In the present, highly-charged US Deficit Debate, health care costs are certainly front and center. Clearly, health care costs need to be drastically reduced, not just to reduce the Deficit, but just as important, to spark long-term economic growth and job creation.
But the focus of so many people on this critical issue is for US citizens, who are Medicare and Medicaid recipients, to bare a substantial part of the burden necessary to reduce future health care costs.
In a past post, I have shown the incredible windfall profits in the past decade of Big Health Insurance Corps, and in all fairness, this industry should be ponying in a lot of money to reduce future health care costs.
And in like manner, Big Pharma should also be sharing in reducing future health care costs.
But the one industry that just about everyone, both Democrats and Republicans, seems to protect in this debate is the Hospital Industry, and particularly the massive Non-profit Hospital Industry.
To get a better understanding of Big Non-Profit Hospital finances, and how much this industry should be sharing in this burden to reduce future health care costs, let me present below some extensive research I previously performed on Non-profit Hospital finances and the Health Care Debate. I posted this article a couple of years ago when the Affordable Health Care Plan was being debated. I only included below the parts of this article that I think are still particularly highly relevant to the current Deficit Debate.
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Many sick patients and their loved ones are astonished by just how high many of their hospital bills have been. And these steep hospital fees have been one of the main causes of many financial bankruptcies of sick patients and their families. Also, there is the additional stress while sick in the hospital, worrying constantly about the financial burden the hospital fees are placing on yourself and on your loved ones.
Given this, let me thoroughly study numerous “Non-profit” hospital audited financial statements, including their related footnotes, to see if I can provide a better understanding of just what hospitals do with these massive amounts of cash inflows from providing patient services.
Non-profit hospitals claim that they need these high prices for patient services just to cover their costs, since they are essentially “non-profit”, thus they make little in the way of money. And then they also assert that they need this high cash inflow due to their substantial capital expenditure needs.
Well, from thoroughly studying these issues, I find just the opposite to be the case. Non-profit hospitals have been quite profitable.
A normal year was 2007, where from my extensive sample, my estimate is that the total ongoing core operating earnings of all US Non-profit hospitals, including state and local governmental ones, were a staggering $38.7 bil. And even in the financial meltdown of 2008, my estimate is that these ongoing operating profits were $30.8 bil.
Also, of the 83 Non-profit hospital organizations I included in my sample, 75 of them, or 90%, had positive ongoing Net Operating Income in 2008. Further, despite the very economically troubled 2008, Estimated Total Operating Revenues of all Non-profit hospitals for 2008 were up 8.4% over 2007. Now that is what I call the closest thing to a recession-proof industry.
In deriving these ongoing core operating profits, I am excluding the non-operating items, consistent with how the Non-profit hospitals present their income statements. Dominating these non-operating items are the gains and losses, mostly unrealized, from these hospitals holding just massive amounts of investments in debt and equity securities on their balance sheets.
In 2007, there were tons of investment gains, which were mostly excluded from ongoing Net Operating Income. And in the horrible stock and bond markets of 2008, there were even more investment losses, which were again mostly excluded from ongoing Net Operating Income.
I sampled and reviewed in depth the audited financial statements of 83 Non-profit hospital organizations, owning and operating a total of 737 hospitals, and generating Total Operating Revenues of $180 bil in 2008, $159 bil of which were Net Patient Service Revenues. From additional study, my best estimate is that these revenues in my sample comprise 18% of the total revenues of all US Non-profit hospitals. Here are the 2008 totals of the salient balance sheet items for my 18% sample:
First, some of their key assets:
• Investments………………………….........$ 85 bil
• Cash and cash equivalents………….....$ 10 bil
• Property, plant and equipment, net..$ 86 bil
• Total assets…………………………..........$228 bil
And then, how these assets were financed:
• Total interest-bearing debt…………….$ 66 bil
• Net assets, or Equity…………………....$107 bil
When I visualize hospitals, I see just tons of land, buildings and equipment, everywhere. Thus property, plant and equipment must dominate the balance sheet assets of hospitals.
But guess what? These hospitals sampled have more in cash and investments ($95 bil) than they have in property, plant and equipment ($86 bil).
And yes, these hospitals have $29 bil more of cash and investments than they owe in mostly tax-exempt, low-interest rate debt (some financial pundits might even call this clever-by-half investment tax arbitrage). But anyway, a significant portion of the cash inflow from patient service revenues has been squirreled away as treasure chest investments on Non-profit hospital balance sheets.
Perhaps the key number above is the Net assets of $107 bil. The bulk of this number results from the accumulated untaxed profits, built up over decades, by Non-profit hospitals. And when I apply my 18% sample to the universe of all US Non-profit hospitals, I get Net assets of roughly $600 bil.
Thus, if I were looking for ways to finance the new US health care legislation, one of the first places I would look is this financial treasure chest of Non-profit hospitals. To be fair, I think a good chunk of this money should be used to reduce future Medicare and Medicaid fees of all hospitals, particularly given all the greedy hoarding of decades of untaxed profits resulting from steep patient fees, coupled with the substantial tax arbitrage used to help build up this massive treasure chest of investments.
