Sunday, April 6, 2008

Not for profit, but certainly not for loss

When the US antitrust agencies analyze mergers involving non-profit hospitals, the parties often argue that the merger is is pro-competitive because any anti-competitive proceeds will be used for charity care of patients. The agencies, if not the courts, always reject this argument and treat non-profits as if they were trying to maximize profit. Now we have some evidence that the agencies were right:
Nonprofits, which account for a majority of U.S. hospitals, are faring even better than their for-profit counterparts: 77 percent of the 2,033 U.S. nonprofit hospitals are in the black, while just 61 percent of for-profit hospitals are profitable, according to the AHD data.
How do they do it? By avoiding their historic responsibility to provide charity care:

In 2006, Northwestern Memorial spent $20.8 million on charity care — less than 2 percent of its revenues and a fraction of what it received in tax breaks.... In 2006, Northwestern Memorial's former chief executive officer, Gary Mecklenburg, received a $16.4 million payout.

...and by making tax free investments:

Untaxed investment gains have greatly increased some hospitals' cash piles. Ascension Health reported net income of $1.2 billion in its fiscal year ended June 30, 2007, and cash and investments of $7.4 billion. That's more cash than Walt Disney Co. has.

1 comment:

  1. How is the amount of charity care calculated? I think nonprofits could use their retail rates, Medicare rates, or Medicaid rates. Left to their own devices, they'd choose the larger numbers, retail charges. Hospitals like Northwestern would then have reason to increase retail rates. The effect of this would be to increase charity care much more than revenue, thereby increasing the charity/revenue ratio.

    Also, with respect to nonprofits, I've been told that "we don't call it profit, we call it "surplus.""