Hospitals made $21B on Wall Street in 2016, but are patients seeing those profits?
By Martha C. White, NBC Business News; February 7, 2018
The booming stock market has been good for ordinary Americans with retirement accounts, and it also has enriched another class of investors to an extent some find problematic: Some medical economists say that nonprofit hospitals are using lucrative Wall Street portfolios to fatten their bottom lines rather than lower what patients pay for health care.
“The tenor and the responsibility of hospital CEOs has now changed over time,” said Gerard Anderson, a professor of health policy, management and international health at the Johns Hopkins University Bloomberg School of Public Health. “They focus on the bottom line and … they get performance ratings based on profitability,” he said.
Stock market growth and what it means for America
Gary Young, director of the Center for Health Policy and Healthcare Research at Northeastern University, said that “some hospital systems are fairly profitable, but many are not.”
“A general principle is that about one-third have margins that are above zero,” he said. “Probably about one-third of hospitals are pretty close to zero, particularly when you talk about patient care, and about one-third are running in the red.”
Sam Richardson, a health economist at Boston College, said, “It’s kind of tricky because the most profitable hospitals are extremely profitable, but there are a lot of hospitals that are losing money.”
“Smaller hospitals and those in rural locations, as well as a number of large teaching colleges, struggle just to break even, he said. “The question is, how can we pay the profitable ones less without bankrupting the ones that are not profitable or losing money?”
An Axios financial records analysis found that the largest nonprofit hospitals earned a collective $21 billion in investment income last year, money that nearly tripled their 2.7 percent operating profit on patient care. The 6.7 percent profit margin these hospitals earned more than doubled from the previous year.
“There’s nothing wrong with doing that — it diversifies the risks they face associated with patient care revenue,” said Martin Gaynor, professor of economics and health policy at Carnegie Mellon University. “But the overall question, if a hospital, particularly a not-for-profit hospital, has earned a lot, is, what are they doing with those profits?”
The largest nonprofit hospitals earned a collective $21 billion in investment income last year.
William Gentry, an economics professor at Williams College, said there are valid reasons for nonprofit hospitals to hold investment portfolios: Lenders need to see that they have funds on hand before hospitals can take on debt to expand, buy new equipment or make other investments.
“They would say it’s because they want to have a reserve when things go bad,” Anderson said, but added that the current unprecedented bull market has some questioning whether patients should also be deriving some benefit.
“Overall, it’s a good thing — we want the hospitals to be financially viable. However, it’s not clear to me that they’re channeling those profits to give patients lower prices,” said Ge Bai, an assistant professor of accounting at the Johns Hopkins Carey Business School who studies health care economics. “We’re not seeing that.”
As far as patient care costs go, hospitals are locked into a Byzantine system in which the price of anything from an aspirin to an angioplasty is determined by who or what is responsible for picking up the tab.
“The idea of costs in the hospital sector makes no sense,” Anderson said. In general, hospitals lose money on Medicare and Medicaid patients, but make up for that by charging private-sector insurers more.
“It’s not clear that they’re channeling those profits to give patients lower prices.”
“You’re basically cross-subsidizing because of case mix,” Gentry said. Ideally, these patient-care income streams will balance out, but that’s not always the case, he said.
The upshot is that patients, especially those without insurance, can get stuck in the middle. “If you have a small rural hospital that’s Medicare-dependent or an inner-city hospital that’s dependent on Medicaid, they’re losing money. That’s why rural hospitals are in trouble right now,” Gentry said.
Health economists describe the current dynamic as a sort of arms race, with health care providers and insurers each trying to gain market share to get more negotiating leverage.
“If you get a lot of market power on the health insurance side, they’re going to be able to negotiate lower payment rates with hospitals if the hospitals don’t have a lot of market power, but then they’re not passing those savings along to the enrollees in their insurance plans. They’re just pocketing the profits,” Richardson said.
Hospitals have an incentive to reinvest Wall Street income into growing their networks in order to compete. “To acquire hospitals you need to have money. If you want to be the biggest hospital system in your community you have to have a lot of money,” Anderson said.
But bigger hospital networks don’t necessarily mean better, or cheaper, health care for patients.
“There’s no one factor behind that, but lack of competition is certainly an important one,” Gaynor said. “In many areas of the country, hospitals don’t face a lot of competition.”The complications of evolving health care costs
There isn’t a simple answer for resolving this, experts say, in part because the trends shaping how Americans get and pay for health care have been evolving for decades, although the increasing cost of care and the growing extent to which that is borne by patients today have brought the industry to a tipping point.
“When health care costs more, that means health insurance premiums are higher and when premiums are higher, employers pay more,” Gaynor said. “Employees indirectly pay for most of that,” he said, either by receiving less in wage increases than they would otherwise, or shouldering higher premiums, deductibles and co-pays. “All of those things have been happening.”
And unlike most other types of purchases, the opacity of the health care marketplace means Americans can’t shop for a tonsillectomy or knee replacement the way they would for a car or a computer. “We don’t have the robust consumer market we’d like to see for shopping for health care service… There are still a lot of barriers for consumers to really shop effectively,” Young said. “We see a lot of variations in prices of providers that cannot be explained by quality of care considerations.”
The rapid growth of high-deductible health plans has forced the issue into sharper focus. Especially in the early part of the calendar year before deductibles have been met, people face more aggressive billing and collections departments, and policies that may demand they pay for surgeries or other procedures before they even take place.
“If people are paying more out of their own pockets, that’s not necessarily a bad thing, but there is a concern that, when faced with higher expenses, people might forgo care, cut back across the board even on treatment that they should be getting,” Gaynor said. “If somebody lets a heart condition go untreated, that potentially could be serious.”