I don't know if the Non-profit hospitals, or any hospitals for that matter, can now do too much for the past financial bankruptcies of very sick patients, but at least they can all help prevent many future financial bankruptcies by chipping in with a healthy amount of future Medicare and Medicaid fee reductions to help fund new US health care legislation.
I am not a tax expert, but let me give a very simple illustration as to why I think this tax arbitrage is unfair.
A Non-profit hospital generates a bunch of income from its hospital operations. None of this income is taxed. With say the $100 mil of cash accumulated from these untaxed earnings, the Non-profit hospital invests $100 mil in Taxable Bonds, that yield say 6%. The annual $6 mil of interest received is tax free to the Non-profit hospital, even though these are taxable bonds.
Now, the hospital wants to make some capital improvements that cost $20 mil. The hospital can borrow at say 3.5% using its tax exempt status. Or the hospital can sell $20 mil of its 6% taxable bonds, and use the cash proceeds to pay for the capital improvement. By retaining all $100 mil of its 6% Taxable Bond Investment, and selecting the 3.5% tax exempt borrowing route, the hospital gets a positive interest income arbitrage of the interest spread, or 2.5%, which is also tax free.
It seems to me that the Non-profit hospitals start out as just that...hospitals, but over time, end up also operating in part as financial institutions....and in total, the investments of all Non-profit hospitals are more than $400 bil, and the interest-bearing debt is more than $300 bil. That results in a lot of tax arbitrage.
I bet other financial institutions wish they could borrow money at a low tax exempt interest rate, invest in much higher yielding taxable debt securities, and then get tax free income to boot.
But that just addresses the financial windfall the US Non-profit hospitals have already experienced. Now let me turn my attention to what impact the new US health care legislation will have on Non-profit hospitals.
Well, there are going to be substantially more cash collections by US hospitals from their patient services. First, there will be many more insured. And second, there will be many less underinsured.
Let me attempt to predict what the financial impact of the new US health care legislation would have been on US Non-profit hospital operating earnings for the most recent 2008 year. In doing so, I think the main focus should be on three key operating numbers. And I will spread the results of my healthy 18% sample over the universe of all US Non-profit hospitals.
First, Total ongoing Net Operating Income for all US Non-profit hospitals, including the local government ones, is estimated to have been $30.8 bil for 2008. This ongoing Net Operating Income number includes interest expense as a reduction, but does not, for the most part, include ongoing interest income and dividend income. In essence, the difference between the Net Operating Income number and the bottom line Net Income or Net Loss number are continuing interest and dividend income and also the investment gains or losses, much of which are uncontrollable, unpredictable and mostly unrealized.
Second, Bad Debt Expense, also called Provision for Uncollectible or Doubtful Accounts, is a particularly key number because with the new US health care legislation, most of the uninsured will now be getting insured and also many of the underinsured will now be getting much better insured. Therefore, I think the Bad Debt Expense of all hospital organizations should drop precipitously, in the range of a 60% to 80% reduction, depending upon to what degree the new health care plan reduces the number of both the uninsured and the underinsured. In my analysis here, I’ll conservatively assume only a 60% reduction in Bad Debt Expense from the new health care legislation.
The Bad Debt Expense number, which is already included as a charge on the income statements of Non-profit hospitals, has been very substantial. For 2008, it is estimated to have been $50.5 bil….that’s correct, 64% higher than the total operating earnings number of $30.8 bil. Assuming a 60% Bad Debt expense reduction from the new US health care legislation, 2008 earnings would have increased by $30.3 bil, or 60% X $50.5 bil.
Yeah, that's a doubling of operating earnings just from Bad Debt expense reductions. Non-profit hospitals have to be clearly aware of the magnitude of the windfall earnings they will be receiving here; my hunch is that many of them just hope the US government doesn't also catch on.
And third, the total amount of Charity Care provided, which is required to be disclosed in Non-profit hospital footnotes, is estimated to have totaled $49.9 bil for 2008. When I review the disclosures of this item, I find inconsistent treatments. Some Non-profit hospitals disclose their revenues foregone from charity care provided. On the other hand, some other hospital organizations, particularly the Catholic organizations, instead more conservatively disclose their actual cost of charity care provided.
With the new US health care legislation, where many of the uninsured will now be insured, the additional net patient service revenue from previously unrecorded charity care income should increase by quite a bit, I think in the range of 40% to 60%, depending on just how extensive the changes in health care legislation end up being. To again be conservative in my analysis here, I’ll assume that the operating earnings would get increased by only 40% of the estimated disclosed charity care provided amounts. Thus under this 40% assumption, 2008 earnings would have increased by an additional $20.0 bil, or 40% X $49.9 bil.
Yeah, that’s correct, for just these two key changes (i.e. Bad Debts expense and Charity Care income), it is estimated that 2008 Net Operating Income for all US Non-profit hospitals would have increased from $30.8 bil to $81.1 bil. And yes, that is an increase of more than $50 bil, or an increase of a staggering 163%.
And that $50.3 bil of increased profit is just for one year. If you assume 5% growth each year, then guess what the total increased profits from new health care legislation of all of these Non-profit hospitals will be over a ten-year period, starting after the bill totally kicks in? Would you believe $804 bil? Well, with the above assumptions, it's true.
