U.S. hospitals generally have three kinds of financial structures. We’ll dive into each below.
They are the traditional variety, and the most common, accounting for 58 percent of all hospitals. The term nonprofit – the same as “not-for-profit” – doesn’t mean they are no profits. Many nonprofit hospitals make big bucks. Nonprofit means that they are tax-exempt; they generally don’t pay taxes on income and land although cash-strapped cities and states are increasingly asking them to contribute. Nonprofit hospitals also have to give “community benefits,” giving charity care and doing other good deeds. Nonprofits are predominate in the northeast and Midwest.
They refer to those owned by investors, comprising about 20 percent of the hospital market. They are often publicly traded and are in business to reward their investors. You’ll find they also are more common in the south and the west.
Government-owned or public hospitals
They make up 22 percent of the hospital pool. Major cities tend to have at least one public hospital, which cares more for the indigent.
Identifying the kind of hospital is a critical first step because it will dictate which documents you can get.
How hospitals make money
Hospitals earn nearly all their revenues from patient care. Nonprofits have the extra advantage of earning money from investments while public hospitals are often supported by taxpayers.
The big payers for hospitals are Medicare for the elderly/disabled and Medicaid for the poor. They account for 56 percent of hospital revenues on average while individual insurance companies make up most of the rest.
The more a hospital gets from government funders – Medicare and Medicaid – the worse its finances are likely to be. That’s because the government tends to pay less than commercial insurers.
Medicaid is typically the worst payer. So that’s a big reason why hospitals in poor areas may suffer while those in rich areas tend to do pretty well.
Some experts say “payer mix” is destiny because it can really drive the numbers.
Hospitals are low-margin business
Even though hospitals are huge enterprises – collecting hundreds of millions of dollars a year or more – their profit margins tend to be pretty slim.
Most hospitals have an operating margin of 1 to 5 percent, meaning they keep one to five cents for every dollar of revenue. A really strong hospital (with a lot of commercially insured patients) will have more than a 10 percent margin. By contrast, pharmaceutical companies regularly have a 20 percent margin or more. Newspapers used to have margins in that range too, but not anymore.
The low operating margin for hospitals means that just a few changes can knock them into the red, such as a cut in state Medicaid or a slash in federal Medicare payments. This is why hospitals often employ teams of lobbyists to represent their interests at the state and federal levels.
Nonprofit hospitals are supposed to do charitable things for the community in return for their tax-free status. This is a huge issue because some hospitals have been doing far less than others. Congress and state attorneys general have been scrutinizing this trend. Illinois famously revoked the nonprofit status of a hospital after finding that its community benefit was near zero. The new IRS form 990 (one of six key documents described below) sets out the most specific definition yet for community benefit.
Nonprofit hospital boards
Nonprofit hospitals are run by self-perpetuating boards, whose members are not required to have financial or health care experience. They often are the richest people in the community and are put there for their contributions. They are the ones who hire and fire the CEO and bear ultimate responsibility for a hospital’s performance. Yet reporters often overlook their dominant role.
Surprisingly, board positions can be handed down in families for many generations. It may be hard to rock the boat when your name is on the wall. Board members who work for the hospital have a clear conflict of interest in favor of the current administration.
The Obama health care bill
The health care law has a huge impact on a hospital’s finances and quality. The law requires hospitals to:
- Conduct a community health assessment every three years and show how it will improve health.
- Adopt clear financial assistance policies for emergency care.
- Limit charges to uninsured patients to amounts billed on behalf of insured patients.
- Follow proper debt collection practices.