Thursday, June 30, 2022

‘Profits over patients’: Study finds charity care lackluster for nonprofit hospitals that enjoy tax-exempt status

Nonprofit hospitals in North Carolina on average spend less on charity care than they end up saving on taxes, according to an analysis produced by Johns Hopkins University researchers. (Port CIty Daily photo/File)

A study requested by State Treasurer Dale Folwell conducted by Johns Hopkins University researchers found that nonprofit hospitals in North Carolina operate on average with profit margins three times higher than the national average, delivering less charity care than the organizations end up saving by not paying taxes. 

Hospitals can avoid paying taxes by operating as nonprofits. This designation is possible through the Internal Revenue Service requirement that the organizations provide a community benefit. Last year, N.C. hospitals received $1.8 billion in tax breaks, while one-in-five families’ medical debt was in collections, the study found.

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So long as the systems engage in charity care and stay up-to-date on tax filings, they can maintain nonprofit status. No regulation or agency oversees the charity care spending process; there are no minimum requirements for the provision of charitable expenses or any rules that would christen when hospitals’ spending on low-income patients merits a tax-exempt status.  

In the void of such rules, N.C. nonprofit hospitals’ charitable spending is paltry, the study finds. Charity care includes free or reduced-cost services paid to qualifying low-income patients. According to the IRS, factors that contribute to charitable hospitals providing a community benefit include an ER open to the public (available regardless of ability to pay), offering care for all paying patients, relying on a community-based leadership board, and using surplus funds to invest in facilities, research, and education. 

Released Wednesday morning, the study concludes the hospitals don’t appear to warrant their tax-exempt status. It begets a series of questions among taxpayers, according to Dr. Ge Bai: “Why should the taxpayers continue to subsidize these nonprofit hospitals? And why should local communities be deprived of their property tax revenues and other tax revenues that would allow them to fund local schools, parks and other public services?”

A professor of accounting at Johns Hopkins University, Bai said her team agreed to Folwell’s request to study North Carolina hospitals, as she was already conducting national research on the matter, determining hospitals’ profit margins are climbing nationwide. Bai undertook the N.C. project at no cost, she said in a virtual press conference Wednesday. 

A majority of the state’s hospitals (85%) are nonprofits. Of the 99 nonprofit hospitals, the average profit margin was 8% and the average proportion of charity care to overall expenses was 3.8% during the 2019 study period. 

Among all the state’s hospitals, the average profit margin was 10.9%, including non-patient revenue from investments or other inputs. At this rate, the hospitals are outperforming other economic sectors –– cable TV, agriculture, and even closes in on the alcohol industry. 

New Hanover Regional Medical Center, then independently operated prior to the February close of the $1.5 billion sale to Novant Health, operated at an 8% profit margin and spent 2.2% of its expenses on charity care in 2019, slightly below the nonprofit state average. 

Dosher Memorial in Southport was one of the least profitable (operating 3% in the red) and spent one of the smallest proportions of its expenses on charity care (0.5%). Pender Memorial Hospital, the least profitable nonprofit in the state by far, operating at an 8% loss, spent 1.6% of its expenses on charity care –– a higher share than several hospitals with double-digit profit margins. (Pender Memorial was absorbed by Novant in the NHRMC sale.)

This trend is not unusual, according to the report. Hospitals with the largest profit margins provided the least amount of charity care relative to their net incomes; those operating at a loss and with the narrowest profit margins “shouldered a larger burden of charity care spending relative to their financial ability to support such spending,” the report found. The two most generous hospitals as a proportion of their spending operated in the red. 

According to the analysis, Novant Health avoided $324.2 million in taxes while spending nearly half of that on charity care, at $179 million, the researchers estimated. Meanwhile, the nonprofit system maintained $2.4 billion in net capital assets and $3 billion in unrestricted reserves. 

Bai said there are no regulations governing the storage of these reserves. 

“These entities are as much investment firms and real estate development firms as they are providers of healthcare,” Folwell said. The treasurer clarified his statements do not reflect healthcare workers but are instead directed to “the multi-million-dollar executives who run these multi-billion-dollar nonprofits.”

He cited Charlotte-based Atrium Health’s $7-billion savings –– nearly twice the amount of the long-term debt of the state of N.C. “All that profit was made on the back of a sick person, every piece of it,” he said.

Folwell has forged a “crusade” against clandestine industry practices in recent years, championing price transparency in the field and strong-arming corporate executives who deny access to financial records. 