And then the additional tax arbitrage income on this $804 bil would amount to another more than $100 bil over that same ten-year period.
If these Non-profit hospitals were publicly-held corporations, the market prices of their common stocks would be going through the roof! And guess what the average increase in the stock price of publicly-held hospital companies was so far in 2009? Would you believe 231%? It's true.
And really, the above increases in Net Operating Income are probably light because I have excluded the impact of the additional patient service revenues resulting from the previously uninsured and underinsured now having more hospital visits due to the much lighter financial burden from the much better insurance.
But what should be done about these huge windfall earnings increases of US hospitals resulting from the new health care legislation?
Just like her very fortunate and shrewd health care sisters (the Health Insurance Industry and the Big Pharma Industry), the Non-profit Hospital Industry has also thrived very well financially in health care, and has done so mostly under the radar screen.
Her first sister, the Health Insurance Industry, has only recently been called out for her windfall profits earned in the 2000s.
And her second sister, Big Pharma, has one-upped her siblings by shifting much of her income to low-taxed international tax havens.
And the third sister, the Non-profit Hospital Industry, has been blessed with one advantage that even Big Pharma doesn’t possess…she doesn’t have to pay any income tax at all on her income….she is just allowed to hoard the money in her investment treasure chest, which she hopes will keep growing tax free, although the financial meltdown of 2008 and early 2009 didn’t work out too well in this respect. However, she has to be extremely elated with the Obama Administration-driven upward explosion of the stock market since early March 2009.
And now with the new health care legislation, all of the Triplet Sister beneficiaries here of health care will be further blessed with both the many new-born insured and the better insured. Thus, I think it is only fair that all three of these fortuitous sisters should ante up a lot more money than they have so far agreed to pay in order to fund the new health care legislation.
Now let me turn my attention to the income tax issue of Non-profit hospitals.
The main argument that has been asserted for a Non-profit hospital not getting taxed on its income is that the hospital provides a substantial community benefit. However, the overwhelming majority of this community benefit amount, the charity care provided, is being dramatically reduced with the new health care legislation. Most of the uninsured charity care sick that have been treated in hospitals for free will now have insurance coverage under the new health care legislation.
Also, there will be an increased emphasis on treating the ones that aren't covered by insurance in Community Health Clinics.
Thus, the amount of charity care provided by hospitals will drop precipitously. Therefore, it is only fair that the income tax rules related to Non-profit hospitals also be significantly altered.
I think that any Non-profit hospital organization, not meeting a rigid community benefit test, should receive no federal income tax exemption at all. Thus, these hospitals should be taxed at 35% on all of their income.
And then I would consider giving all Non-profit hospital organizations, which continue to meet a rigid community benefit test, a generous federal income tax exemption each year, but for only a certain percentage of their total operating revenues for that year. From my extensive sample, ongoing Net Operating Income as a Percentage of Total Operating Revenues was, in the aggregate, 4.1% for 2007 and 3.0% for 2008. Thus, I think a fair tax-free income exemption might be perhaps 4% or 5% of Total Operating Revenues. And then any income above this 4% or 5% of Total Operating Revenues threshold gets taxed at 35%.
And then there should be good controls in place that will disallow stripping out excess earnings through any means of unreasonable compensation or excessive employee benefit increases.
Let me now provide some comments on my research.
In my research of Non-profit hospitals, I ended up sampling a substantial portion of all US Non-profits and local governmental hospitals located in the State of Indiana, since all of these Indiana hospitals are required to file online audited financial statements each year with the Indiana Dept of Health (Score one for Indiana’s out-front financial transparency here).
I also included in my sample all the large Catholic hospital systems, where I could find audited financial statements on the Internet, which was the case for nearly all of them.
And lastly, I included many large non-Catholic, Non-profit and governmental hospitals, where I could locate their audited financial statements on the Internet. I found the internet site dacbond.com particularly helpful here.
I excluded from my sample several hospital organizations because their audited information disclosed was either incomplete or highly unusual.
My estimate is that in total, my Non-profit hospital audited financial statements sampled covered about 18% of the total estimated Net Patient Service Revenues of all US Non-profit and local governmental hospitals.
Let me provide a quick information snapshot for a portion of my sample of Non-profit hospitals, including governmental ones, that I reviewed:
Catholic Hospitals......12 Organizations, 389 Hospitals, Total Revenues in 2008 $60 bil (up 9% over 2007), Net Operating Income (NOI) in 2008 $1.6 bil (2.6% of Revenues), Cash and Investments $32 bil, Net Assets $38.5 bil.
