Profits at Not-for-Profit Hospitals Put Industry in the Spotlight

The net income of the 50 largest not-for-profit hospitals jumped nearly eight-fold to $4.27 billion between 2004 and 2006, according to a story today in The Wall Street Journal. No fewer than 25 of the nation’s not-for-profit hospitals or hospital systems now earn more than $250 million a year, and 77 percent of not-for-profits are in the black, compared to 61 percent of the nation’s for-profit hospitals, the Journal reported.

A major winner is Ascension Health, a Catholic system with 65 hospitals, with cash and investments worth $7.4 billion.

Not-for-profit hospitals receive tremendous tax breaks for their work. But critics say many of them do not spend enough on charity care to warrant the tax exemptions they receive. ("New IRS Form Means More Collections Details By Hospitals," Sept. 25, 2007).

"Nonprofit is a misnomer—it’s nontaxable," Edward Novak, president of Chicago’s Sacred Heart Hospital told the Journal. "When you’re making hundreds of millions of dollars a year, how can you call yourself a not-for-profit?"

In contrast, Sacred Heart is a small for-profit hospital on Chicago’s tough West Side that gets 62 percent of its revenue from Medicaid and pays millions in taxes, according to the WSJ article.

Iowa Senator Charles Grassley, who threatened last year to introduce legislation forcing not-for-profits hospitals to provide a minimum amount of free care to patients, told the WSJ that some non-profits seem to forget their operations are subsidized by taxpayers.

“They allow their priorities to get out of whack," said Grassley, who called hearings on the issue last year as the ranking Republican on the Senate Finance Committee.

In response, the Internal Revenue Service revised its tax exempt status Form 990, including a new Schedule H form that hospitals must complete. Beginning with next year’s returns, hospitals must break out what they spend on charity care and set aside for bad debt, rather than lumping those expenses under “community benefit”, which non-profits currently do.

According to the Journal, St. Louis-based BJC HealthCare in 2004 also included employees’ salaries as part of its community benefit. That year, BJC’s employee salaries accounted for $937 million of the $1.8 billion it claimed as community benefit, while charity care accounted for $35 million.

“The problem with the fuzzy definition of community benefit is brought to the forefront by the example of BJC HealthCare in terms of including salaries in their community health care,” said Michael Klozotsky, a healthcare analyst with Kaulkin Ginsberg’s Media Group.

In anticipation of the increased scrutiny and to justify their tax exempt status, many not-for-profits have lowered the threshold by which patients can qualify for free care. Jeff Schaub, a senior director for Fitch Ratings’ public finance health care group has said that some not-for-profit hospitals have increased the qualifying limit from 100 percent of the poverty level to up to 400 percent of the poverty level ("Hospitals Expanding Charity Care Guidelines to Ensure Tax-Exempt Status: Analyst," March 11).

However, the salaries of not-for-profit chief executives aren’t being lowered. The WSJ article cited several CEOs that received millions in compensation and perks, including country club memberships, expenses for spousal travel, low interest loans and forgiven loans.

Klozotsky said such expenditures also create negative perception issues. “It’s pretty difficult to justify those kinds of expenditures when millions of Americans, insured and uninsured, are facing rising health care cost, that in many instances cause them financial hardship,” said Klozotsky.