Tuesday, April 08, 2008

Is "non-profit business" an oxymoron?

An April 4 article in the Wall Street Journal, entitled "Nonprofit Hospitals, Once For the Poor, Strike It Rich" has prompted a slew of comments on wsj.com. I think they are worth reading and do not intend to summarize them here. Some accused the Journal and the quoted politicians of grandstanding. Others said the story was right on target.

The issue of the type and degree of benefits provided by non-profit hospitals is a legitimate and important one. Our institutions are given certain privileges by the government, and the government has a right to supervise our performance in carrying out our public service functions. Recently, the Massachusetts Attorney General announced a review of certain of these activities, those relating to community benefits. This is a healthy step, in that as times change, the standards of behavior and reporting should likely change, too.

The WSJ's story contained examples of non-profit behavior that many will find excessive. I think some examples chosen are unusual and not reflective of most hospitals. But I imagine that a detailed review of Massachusetts hospitals would find some items of a more modest level that at least some people would find troubling.

On this blog, I have written posts on several of the commercial aspects of running a hospital -- for example, one on the growth imperative, another on advertising. I have also told about what it was like when this hospital was very close to closure because of a failure to mind its financial ways. Finally, you have seen posts on the special role of our Board of Directors in setting standards for a non-profit institution like ours.

In reviewing this issue, it seems to me that there is not always a bright line between the business behavior of a non-profit and a for-profit company. Both need to operate in the black to carry out their purpose. Both need to determine how to compete in a marketplace to achieve that. The strategies employed to do that might look quite similar. Both need to attract qualified people in both supervisory and line positions. The salaries and benefits offered, therefore, might be somewhat similar. Both depend on the vigilance of a Board of Directors to monitor management's performance and behavior. So the structure and functions of the boards overlap in several ways (but not totally, given the pertinent legal requirements). And, as a final level of control, both have regulators to ensure that appropriate community standards are maintained and enforced.

But there is a fundamental difference. 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.

As health care costs continue to rise and consume a greater percent of our national economy, we can expect further debates on these issues. Those debates are normal and appropriate and help hold all parties accountable to their constituencies.

11 comments:

Anonymous said...

But when I see "non-profit" Blue Cross/Blue Shield giving their CEO a $16M retirement package while he still holds a $multi-million paying position at the company, the wsj commenters have very valid points. Doubly so when my premiums go up 20%, 30% or more every year (up 50% this year alone).

And before you correct me, you said "non-profit business" not "non-profit hospital", although I think such distinctions are irrelevant. I'm the one who ends up paying for both.

Barry Carol said...

I think Academic Medical Centers are unique because of their teaching and research functions. As a patient or a payer, I think it would be more interesting to compare, say, a for profit community hospital vs. a non-profit. Assuming there are not significant differences in uncompensated care, how do the cost structures and the pricing for like services compare? Are for profits more efficient? Can non-profits charge less because they don’t have to make a profit or answer to shareholders? With 85% of hospital beds nationwide controlled by non-profit institutions and for profits virtually non-existent throughout the Northeast, I don’t think non-profits deserve very high marks for either efficiency or their ability to control costs over the long term. That said, there is no question that all hospitals have to at least cover their costs in order to stay in business.

I think it would be more productive if we keep pushing for greater transparency around both pricing and quality. I would like to see some adverse consequences for hospitals and doctors who persistently treat patients more aggressively than peer institutions elsewhere with no difference in outcomes to show for it. Bundled pricing for expensive surgical procedures would also be helpful, but doctors and hospitals would actually have to work together to bring that about. Perhaps grouping hospitals and doctors into tiers like drugs are now could help to steer patients to those providers that deliver high quality care at a reasonable cost. If patients and referring doctors know who the most cost-effective providers are, the less efficient might be forced to improve or lose business which is the way it should be.

Anonymous said...

There are some interesting comments on this subject also on The Health Care Blog; the post is a few days old. I abstracted one comment from "mpk" below (with apologies to mpk; hope doing this is "legal"):

"Our local "non-profit" hospital was $40 million in the black last year. It also received almost $25 million in state and federal grants because of it's non-profit status and the fact that they have to handle some illegal immigrants in their ER. However,it paid no taxes. My neighbor is the CFO of one of the subsidiaries this Hospital and he just got his $200,000 BONUS at the beginning of the month. He's 33 years old, knows nothing other than massive salaries and profits for himself and is very happy the state and federal gov't are giving them millions in grants and "aid" while the execs strip out millions for themselves."

I have similar experience, both at my local hospital and the hospital system at which I used to practice - I don't think it's as uncommon as you think, Paul.

Another commenter had an interesting idea - make the "rich" nonprofit hospitals subsidize the "poor" ones - e.g. if you aren't in a location where you have to provide much charity care, then contribute $$ toward those that have much higher charity care rates.