.....Most Number of Hospitals:
............Ascension Health (St. Louis)..........................73
............Catholic Health Initiatives (Denver)...............73
............Trinity Health (Novi, MI)...............................44
............Catholic Health Care West (San Fran).............42
............CHRISTUS (Houston).....................................40
............Catholic Health Care East (PA).......................35
............Catholic Health Care Partners (Cincy, OH)......32
............Providence Health & Services (Seattle)...........27
............Bon Secours Health (Baltimore, MD)...............18
............Wheaton Franciscan Health (Milwaukee, WI)..16
.....Highest Revenues in 2008:
.......Ascension Health (St. Louis)...................................$13.5 bil
.......Catholic Health Care West (San Fran)........................$8.4 bil
.......Catholic Health Initiatives (Denver)..........................$8.2 bil
.......Providence Health & Services (Seattle)......................$7.0 bil
.......Trinity Health (Novi, MI)...........................................$6.4 bil
.......Catholic Health Care Partners (Cincinnati, OH)...........$4.0 bil
.......CHRISTUS (Houston).................................................$3.2 bil
.......Bon Secours Health (Baltimore, MD)...........................$2.6 bil
.......SSM Healthcare (St. Louis)..........................................$2.6 bil
.......Sisters of St. Francis (Mishawaka, IN)..........................$2.2 bil
.....Highest Average NOI as % of Revenues for the last two years:
............Trinity Health (Novi, MI) …………….................6.0%
............Providence Health & Services (Seattle)….........4.5%
............Ascension Health (St. Louis)………………...........4.1%
............Sisters of St. Francis Health (Mishawaka, IN)...3.9%
............Catholic Health Initiatives (Denver)................3.4%
............Catholic Health Long Island (NY)....................3.3%
............Catholic Health Care West (San Fran)..............3.0%
.....Highest Bad Debts Expense for the two years 2007 and 2008 Combined (also as a % of Revenues and as a Multiple of Net Operating Income (NOI)):
............Ascension Health (St. Louis)………...............$1,633 mil (6.3% of Revenues and 1.6 times NOI)
............Catholic Healthcare West (San Fran)............$1,200 mil (7.6% of Revenues and 2.6 times NOI)
............Catholic Health Initiatives (Denver)…...........$1,162 mil (7.3% of Revenues and 2.2 times NOI)
............Catholic Healthcare Partners (Cincy)..........…$ 477 mil (6.2% of Revenues and 6.9 times NOI)
............Trinity Health (Novi, MI)…….........................$ 466 mil (3.7% of Revenues and .6 times NOI)
............Providence Health & Services (Seattle)..........$ 444 mil (3.3% of Revenues and .8 times NOI)
............Bon Secours Health System (Baltimore).........$ 386 mil (7.6% of Revenues and 7.6 times NOI)
............CHRISTUS (Houston)…………….......................$ 292 mil (4.9% of Revenues)
............All Catholic Hospitals..................................$6,576 mil (5.7% of Revenues and 1.7 times NOI)
.....Highest Net Assets:
.......Ascension Health (St. Louis)............................$9.7 bil
.......Catholic Health Initiatives (Denver)..................$6.7 bil
.......Trinity Health (Novi, MI)..................................$5.2 bil
.......Catholic Health Care West (San Fran)................$4.3 bil
.......Providence Health & Services (Seattle)..............$3.9 bil
.......CHRISTUS (Houston)........................................$2.4 bil
.......Hospital Sisters Services (Springfield, IL)...........$2.0 bil
.......Catholic Health Care East (PA)...........................$2.0 bil
.......Catholic Health Care Partners (Cincy, OH)..........$1.5 bil
Non-Catholic, Non-Profit Hospitals…36 Organizations, 238 Hospitals, Total Revenues in 2008 $96 bil (up 8% over 2007), Net Operating Income in 2008 $3.2 bil (3.3% of Revenues), Cash and Investments $51.8 bil, Net Assets $53.9 bil.
.....Highest Revenues in 2008:
.......Kaiser Permanente (CA) Integrated Managed Care Organ.$40.3 bil (35 hospitals), no audited fin sts thus not in totals
.......Sutter Health (Sacramento, CA)..........$8.3 bil (26 hospitals)
.......Mayo Clinic (Rochester, MN)............................$7.2 bil
.......Partners Healthcare Syst(Boston, including Harvard).$7.1 bil
.......University of Pittsburgh Medical.........$7.1 bil (19 hospitals)
.......The Cleveland Clinic (Cleveland, OH).................$5.1 bil
.......NorthShore Long Island Jewish Health (NY)......$4.5 bil
.......Banner Health (Phoenix, AZ).............................$4.0 bil
.......Advocate Health Care Network (Chicago)..........$3.7 bil
.......Henry Ford Health System (Detroit)..................$3.7 bil
.......BJC Healthcare (St. Louis).................................$3.2 bil
.......Clarian Health (Indianapolis, IN)......................$3.1 bil
.......Baylor Health Care Systems (Dallas)..................$3.1 bil
.......Jefferson Health (Philly)...................................$3.0 bil
.......New York Presbyterian Hospital (NY)...............$3.0 bil
.......Allina Health System (Minneapolis, MN)...........$2.8 bil
.......Sentara Health Care (Norfolk, VA).....................$2.8 bil
.......Texas Health Resources (Dallas)........................$2.6 bil
.......Inova Health (Northern VA).............................$2.1 bil
.......Baycare Health System (Tampa, FL)..................$2.1 bil
.......Cedars-Sinai Medical Center (LA, CA)................$2.0 bil
.......Iowa Health System (IA)...................................$2.0 bil
.......Scripps Health (San Diego)................................$2.0 bil
.....Highest Average NOI as % of Revenues for the last two years:
