A Health Affairs report last year caused waves when it found that seven of the top 10 most profitable U.S. hospitals were nonprofits. In announcing the report, study leader Gerard F. Anderson, professor in the Department of Health Policy and Management at the Bloomberg School, wondered what the nonprofits are doing with their — well, profits.
The report had people questioning nonprofit hospitals and whether those huge profits are common for nonprofit health systems. At least one of the mentioned hospitals, however, disputed the study's finding and said it did not consider some types of normal operating expenses.
However, for every hospital posting a profit, there are many nonprofit community hospitals struggling to reach profitability. In that same study, the majority of 3,000 health systems profiled lost money on patient services.
Healthcare leaders say a hospital or health system’s nonprofit or for-profit status isn’t what leads it to profitability. Instead, it’s the health system’s location, size, ability to scale and share of the local market. Nonprofits are in many ways facing the same struggles that for-profits are.
“Being nonprofit or for-profit on its nose does not determine performance,” Amy Knight, chief operating officer at Children’s Hospital Association, told Healthcare Dive. Instead, the system’s mission and business goal often influence market location, the scope of services and payer mix, she added.
A few key differences in how financials are handled
There are nearly three times as many nonprofit hospitals as for-profit hospitals in the U.S. — 2,845 nonprofit community hospitals and 1,034 for-profit community hospitals, according to the American Hospital Association.
The main differences between the two types of systems are how each accesses capital, which one pays taxes and which one must offer community benefits. Nonprofits must “serve the healthcare needs of the community.” In return, nonprofit hospitals don’t pay taxes. For-profit systems benefit from investors’ money and have more flexibility about which services they offer, often seeking more profitable ones.
Nonprofits need to prove a community benefit through their tax forms to maintain their status and exemption from federal, state and county taxes. Both nonprofits and for-profits must offer charity care.
A for-profit’s ability to raise capital through investors gives them “more latitude to have more access to capital” than a nonprofit hospital, Richard Gundling, senior vice president of healthcare financial practices at the Healthcare Financial Management Association told Healthcare Dive. Plus, a for-profit can return profits to investors, as well as invest in the healthcare system. A nonprofit must invest profits back into the organization.
Community nonprofit hospitals face difficulties
Flipping through the latest earnings reports from for-profit hospitals, one might think that for-profit hospitals are falling behind nonprofits regarding profits.
For instance, HCA reported flat revenue and less income in the first quarter, Quorum Health posted 2016 losses and plans to divest six more hospitals, Tenet Healthcare suffered a revenue loss and CHS is selling 25 hospitals after a $1.7 billion loss in 2016.
But it’s not only for-profit health systems that are having a rocky period. Those in nonprofit systems say they too are struggling to be profitable. Alan Macdonald, president and CEO of Hallmark Health in Massachusetts, told Healthcare Dive that Hallmark Health, which includes Melrose-Wakefield Hospital and Lawrence Memorial Hospital, has been running a loss for four years.
One issue for Hallmark Health — and other community hospitals — is the percentage of patients on government programs has increased, which means lower payments than if more patients belonged to private payers.
Macdonald estimated 58% of Hallmark Health’s patient base is on a public program (47% on Medicare and 11% on Medicaid). Macdonald said the Medicaid percentage has doubled since Medicaid expansion.
Medicaid expansion gave more people insurance, but it is also having a financial effect on Massachusetts and other states that expanded the program. The amount of the state’s budget goes to MassHealth, which is the commonwealth’s Medicaid program, is 40%.
Having more Medicaid patients and fewer on private insurance means health systems are getting less money for care.
Community hospitals are feeling the changes in care delivery
Another major issue for community hospitals is how healthcare has changed over the past 20 or 30 years. In the early 1990s, Macdonald said, about 5% of Hallmark Health’s business was outpatient and ambulatory care, while 95% was in-patient care. Now, two-thirds is outpatient and ambulatory care.
Patients once spent four or five days in the hospital after a hernia or gallbladder operation. Now, they often go home the same day. Plus, patient volumes are down, which makes systems like Hallmark Health look for ways to add revenue elsewhere and consolidate services. For Hallmark Health, Macdonald said that meant consolidating cardiovascular and surgical services.
“It’s so much easier to continue to provide basic services when you have enough volume to maintain staff for those services,” Macdonald said about lower patient volume.
Hallmark Health’s goal is to get to 103% of expenses so they can invest back into the health system, but it’s hard to get beyond a 1% or 2% margin, said Macdonald.
He said the health system has done well with investments over the past two years, which has helped offset losses, but Macdonald added that’s not a long-term solution, especially since Hallmark Health owes more than $100 million.
Macdonald said community hospitals like Hallmark Health need to find affiliations to help bridge gaps in care so they can provide services from pre-admission to post-discharge. Community hospitals can’t provide all services so they must work with other facilities.
After an earlier acquisition attempt of Hallmark Health by Partners HealthCare failed, Hallmark teamed up with Wellforce, which runs Tufts Medical Center in Boston and Lowell General Hospital, to meld services and improve efficiency with back office work.
The partnership with Wellforce maintains three independent organizations, but they are under one financially obligated group. The partnership allows a system like Hallmark Health to get clinical skills from a larger regional group. Creating that kind of scale helps health systems reinvest in itself.
“First and foremost, it gives you the opportunity to access capital that you don’t have for yourself,” Macdonald said. “When you are part of a larger group, you have more borrowing power.”
Nonprofits interact with their communities
Nonprofits often focus on how to benefit the communities around them, which can endear them to neighbors, adding a less tangible but still valuable asset
“As a not-for-profit hospital, you are going to provide everything you can,” McDonald said. “For a for-profit, you might make more decisions about what services you are going to have and which you are not going to have. A for-profit has to look at profitable services as much as possible.”
Despite a for-profit’s emphasis on profitable services, studies have found quality is often the same regardless of provider type.
“Both provide high-quality services. It’s just access to capital (that is different),” Gundling said.
Gundling said a nonprofit hospital decides on community benefits by looking at what a community needs. A hospital in a poor area might provide necessary charity care, while an affluent suburb may need help with Meals on Wheels programs and similar “age in place” offerings.
“It’s not a cookie-cutter,” Gundling said of community benefits. "There is a strong grassroots support" for nonprofit hospitals, which often have public health programs and raise funds for their communities, he said.
Gundling said the trend of healthcare M&A will continue as systems look for ways to handle risk-based contracting and other Medicare changes. He expects for-profits will look for M&A options, especially in rural areas. “It could maybe bring some scale and management to that area,” he said.
Nonprofits, on the other hand, may look at different regions for M&A. “I think nonprofits will look at other smaller mid-size hospitals in different regions and focus on those,” Gundling said.
Both focuses are based on the same need — scale. “The strategies are the same. Everyone is looking for scale,” Gundling said.
Gundling said patient volume and revenue are to remain fairly flat in the coming years.
“Expense pressures will push down operating margins. Pharmaceutical costs, employment, pension cost growth and bad debt increases will continue,” Gundling said.
Gundling said new alternative payment models will play a part in hospital and health system success. Organizations that can transition to new payment models, while increasing quality and safety measures while lowering expenses “will be able to be in a better position to deal with future changes,” he said.
Ultimately, hospitals that focus on value will succeed. “Focusing on increasing value to patients and purchasers is a no-fail strategy,” Gundling said.