Nonprofit Hospitals Get Wealthy Fast, but Don't Share Much

Last week, a page-one WSJ story revealed the dirty little secret of some nonprofit hospitals -- they have grown very very wealthy, very very quickly. (The article itself, titled "Nonprofit Hospitals, Once For the Poor, Strike It Rich," is visible via this Google News link, but otherwise behind a paywall.) The 50 top nonprofit hospitals racked up net income of $4.6 billion in 2006 (no, that's not a typo), versus a little more than $500 million in 2001.

At the same time, many have been skimping on charity care. Northwestern Memorial Hospital in Chicago, for instance, recently rebuilt its entire campus, installed marble floors and flat-panel TVs in a new women's hospital and paid its former CEO $16.4 million in 2006. But the hospital spent only $20.8 million -- less than two percent of its budget -- on indigent care.

Tax breaks good, charity care bad
The scandal, of course, is that Northwestern Memorial receives (presumably annual) tax breaks worth $50 million specifically because of its nonprofit status, at least by the calculation of one think tank quoted by the WSJ. Nonprofits get favorable tax treatment for the simple reason that they're supposed to be serving their communities, and it seems a bit on the unreasonable side that many seem to simply pocket that subsidy instead. (Iowa Sen. Charles Grassley agrees, and has recently been pounding on hospitals to boost their charitable giving.)

I'd been curious to see what some of the hospital bloggers now on the Web would have to say about the Journal's findings, and Paul Levy -- the CEO of Beth Israel Deaconess Medical Center in Boston, who somehow still finds time to write the insightful blog Running a Hospital --doesn't disappoint. Levy argues that some of the article's examples are "unusual and not reflective of most hospitals" and notes that the business sense necessary to run modern nonprofit hospitals isn't all that different from what's required at their for-profit brethren.

But there is one key difference that Levy emphasizes:

The non-profit does not have shareholders who benefit financially from its operations. Its fundamental constituency is the community it serves. For a small community hospital, it is literally the local community. For an academic medical center like BIDMC, it is the local community, but it is also a regional, national, and indeed international community that benefits from the research and educational programs of the hospital.

Is this a difference without a distinction? I think not. I know that our Board and I would be making very different decisions about patient care, research, and training expenditures if we operated under a for-profit rubric. While we always have to be prudent about which services we offer, many more areas that do not generate a profit or that result in perpetual losses would likely be cut or eliminated if we were not a non-profit. As a matter of strict business, many of these could be jettisoned and provided by others outside of our hospital. But we believe that we owe to our patients and to the nurses and doctors who we are training to offer these as part of our public service mission.

What really demonstrates a hospital's commitment to the community is its dedication to providing free care to those without insurance, and nonprofits are especially on the hook here specifically because their tax breaks are supposed to make it affordable. That's the very front they're currently falling down on.

Postscript: I found myself curious how much Beth Israel itself spends on charity care as a percentage of revenue, but quickly learned one other salient fact: Up-to-date information on hospital finances is not that easy to find. Beth Israel's annual report is devoid of financial data beyond its receipt of federal research grants -- a bragging point, essentially -- and the only public document I could find in about an hour of searching was the hospital's IRS Form 990... from 2004. (Better than nothing, I suppose.)

I did, however, learn that the hospital is currently locked in a war of words with the Service Employees International Union, which argues that Beth Israel inflated its charity-care expenses in 2005 and 2006 by including the cost of bad debt. (Levy has addressed this subject numerous times on his blog. Summary: He thinks SEIU is waging a campaign to destroy the hospital's reputation as part of an organization drive.)

Anyway, according to the NYT, Beth Israel claims to have spent $67.6 million on charity care in 2005, a figure that SEIU argues was inflated by about 19 percent. What fraction of the hospital's revenue does that represent? I have no idea, although according to the 2004 Form 990, Beth Israel pulled in total revenue of $995 million just a year earlier. Since that figure almost certainly rose the following year, that would mean charity care in 2005 amounted to no more than 6.8 percent of revenue, and probably considerably less, particularly if you agree with SEIU's calculation. I have no dog in that fight, but even taking Beth Israel's disclosure at face value, that level is awfully close to the minimum five percent of budget that Grassley would like to see nonprofit hospitals spend.

If anyone has fresher data or clarifications, I'm anxious to hear about it. Feel free to sound off in comments.

(Photo of an abandoned hospital by Flickr user reivax, used under Creative Commons.)