.......Stanford Hospitals and Clinics (Palo Alto, CA)………….....7.7%
.......Baptist Health South Florida (Miami)……………………........7.4%
.......Jefferson Health System (Philly)………………………….........7.2%
.......Baylor Health Care System (Dallas)………………………........7.1%
.......Inova Health System (Northern Virginia)…………………....6.8%
.......Cedars-Sinai Medical Center (LA, CA).............................6.6%
.......The Cleveland Clinic.……………………….............................6.0%
.......Sutter Health……………………………………...........................5.9%
.......ProMedica HealthCare (Toledo, OH)…………………….........5.9%
.......Scripps Health (San Diego)………………………………............5.6%
.......Advocate Health Care Network.………………......................5.6%
.......Rush University Medical Center (Chicago)………………......5.3%
.......Texas Health Resources (Dallas)…………………………..........5.3%
.......Shands Teaching Hospitals and Clinics (Gainesville, FL)…5.3%
.......Integris Health (OK)………………………………………...............5.2%
.......Mount Sinai Hospital (NY)...............................................5.2%
.......University Hospitals Health Systems (Cleveland, OH).....4.9%
.......Sentara Health Care (Norfolk, VA)...................................4.6%
.......Northwestern Memorial (Chicago)..................................4.5%
.......Baycare Health System (Tampa, FL)................................4.1%
.......Baystate Health (Springfield, MA)...................................4.0%
.......Banner Health (Phoenix)................................................3.7%
.......Sharp Health Care (San Diego, CA)..................................3.2%
.......BJC HealthCare (St. Louis)..............................................3.2%
.......University of Pittsburgh Medical Center..........................3.1%
.......Legacy Health System (Portland, OR)..............................3.0%
.....Highest Bad Debts Expense for the two years 2007 and 2008 Combined (also as a % of Revenues and as a Multiple of Net Operating Income (NOI)):
.......Sutter Health (Sacramento)……………....................$ 527 mil (3.3% of Revenues and .6 times NOI)
.......Baptist Health South Florida (Miami)…..................$ 480 mil (13.3% of Revenues and 1.8 times NOI)
.......Banner Health (Phoenix)…………………...................$ 400 mil (5.5% of Revenues and 1.5 times NOI)
.......Baylor Health Care System (Dallas)………..............$ 395 mil (6.6% of Revenues and .9 times NOI)
.......University of Pittsburgh Med Center……...............$ 382 mil (2.9% of Revenues and 1.0 times NOI)
.......Texas Health Resources (Dallas)……......................$ 378 mil (7.5% of Revenues and 1.4 times NOI)
.......Clarian Health Partners (Indianapolis)..................$ 349 mil (5.9% of Revenues and 3.3 times NOI)
.......Advocate Health Care Network (Chicago)..............$ 328 mil (4.6% of Revenues and .8 times NOI)
.......Cleveland Clinic…………………………........................$ 327 mil (3.3% of Revenues and .6 times NOI)
.......Jefferson Health System (Philly)…………................$ 317 mil (5.4% of Revenues and .8 times NOI)
.......Palmetto Health (Columbia, SC)………....................$ 304 mil (13.1% of Revenues and 8.7 times NOI)
.......Integris Health (Oklahoma)………………..................$ 296 mil (12.2% of Revenues and 2.4 times NOI)
.......Mayo Clinic (Rochester, MN)……………..................$ 293 mil (2.1% of Revenues and 1.5 times NOI)
.......Baycare Health System (Tampa)…………................$ 286 mil (6.6% of Revenues and .9 times NOI)
.......Orlando Regional Health Care…………….................$ 280 mil (9.4% of Revenues and 3.5 times NOI)
.......Henry Ford Health System (Detroit)……….............$ 278 mil (3.9% of Revenues and 2.6 times NOI)
.......Shands Hospitals and Clinics (Gainesville, FL).......$ 269 mil (8.1% of Revenues and 1.6 times NOI)
.......Sentara Health Care (Norfolk, VA)………................$ 266 mil (5.0% of Revenues and 1.1 times NOI)
.......BJC Healthcare (St. Louis)………………...................$ 266 mil (4.2% of Revenues and 1.3 times NOI)
.......Cedars-Sinai Medical Center (LA, CA)…................$ 261 mil (6.7% of Revenues and 1.0 times NOI)
.......Partners Healthcare System (Boston)……..............$ 231 mil (1.7% of Revenues and 1.0 times NOI)
.......All Non-Catholic, Non-profit Hospitals…............$7,417 mil (4.0% of Revenues and 1.1 times NOI)
.....Highest Net Assets:
.......Partners Healthcare Systems....................$5.7 bil
.......Sutter Health............................................$4.3 bil
.......University of Pittsburgh Medical Center...$3.6 bil
.......Adventist Health System (Orlando, FL)....$3.4 bil, 37 hospitals, no audited fin sts thus not included in totals
.......Jefferson Health System (Philly)...............$2.9 bil
.......BJC Healthcare.........................................$2.7 bil
.......The Cleveland Clinic.................................$2.6 bil
.......New York Presbyterian (NY)....................$2.3 bil
.......Mayo Clinic..............................................$2.3 bil
.......Baylor Health Care Systems (Dallas).........$2.0 bil
.......Northwestern Memorial (Chicago)............$2.0 bil
.......Texas Health Resources (Dallas)...............$1.9 bil
.......Inova Health (Northern VA).....................$1.9 bil
.......Advocate Health Care Network (Chicago)..$1.8 bil
.......Banner Health (Phoenix)..........................$1.6 bil
.......Baycare Health (Tampa, FL)......................$1.5 bil
.......Sentara Health Care (Norfolk, VA)............$1.5 bil
.......Cedars-Sinai Medical Center (LA, CA).......$1.5 bil
All Indiana Hospitals…27 Organizations, 73 Hospitals, Total Revenues $14 bil, Net Operating Income $562 mil, or 4.0% of Revenues, Cash and Investments $6.9 bil, Net Assets $9 bil.