His primary interest in the cause is flattening the state’s enormous annual premiums: One week of a state employees’ (teachers and other public servants) wages each month pays for health insurance. Nearly 750,000 workers in N.C. fork over huge chunks of their paychecks for these premiums, with the state –– the largest healthcare customer –– shelling out $3 billion annually on insurance and medicine. 

“We are on an unsustainable path,” the treasurer said of the State Health Plan. Charity care spending is frequently cited by hospital executives as a reason why they can’t lower costs, Folwell said, with those able to pay theoretically subsidizing those who can’t. 

The Johns Hopkins report bursts this excuse, he concluded.

“We have seen the cartelization of healthcare in North Carolina over the last four years,” Folwell said, citing the definition of a cartel as an association formed to restrict competition and raise prices. “[S]topping the cartelization means the stopping of the borrowing, stopping the buying and stopping of the building.”

Hospitals restrict the supply of care and charge rates they choose for consumers who don’t want, but need the product, he explained. “When they’re asked about what this product may cost, [customers are] looked at as if they have three eyes,” he said. “Imagine a product that you don’t want to consume, they won’t tell you what it cost, and then when you don’t pay for something you didn’t want to consume and weren’t told what it cost, then your credit’s destroyed.”

Yale economists have found where there is market consolidation of healthcare, prices rise. The treasurer has been vocal about this trend since before the NHRMC-Novant sale, even drawing the ire of the county-appointed group tasked with recommending a buyer in public advertisements. Since the sale, Novant has vowed to keep healthcare costs low. 

The transaction actually bulked up the hospital’s charity care policy: NHRMC now comps all treatments for patients earning up to 300% of the federal poverty level ($79,500 for a family of four). Before the Novant sale, NHMC’s charity care policy financed patients at up to 200% of the poverty line.

A Novant Health and New Hanover Regional Medical Center spokesperson redirected a request to comment on the report to the North Carolina Healthcare Association. Cynthia Charles, vice president of the association, wrote in an email the organization is still reviewing the report and can’t yet comment on its accuracy or fairness. 

“​​However, we find it appalling that the Treasurer is publicly attacking hospitals right now, especially after all that they have done the past 19 months to respond to an unprecedented, sustained pandemic where the state has seen more than 1.47 million COVID-19 cases,” she wrote. 

The report does not reflect the millions spent annually on disaster preparation investments or expenditures on research and graduate medical education, according to Charles.

“Non-profit hospitals are out in their communities on the frontlines of addressing many social needs ranging from food insecurity to homelessness,” she wrote. “In addition, being in good shape financially allows non-profit hospitals to continue to operate and employ staff at appropriate levels to provide patients with the safe, high-quality care they need and deserve.”

Charles provided statistics for the study period year (2019) that tally, of the organization’s 130 members, $1.12 billion was spent on charity care; $866 million was lost through Medicaid; $2.5 billion was lost through Medicare; and $883 million of bad debt went uncollected.

Reporting government-insured “losses” as a community benefit is a controversial practice, according to the study. 

During the NHRMC bidding war last year, both Novant and Atrium included Medicare underpayments to beef up the size of their community benefits spending, the study observes.  

Many nonprofit hospitals inflate community benefit spending by including “underpayments” from government-backed insurance programs. Most systems fold in the difference between the private rate of care versus what gets reimbursed through the federal programs when tallying their community benefit (private insurers are charged 273% more than Medicare in N.C., higher than the average national markup, according to the study). 

The Johns Hopkins study questions the revenue loss claimed by these underpayments, pointing out research that found more efficient hospitals had higher Medicare margins compared to less-efficient hospitals. 

Folwell called for the legislature to introduce auditable and accountable benchmarks for hospitals’ charity care spending; other states, including Illinois and Utah, require hospitals’ charity care expenses to exceed their property tax exemptions.

“The concentration of power in the hands of few … is something that can no longer continue because the consumers of this state, have not, will not, and will never be protected as long as this occurs,” Folwell said.

Below, view local nonprofit hospitals’ profit margins and charity care shares. Note, the 2019 study period occurred prior to the 2021 NHRMC-Novant sale: 

Hospital NameCounty NameTotal Profit Margin (%)Charity Care (% of expense)Health System Name
New Hanover Regional Medical CenterNew Hanover7.992.26Independent*
Pender Memorial HospitalPender-8.391.67Independent*
Brunswick Community HospitalBrunswick2.177.15Novant Health
Brunswick Community HospitalBrunswick2.177.15Novant Health
*Both systems are now operated by Novant Health.

View the full report below:


Send tips and comments to Johanna F. Still at johanna@localdailymedia.com

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