amount of rent that is being extracted.
Richard Mayhew
@Hilary: Exactly — most entities with the exceptions of foundations which have a mission to spend down to zero — need to break even or do slightly better than that over a cycle if the activity is supposed to be a perpetual activity.
Fraud Guy
My wife used to work at different, local non-profit hospitals. At one, during an annual employee meeting, the CEO announced that their goal was to increase profitability for her location, which had a high share of indigent and public aid patients. At the other, they announced nearly annual multi-million dollar building programs. They also once reserved three years of employee salaries and bonuses in advance in order to do something with their “non” profits to avoid a tax status change.
Applejinx
@CONGRATULATIONS!: How do you feel about keeping government in business?
Econ 101 is a choice. That’s why I’m pissing in y’alls cornflakes this way. I understand this is a wonkery argument about things as they are, and you’d be surprised at how well i can follow the wonkery with a bit of explaining: yes, the rise of humongous entities (something that’s far from limited to healthcare!) is a phenomenon that distorts the market by siphoning off social surplus for no good reason but name recognition. Yes, rentiers will piggyback on this and there’s no special difference between for-profit and 501(c)3 at these scales: there will be administrators, bargain-makers, it’s not a planned economy so ALL these things matter and you’re proposing to manipulate the system to steer outcomes through regulation and recognizing that ‘nonprofits’ are by no means immune from these forces: you could well end up with titanic 501(c)3s behaving in undesirable ways. I even agree that rules-setting by regulation is the proper course.
At the scales you’re talking about, rent extraction is still the only motivating force when your subject is a ‘business’, and there’s decades of settled opinion (entirely a political position! ask a socialist or commie!) that this rent extraction is the ONLY right and proper motivation because it ‘makes all other motivations work better’. And THAT is an article of faith, and one I do not hold.
So: go ahead and continue to talk entirely within the ‘hospital business’ frame, with regulation as sort of the unpopular bodge job that’s not commonly seen as a vital part. Go ahead and wonk from within this frame.
Just don’t mind me while I spit. (honestly, the saving grace of the situation for me is the talk of regulation and fighting the diversion of resources to rentiers. I too see that as an intrinsic aspect of the system, which is why I spit.)
Ella in New Mexico
I read this article, but as soon as I saw that the data was from a single year-2013 I discounted it’s results as more of a snapshot of that point in time than some kind of epiphany regarding the benefit of for vs. non-profits.
As a person who works for a typical “for profit” hospital, but who has many friends and colleagues who work in non-profit settings all over the country, the vast majority of them (with one exception) have excellent nurse-to-patient ratios, excellent patient and employee satisfaction scores, and generous employee wages and benefits. My hospital won’t do anything like those do if it decreases it’s profits going to upper management and shareholders–unless there’s a frigging Sentinel Event or a lawsuit.
ALL the for-profit hospitals in which my friends and colleagues work either have some pretty unhappy workers, poorly cared-for patients, or nursing unions that came in and forced the bastards to do the right stuff with their employees and patients.
I’m sure there are a few non-profits out there who appear to “make profits” but I would suggest that many of them–particularly the religiously affiliated or teaching hospitals–do a significant amount of work for un or under insured people that the for-profits don’t have to do and reinvest in their workforces and facilities far more consistently than for-profits do as a whole.
And that’s money well-spent in the healthcare expense column, if you ask me.
Tripod
I’m really leery of flooding the market with beds and letting the magic hand do the rest. Bed demand is flat, and bed tower break even is at a pretty high occupancy rate. This seems like a solution with lots of provider churn, and not much benefit to the consumers.
Applejinx
By contrast, if you framed the question (within our context, unrealistically) as
There are points of similarity, especially in implementation, but note that profitability is automatically always zero. By definition of ‘fixed budget’, the idea is you are given so much and are stretching it as far as possible, with the metric being ‘how much services were provided at that expenditure level’.
But that is NOT how things are framed so we’re stuck talking about ‘how do we generate superfluous capital and thus make a business case for the expansion of our service providers’ which is why it can seem obscene. Business, especially in America, ESPECIALLY in 2016 ‘disruptive’ America, is not seen as ‘establish an efficient operation that doesn’t grow’. The whole idea of competing for existence by out-growing the next guy in a largely unregulated system gives rise to these ‘real estate hospitals’ and such things: within that frame it’s an existential mandate to not only expand but do so more than your neighbor, or the assumption is you should be culled.
I don’t agree hospitals should be culled for ‘not being the most efficient use of capital’.
CONGRATULATIONS!
@Applejinx: You’re looking for a fight and I’m not the guy, especially not today. Go yell at someone who has the time and gives a shit.
Mnemosyne
@Applejinx:
Here’s the thing you’re ignoring, though: even if we switched to Medicare For All system tomorrow, these hospitals would continue to exist. So we have to figure out a way to ease back on the costs no matter what, because building a hospital from scratch is WAY more expensive than you seem to think.
Mnemosyne
@Ella in New Mexico:
That was my (in-law) family’s experience when my father-in-law was slowly dying of a brain tumor. He was emergency admitted to a for-profit and the family couldn’t get him out of there fast enough.
Kylroy
@CONGRATULATIONS!: Applejinx gave the game away with “Econ 101 is a choice.” We had a world power devote half a century to proving that false.