.....Highest Revenues in 2008:
.......Clarian Health (Indy)........................$3,115 mil, 9 hospitals
.......Sisters of Saint Francis (Mishawaka)..$2,208 mil, 9 hospitals
.......Saint Vincent Health (Indy)...............$1,768 mil, 16 hospitals
.......Community Health Network (Indy)....$1,205 mil, 4 hospitals
.......Parkview Health (Fort Wayne).............$752 mil, 7 hospitals
.......Community Foundtn NW IN(Munster)..$641 mil, 3 hospitals
.......Deaconess Health System (Evansville)..$522 mil
.......Memorial Health (South Bend)..............$446 mil
.......Saint Mary's Health (Evansville)............$408 mil
.......Union Hospital (Terre Haute)................$373 mil
…..Highest Average NOI as % of Revenues for the last three years:
…….……Saint Vincent Health………………............10.0%
………….Parkview Health System (Fort Wayne)....7.9%
………….Deaconess Health System (Evansville)....4.5%
………….Memorial Health System (South Bend)….4.5%
............Community Health Network (Indy).........3.8%
............Sisters of Saint Francis............................3.3%
............Bloomington Hospital.............................3.0%
.....Highest Net Assets:
..........Saint Vincent Health.......$1.7 bil
..........Clarian Health.................$1.4 bil
..........Sisters of Saint Francis....$1.4 bil
All Governmental Non-profit Hospitals Sampled (man, these are hard to find audited financial statements for, other than the ones in Indiana)...21 Organizations, 50 Hospitals, Total Revenues in 2008 $10.5 bil (up 12% over 2007, Net Operating Income in 2008 $183 mil, or 1.7% of Revenues, Cash and Investments $5.2 bil, Net Assets $7.1 bil
.....Highest Revenues in 2008:
.......Carolinas Health Care (Charlotte, NC)..$3.4 bil, 25 hospitals
.......South Broward Hospital (Southeast FL).$1.5 bil, 5 hospitals
.......Greenville Hosp System (Greenville, SC)....$1.2 bil
.....Highest Average NOI as % of Revenues for last two years:
....................Jackson County Schneck (IN).................9.7%
....................Norman Regional Hospital (OK).............7.5%
....................Hendricks County Regional (IN).............5.9%
....................University of Kansas Hospital (KS)..........5.5%
....................Withan Hospital Lebanon (IN).................5.4%
....................Hancock County Regional (IN)...............4.4%
....................Major Hospital Shelbyville (IN)...............4.3%
.....Highest Bad Debts Expense for the two years 2007 and 2008 Combined (also as a % of Revenues and as a Multiple of Net Operating Income (NOI)):
...............South Broward Hospital (Southeast FL)...........$ 496 mil (17.4% of Revenues and 12.1 times NOI)
...............Carolinas Health Care (Charlotte, NC)...............$ 283 mil (4.5% of Revenues and 1.9 times NOI)
...............Greenville Hospital System (Greenville, SC).....$ 212 mil (9.2% of Revenues and 4.9 times NOI)
...............All Governmental Hospitals………………….......$1, 696 mil (8.5% of Revenues and 3.7 times NOI)
.....Highest Net Assets:
....................Carolinas Health Care.........................$2.6 bil
....................South Broward Hospital System (FL)....$ .9 bil
....................Greenville Hospital System (SC)............$ .5 bil
....................Spartanburg Regional Health (SC).........$ .5 bil
....................Sarasota Public Hospital (FL)................$ .5 bil
From some extensive sampling from all the hospitals included on the American Hospital Directory (AHD) website, which shows about $1.7 trillion of most recent annual Gross Patient Service Revenues, below here is the revenue breakdown by hospital type. The actual Gross Patient Service Revenues for the most recent year should be a bit north of $2.0 trillion due to the AHD listing not including all of the hospitals, due to some hospitals included not reporting their revenues, and also due to the fact that some of the revenues shown are for fiscal year 2007.
Non-profit, non-governmental hospitals.......76.5%
Governmental hospitals................................15.4%
For-profit Proprietary hospitals......................8.1%
Thus, my above 18% sample of Non-profit hospitals focuses on the first two above types of hospitals, which comprise 91.9% of the gross revenues of all US hospitals.