But here's the crux: "them's the rules" for nonprofits, and the rules are poorly defined, so naturally some hospitals are going to play the rules to their benefit - just like some churches, some colleges, the American Red Cross, and many other nonprofits.

The key is, the rules for qualifying and operating as a nonprofit organization, be it a hospital or anything else, need to be MUCH better defined by the feds. Else we taxpayers are going to continue massive subsidies to businesses who are abusing their nonprofit status.

nonlocal MD

Anonymous said...

I work at a not for profit hospital in NJ where there was a strike in 2006 because the hospital refused to give the RNs a new Health insurance package that was far superior to the one offered by the hospital and would have saved the hospital half a million dollars. I suspected at the time that the reason for the hospital refusing the new money saving plan was that they were including all the employees in their Charity Care pool. After reading the April 4th, 2008 WSJ article I am convinced of this fact.

it'sme said...

The increasing transparency of non-profits' and that their status is, indeed, an oxymoron....because so many of us have been victimized by this facade...will find themselves going the way of Wall Street..and just watch the scramble as they try to squeeze the last drop of blood out of us before they go down with a Single-Payer System. Claiming that there are enhanced/better services provided for by the non-profit status is just one of the diversions we have been fed. Mark my words, the list of those whose greediness benefited by the smoke-screen of being called a non-profit will be published for all to see. You can run but you cannot hide, and whoever wins this election will have be on board to expose this greed (hopefully before we go to the polls so we can make a quicker recovery after the fact). Unlike Wall Street, we will not bail you out because that would be the ultimate "double dip", now wouldn't it.

Anonymous said...

Transparency will win out and the label of "non-profit" will be exposed for what it is. Just like the meltdown on Wall Street, which I call a Karma Correction, all of the greed will be revealed, and the excuses for the greed will fall on deaf ears (at long last)!

Anonymous said...

I appreciated the comments made by "Anonymous" on April 9th. I sit on the other side of this proverbial fence.

As an administrator in a hospital that receives one of the largest federal contributions for providing care to the indigent, I've lived through both lean years and times of great profit. Last year my organization realized a 40 million dollar profit. With these monies we openened a for-profit entity, a rural non-profit entity, and, yes, gave several chief administrators large bonuses (I was not one of these).

In comparison, this year, we are looking to close the year 50 million dollars in the red. The reasons for this are economic, refusal by our state's goverment to reimburse due to their own financial issues, and regulatory. In response--cheif administrators (those same ones who received large bonuses) took a 5% pay cut, then a 10% pay cut, and will likely be asked to take a 15% pay cut before the end of the year. The CEO of my organization has shown her commitment by returning her salary to the organization.

So, I guess what I'm trying to say is that its easy to throw stones at non-profit entities when the money is flowing. Don't, however, fail to recognize the commitment to the charitable goal and to lower staff members by top administrators when times are lean. This is not the first time I've seen my superiors dig deeply in their own financial pockets in order to protect lower-paid individuals in the organization.

This is also why I have stayed with this organization earning %50 percent less than I could earn elsewhere. Each time I see my bosses give so selflessly (and I've seen it many times)I renew my own commitment. And, when we have highly profitable years and my superiors give themselves large bonuses, I don't begrudge them this.

Anonymous said...

The definition of non-profit to my understanding is that all profits are put back into the hospital. I do not think that means giving bonuses of any kind. Non-profit hospital administration and managers should be paid a salary based on their job duties, not based on profits made. That is the definition of a "for-profit" company, correct? The "for profit" administrative salaries should be tied to the amount of profits made.

There definitely needs to be major reform when it comes to non-profit status. I work for a hospital and we owned and employed many of our local physician offices in the area. The doctors' pay was based on how much money their offices brought in, until recently. The non-profit hospital just figured out it was against federal regulations to pay them this way. You think?

Anonymous said...

I run a small independent pharmacy in Muskegon, Michigan. My main competition is not Walgreens, but our local non-profit hospital. This hospital has set up 7 pharmacies in our medium size town. They also have a home health equipment company, a hearing aid company, and they own a vast majority of the physician offices.

If the non profit hospital provides a unique service for the community, then I think most citizens would approve. But if the hospital is merely setting up competing businesses where the service is already well provided by the private sector, then the community has every right to question both the legality and the motives of that hospital.

With the hospital owning and controlling the vast majority of the communities medical assets, what can I do other than complain?

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jarkarse said...

The whole system is corrupted by multiple prices for the same service based on your method of payment. Why is it that self pay patients pay almost double the amount of a traditional insured patient? The answer: The non-profit hospital writes off the inflated cost as "charity" then bills for the actual cost.

This is not including the "cherrypicking" of lucrative insurance billing to the for-profit branch of the same company. They "out-source" to themselves to the for-profit side, but maintain the ability to write off the undesirable accounts on the non profit side. (example: medical supply, linen, surgery centers, pharmacy, home health ect...)