The Myth of the Non-Profit Hospital
Two events involving for profit health care company, HCA, the family business of Republican Senate Majority leader Bill Frist’s family (he put his shares into a not so blind, blind trust for a while), have cast new light on the evolving institution of the non-profit hospital. One is a pending corporate takeover of HCA in the largest leveraged buyout in American history, as a group of senior managers borrows money from investment banks to buy out members of the general public that own stock in HCA. The other is a standoff between HCA’s Colorado hospital operations under the name of Health One, and one of the state’s biggest insurers, United Healthcare, that could prevent insureds from visiting their usual health care facility.
Forty-eight of the hundred largest non-profits in Colorado by revenue, including all five of the largest and eight of the top ten are hospitals or health care organizations. But, non-profit hospitals are increasingly becoming little more than landlords.What Does A Hospital Do?
Let’s start with the basics.
A large share of the physicians you see in your typical hospital aren’t hospital employees. While hospitals generally have some physicians on hand, including a large share of newly minted medical school residents in training called “residents” and “interns”, the rest of the doctors at a hospital, merely have “privileges” to work at the hospital and are self-employed. They maintain their own offices, bill their own patients separately, and make a hefty profit doing so.
For example, if your children are born, as mine were, at Presbyterian/St. Luke’s Medical Center in Denver, neither the nurse-midwife or obstetrician, nor the anesthesiologist who provides the epidural, are hospital employees, even though they provide direction to the nursing staff. Likewise, it isn’t uncommon for physician’s assistants and laboratory tests to be independent of the hospital umbrella with separate billing done directly to patients.
This isn’t the only service that isn’t provided “in house.”
Everything Is Outsourced
Most hospitals outsource their laundry (although that isn’t usually billed separately to patients). Often collections and billing are also outsourced. But, this is hardly unusual in and of itself. Almost all organizations, profit and non-profit alike, outsource some services. In most businesses, a lawyer, a janitorial service, an accountant or bookkeeper, a grounds keeping service, a computer network consultant, and more act as independent contractors. But, non-profit hospitals typically go much further in the outsourcing department.
Presbyterian/St. Luke’s Medical Center, like the other hospitals affiliated with HCA in Colorado, contract out all of their operations to an outfit called “HealthONE.”
So, those nurses and hospital administrators you encounter when you arrive in the maternity ward? They’re not exactly Presbyterian/St. Luke’s employees. They work for HealthOne.
So, who is HealthONE?
“HealthONE, [is] a 50-50 joint venture between publicly-traded HCA of Nashville, Tenn. and nonprofit HealthONE Alliance[.]”
Actually, this time around, the Denver Post, quoted above, appears to have it wrong. As the Rocky Mountain News explains more fully:
This network of hospitals is jointly governed through HCA-Health-One LLC, while Nashville, Tenn.-based HCA handles the day-to-day facility management.
The joint venture was formed a decade ago during the hospital industry’s consolidation frenzy. Columbia/HCA, already owner of two local hospitals, bought Rose Medical Center in 1995 and then signed a deal to combine operations with a charitable hospital group then called HealthOne.
The joint venture took the HealthOne name, and the charity recently changed its name to the Colorado Health Foundation.
And, the Rocky Mountain News also isn’t convinced that this LLC is quite as straightforward as it is portrayed as being. Since HealthONE itself has only two owners, its own operations and records would normally not be a matter of public record, although this is modified somewhat by the fact that HCA must disclose its finances and operations to the Securities and Exchange Commission and to shareholders and analysts. (This will change when it goes private and Denver Post Columnist Al Lewis is also concerned, with some good cause, that the increased debt burden will put pressure on HCA to cut corners in patient care.)
The charitable side of the system is the 19th largest non-profit organization in Colorado.
The Charity Isn’t Involved In Day To Day Operations
So, back to the fuller question, “who is HealthOne and what does that mean to me?”
It means that while those nurses and hospital administrators that you encounter at the maternity ward may generate revenues for both for profit company HCA, and the non-profit entity called the Colorado Health Foundation, the administrators take their marching orders from the for profit HCA, and the nurses in turn take their marching orders from the for profit physician’s practices that have privileges at the hospitals, and from the administrators who take order from the for profit HCA.
The charitable owner in the HealthONE joint enterprise participates in running the hospitals only indirectly. It has a say in choosing the CEO and senior management of HealthONE, and HealthONE cuts it checks from time to time, when times are good, if it doesn’t choose to reinvest the funds in running the business. But, the basic premise of the HealthONE is that the non-profit hospitals have thrown in their bricks and mortar, their equipment and their longstanding reputations, while the for profit HCA runs the show.
In concrete terms, HealthONE has about 8,700 employees, while the charitable partner has about 140, most of whom are in charge of tasks like awarding and administering grants, and fundraising, as opposed to providing health care.