Let me now briefly turn my attention to the third category of hospitals: Proprietary ones. The large ones here are the ones that file with the SEC, most of which are publicly-held companies.
I reviewed the audited financial statements of all Proprietary Hospitals that filed with the SEC and which also had total annual revenues exceeding $1 bil. Here is a snapshot of these seven hospital organizations, which operated 485 hospitals around the country, had Total Revenues of $62 bil in 2008 (up 12% over 2007), Core Pretax Income from Continuing Operations of $1.9 bil in 2008 (3.1% of Revenues) and Cash Flow Generated from Operations of $4.4 bil in 2008:
.....Largest Number of Hospitals:
.......HCA Hospital Corp America (Nashville, TN)…158 hospitals
.......Community Health Systems (Franklin, TN)…………….......118
.......Health Management Associates (Naples, FL)…………….....56
.......Tenet Healthcare (Dallas, TX)……………………………...........55
.......LifePoint Hospitals (Brentwood, TN)…………………….........48
.......Universal Health Services (King of Prussia, PA)…………....35
.......Iasis Healthcare (Franklin, TN)…………………………….........15
.....Highest Total Revenues in 2008:
.......HCA Hospital Corp America (Nashville, TN)….....$28.4 bil
.......Community Health Systems (Franklin, TN)………..$10.8 bil
.......Tenet Healthcare (Dallas, TX)……………………….......$ 8.7 bil
.......Universal Health Services (King of Prussia, PA)…..$ 5.0 bil
.......Health Management Associates (Naples, FL)……….$ 4.5 bil
.......LifePoint Hospitals (Brentwood, TN)……………….....$ 2.7 bil
.......Iasis Healthcare (Franklin, TN)……………………........$ 2.1 bil
......Total Core Pretax Income from Continuing Operations as % of Total Revenues:
………………..2008………. 3.1%
………………..2007………. 3.5%
………………..2006………. 5.7%
.....Highest Average Core Pretax Income from Continuing Operations as % of Total Revenues for last three years:
.......Lifepoint Hospitals (Brentwood, TN)……………………......9.0%
.......Universal Health Services (King of Prussia, PA)…..…….6.1%
.......Health Management Associates (Naples, FL)……………..5.4%
.......HCA Hospital Corporation of America (Nashville, TN).4.8%
.......Iasis Healthcare (Franklin, TN)…………………………........4.0%
.......Community Health Systems (Franklin, TN)…………….....3.8%
.......Three Year Average for All Seven Organizations…….....4.1%
.....Total Bad Debt Expense:
.......2008….$6.7 bil (10.8% of Revenues, 3.5 times Core Pretax Income)
.......2007….$5.9 bil (10.7% of Revenues, 3.1 times Core Pretax Income)
.......2006….$4.9 bil (10.0% of Revenues, 1.8 times Core Pretax Income)
.....Highest Bad Debts Expense for the two years 2007 and 2008 Combined (also as a % of Revenues and as a Multiple of Core Pretax Income):
.......HCA Hospital Corp America (Nashville, TN)........$6,539 mil (11.8% of Revenues and 3.1 times Core Pretax Income)
.......Community Health Systems (Franklin, TN)……...$2,095 mil (11.7% of Revenues and 4.8 times Core Pretax Income)
.......Tenet Healthcare (Dallas)…………………………........$1,193 mil (7.1 % of Revenues)
.......Health Management Associates (Naples FL)….....$1,025 mil (11.7% of Revenues and 2.9 times Core Pretax Income)
.......Universal Health Services (King of Prussia, PA).....$ 888 mil (9.2% of Revenues and 1.5 times Core Pretax Income)
.......LifePoint Hospitals (Brentwood, TN)…………………....$ 620 mil (11.8% of Revenues and 1.4 times Core Pretax Income)
.......Iasis Healthcare (Franklin, TN)……………………….......$ 298 mil (7.8% of Revenues and 2.0 times Core Pretax Income)
.......All Seven Proprietary Hospitals……………………......$12,658 mil (10.8% of Revenues and 3.3 times Core Pretax Income)
These Proprietary hospitals all pay income taxes, have very little in the way of Investments, and are highly leveraged (with debt at 79% of total assets). They have very heavy investments in Property, plant and equipment (47% of total assets) and because they tend to be aggressive acquirers of hospitals, they also have a lot of Goodwill (19% of total assets).
With their extremely high Bad Debt Expense, these companies will be huge beneficiaries of the new US health care legislation. Thus, in all fairness, these publicly-held hospitals should be ponying up a lot of money to help fund the new health care legislation. In my earlier recommendation, these Proprietary hospitals should be reducing their Medicare and Medicaid fees by quite a bit, just like the Non-profit and governmental hospitals should be doing. The one difference is that there shouldn't be any additional income taxes assessed on Proprietary hospitals, because they already pay income taxes, for the most part.
