WASHINGTON—Seven of the 10 most profitable hospitals of 2013 in the U.S. were nonprofit, according to a new study by Johns Hopkins Bloomberg School of Public Health and Washington and Lee University, published in the current issue of Health Affairs.
“All hospitals should make a little profit,” said Ge Bai, PhD, CPA, assistant accounting professor at Washington and Lee University, “but some hospitals are obtaining outrageous profits.”
The study found that the median hospital lost $82 per patient, but 45 percent of hospitals were profitable. A small percentage of hospitals, the top 2.5 percent, earned over $2,475 per discharged patient. The top-earning hospital, Gundersen Lutheran Medical Center in La Crosse, Wisconsin—a nonprofit institution—earned a profit of $302.5 million, which translates into $4,241 per patient.
“A small subset of nonprofit hospitals are earning substantial profits,” said study leader Gerard F. Anderson, PhD, professor at the Bloomberg School. “Either they’re doing something right or they are taking advantage of a flawed payment system. Perhaps the most important question is what are they doing with all of that money?”
Anderson and Bai examined over 3,000 acute care hospitals; 59 percent were nonprofit, 25 percent were for profit and 16 percent were public hospitals. Profitability was calculated as net income from patient care services, excluding profits from investments, charitable contributions, tuition, parking fees, the hospital cafeteria and rental space.
Anderson says that the most profitable hospitals are located in areas where they have a monopoly or near- monopoly in their community, which allows the hospital to charge insurers high rates. Insurers are often forced to pay these higher rates because they need to include the hospital in their network in order to attract customers.
The most profitable hospitals tended to share certain characteristics including higher price markups, being part of a regional hospital system and having a monopoly or near monopoly in an area. Hospitals treating more Medicare patients, located in counties with more uninsured patients or in areas where insurers and HMOs have more power tended to be less profitable. Small (50 beds or less), rural and teaching hospitals lost more money than larger, urban hospitals with a minor or no teaching component.
The researchers noted that Medicare and Medicaid payments in 2013 were based on a fee-for-service model. However, a new value-based model is being phased in during the next few years. Bai thinks that it is possible that under the new system, different hospitals will be more profitable, since the old system incentivized hospitals to conduct more tests and procedures while the new system rewards hospitals with the best outcomes.
“The system is broken when nonprofit hospitals are raking in such high profits,” said Anderson. “The most profitable hospitals should either lower their prices or put those profits into other services within the community. We need to develop incentives that allow all hospitals to make a fair profit while at the same time keeping prices reasonable.”