Is This Illegal?
Just to be clear, there is nothing clearly illegal about any of this. I’ve personally set up similar joint ventures involving non-profit hospitals and for profit owners of surgical centers (HealthONE owns nine). (The whole surgical center v. hospital dichotomy is also a product of the regulatory environment and another story.)
There are federal laws and regulations out there that are designed to prevent doctor’s from receiving kickbacks by referring their patients whose care is paid for with federal funds to entities in which they have a financial interest.
There are federal and state laws that prevent people affiliated from non-profits from receiving more than fair market value compensation for goods or services from the non-profit.
But, it is inevitable and necessary for almost every non-profit of any size to pay employees a reasonable wage for their services, and to obtain services in the marketplace from for profit vendors. Non-profits are also allowed to invest in for profit enterprises. From a tax law perspective, indirect ownership in a joint venture like HealthONE isn’t all that different from a private foundation investing in a mutual fund.
Playing an active management role in HealthONE would probably not cause a tax or state law problem for the Colorado Health Foundation, because providing health care is a core purpose of the charity. But, a charity whose objectives had nothing to do with health care would risk facing a special punitive tax known as the unrelated business income tax, or worse, loss of non-profit tax status all together, if they took an active management role in an organization like HealthONE. The conventional wisdom is that handing the reins over to HCA on a day to day basis is actually the conservative thing to do from a tax perspective for a non-profit hospital.
Why the “clearly illegal” hedge at the start of this section? Because, while it is clear that step by step that entities like HealthONE comply with all applicable federal and state laws, there is also a big picture question to address.
In the old days, when these charities were being formed, hospitals actually provided a nursing staff and hospital administrators of their own, and charity care, or at the very least, providing health care facilities that wouldn’t exist in the absence of a charity due to failures of a community to organize themselves collectively, had a clear charitable health care mission.
Now, it is getting harder and harder to see a connection between the hospitals themselves, and the charities. How can Presbyterian/St. Luke’s really be a non-profit hospital when a hefty take of the profits end up in the pocketbook of some mutual fund in New York? Sure, there is still a charity somewhere in the apparatus, but it is no longer clear that the hospital itself is charitable in any meaningful sense of the word. Life wouldn’t look much different from a charitable good perspective, if the charity sold out its interest in the HealthONE joint venture and invested the money in a diversified health insurance mutual fund instead.
What Does HealthONE own?
HealthONE’s facilities include:
*Medical Center of Aurora
*North Suburban Medical Center in Thornton
*Presbyterian/St. Luke’s Medical Center in Denver
*Rose Medical Center in Denver
*Sky Ridge Medical Center in Lone Tree
*Spalding Rehabilitation Hospital in Aurora and Denver
*Swedish Medical Center in Englewood
*Nine surgical centers
*More than 30 outpatient clinics
*Airlife (ground and helicopter ambulances).
Are Community Hospitals Better?
Not all hospitals are run by large publicly held corporations. Indeed, HCA is something of an exception to the general rule in that regard, although a notable one, because it is one of the biggest players in the Colorado health care provided market, along with Centura and Exempla.
But, that doesn’t mean that smaller non-profit hospitals are all that pure either. Non-profit status doesn’t actually mean that you can’t make a profit. Non-profit status simply means that profits, if any, can’t be distributed to private shareholders on account of their equity investments.
But, private hospitals still have to finance their capital projects somehow. Frequently non-profits do so, in addition to fund raising campaigns, with bank loans or by issuing bonds at a market rate interest rate, which can pay interest to private parties for their investment in the enterprise.
And, while non-profit employees can’t receive an excess benefit that amounts to a dividend, this doesn’t prevent hospital administrators, senior nurses and those physicians who are employed by the organization from being compensated generously within reason. It also doesn’t require hospitals to drive particularly hard bargains with their for profit vendors, so long as the deals aren’t giveaways. Likewise, non-profit status imposes no limitations on the incomes that can be earned by the physicians who merely have “privileges” at a non-profit hospital.
A community hospital that doesn’t outsource its entire operations is arguably under less pressure to cut costs and increase revenues than a partnership only half owned by a charity. Being outside a major hospital network also generally spreads the wealth that the hospital generates more widely.
But, it is only a myth that non-profit hospitals have an enforceable legal obligation to, or do, provide better services for lower prices as a result of their non-profit status, or that they have to meet specific obligations to provide charity care. Usually the excess of revenues over expenses goes partially towards “empire building”, partially towards greater generosity towards high level employees and private vendors than a for profit entity might be inclined to afford, and only partially towards a relaxed attitude about bad debt, which sometimes morphs into charity care.
But, the issue of charity care in non-profit hospitals is a story for another day.
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