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Retired cardiologist: Efforts to maximize hospital profits leads to higher healthcare costs

A 2013 study showed that charity care constituted only 1.9 percent of nonprofit hospitals' operating expenses.

Jeff Lagasse, Associate Editor

A retired cardiologist, writing in the American Journal of Medicine, has claimed that there is an accelerating drive toward maximum profitability for hospitals, even nonprofits, and that this drive is fueling higher healthcare costs.

In 2013, seven of the 10 most profitable hospitals in the country were nonprofits, including the top four. And two on the list, Stanford at number three and the University of Pennsylvania at number seven, are teaching and research hospitals.

In his commentary, Robert Doroghazi, MD, traced this acceleration all the way back to 1969. Just four years removed from the establishment of Medicare and Medicaid, the Internal Revenue Service revised the standard for what constitutes tax-exempt status, changing it from charity care to the more vaguely-defined "community benefit." Nonprofits, said Doroghazi, used this as a go-ahead to maximize profits.

[Also: Prestigious nonprofit hospitals are pretty good at driving profits]

By 2002, the Congressional Joint Commission on Taxation estimated the value of nonprofit tax exemption at $12.6 billion, and the trend continued, such that in 2009 the IRS required all hospitals claiming tax-exempt status to comply with new standards on what constituted community benefit. The goal was that nonprofit hospitals would spend at least 5 percent of their revenues on charity care, according to Doroghazi, but that goal was not met.

Instead, it accelerated. By 2011 it was estimated that the value of the tax exemption had skyrocketed to $24.6 billion, and a 2013 study showed that charity care constituted only 1.9 percent of nonprofit hospitals' operating expenses.

Doroghazi claims that much of the increase in hospital profit has gone into executive compensation. CEO pay was up more than 24 percent from 2011 to 2012, he said, and over those two years, 30 executives at nonprofit hospitals made more than $4 million in one year. Two made more than $10 million, and one made more than $20 million.

[Also: Nonprofit healthcare margins to buckle under value-based pay]

There are only a limited number of ways a hospital can generate the excess revenue to pay investors a profit, said Doroghazi. One way is to provide better and more efficient care, but Doroghazi doesn't see much of this happening; instead, he surmised that hospitals are charging more to make up the difference. Or they're "cherry-picking" their patients, minimizing the ones who can't pay while maximizing the profitable ones, especially those requiring high-end procedures.

"I believe the quest for profits between all hospitals, nonprofit and for-profit, has been one of the main drivers causing our healthcare costs to be the highest in the world, far outstripping inflation," he wrote.

He said Congress needs to redefine what it means to be a nonprofit: One that has zero profit aside from that which is necessary to maintain operations, reserves, and funds for future capital investments.

Twitter: @JELagasse