Of these seven large Proprietary hospital companies, five had publicly-traded stock for all of 2009. Clearly, the stock market has figured out that hospitals will be huge winners with the new health care legislation. Look how much these stock prices of hospital companies have increased since the beginning of 2009 through Sept 23, 2009:
..........Tenet Healthcare…………………......+606%
...........Health Management Associates…+310%
..........Community Health Systems……….+127%
..........Universal Health Services…………..+ 66%
..........LifePoint Hospitals…………………....+ 44%
..........Average Increase of All Five……...+231%
The stock market is much smarter than the US Congress, and even much smarter than the very talented CBO, at assessing how an industry’s earnings are going to be impacted by the new health care legislation. For the past two years, these seven Proprietary hospitals had total core pretax income of $3.9 bil, which included a deduction for Bad Debts Expense of $12.7 bil. If the Bad Debts Expense of these seven Proprietary hospitals were pared down just by half with the new health care legislation, the core pretax income of these seven hospitals for these two years would have advanced from $3.9 bil to $10.2 bil!
In the Health Care Debate, the US Congress has attempted to go after the health insurance industry, but they haven't been successful in effectively leveling the playing field here and in preventing the Health Insurance Industry from continuing to register obscene profits that wreak havoc on the US economy.
And they have hit Big Pharma, although the roughly $80 bil that the drug industry has agreed to is really peanuts as compared to what they should ante in. Congress has been again outfoxed by the very savvy lobbyists for the drug industry.
But pretty much getting off Scot-free is the entire Hospital Industry. So far, it looks like the Hospital Industry has agreed to pony up roughly $155 bil. I call that highway robbery. Given their gargantuan windfall profits from the new health care legislation, coupled with how they have already made out like tax-free Bonnie and Clydes, they should be paying at least double, perhaps even triple, that amount through some combination of Medicare and Medicaid fee cuts and increased income taxes and/or increased health care reform fees. It looks like the Hospital Industry lobby has been substantially more effective than even the Big Pharma lobby, this time around. And that's really saying something.
I think the US Congress has no business legislating to purposely provide windfall profits to the for-profit Proprietary hospital industry. But to also legislate to intentionally provide windfall profits to the "Non-profit" hospital industry takes reckless governing ineptitude to a completely different level.
Some Additional Thoughts:
*I think it would be wise to stack up some operating numbers for Big Hospital vs. Big Health Insurance, to make sure that everyone is attacking the correct target(s) in order to best bend down the long-term health care cost curve.
From my 18% sample of Non-profit hospitals, including state and local governmental ones, I derive the following estimates for Fiscal Year 2008 for all Non-profit hospitals:
Total Operating Revenues.............................$998 bil
Net Operating Income.....................................$31 bil
Plus Ongoing Interest and Dividend Income....$15 bil
= Core Ongoing Net Operating Income.............$46 bil
And from SEC filings, here are the 2008 operating totals for the twelve largest publicly-held health insurance companies that have been in existence for all of the past ten years:
Total Core Revenues...........................$280 bil
Total Core Pretax Income..................$17.5 bil
Normal Effective Tax Rate........38%
Core Income Tax Expense...................$6.6 bil
= Core Net Income.............................$10.9 bil
Let's see...the largest of the twelve was United Health Group with Core Revenues of $81 bil, the second largest was Wellpoint with Revenues of $62 bil and the smallest of the twelve was Centene, with Revenues of $3.4 bil. Thus, my hunch is that the rest of the publicly-held health insurance industry is roughly another 10%. Thus, here would be the 2008 estimated operating numbers for the entire publicly-held health insurance industry, under that assumption:
Total Core Revenues.................$308 bil
Total Core Pretax Income..........$18.6 bil
Total Core Net Income..............$11.6 bil
I'll ignore the private health insurance industry because I really have no educated clue here on those numbers.
Anyway, I think the above operating numbers for 2008 are pretty revealing.
***The Total Revenues of the Non-profit hospital industry are 3.24 times that of the publicly-held health insurance industry.
***The Total Core Pretax Income of the Non-profit hospital industry is 2.47 times that of the publicly-held health insurance industry.
***The Total Core Net Income of the Non-profit hospital industry is an incredible 3.97 times that of the publicly-held health insurance industry.
The key operating number is the latter one above, since it factors in the important tax aspect. Thus, the bottom line Core Net Income as a percentage of Total Revenues of the publicly-held health insurance industry for 2008 was only 3.76%, as compared to a much higher 4.61% for the Non-profit hospital industry. To show how high these Non-profit hospital margins are, this 4.6% for the entire Non-profit hospital industry is higher than the margins for 2008 of the following five Dow Industrial stocks:
Boeing...........4.4%
Kraft Foods....4.4%
Wal-Mart........3.4%
Home Depot...3.2%
Alcoa..............0.9%
And now let me factor in what I think the 2008 operating numbers would have looked like if the new health care plan was totally in effect for 2008.
Earlier, I showed that Non-profit hospital net operating income for 2008 would increase by an estimated $50 bil due to the effect of the impacts on both bad debts expense and on charity care income, from the new insured and better insured. With the $46 bil starting point, that makes it $96 bil. Let's see, the impact of the 91.9% Non-profit hospital portion of the $155 bil bargain deal struck spread over seven years equals a $20 bil income reduction per year. Thus, that now makes it $76 bil for 2008 ongoing Net Operating Income, as Adjusted. Total Revenues for 2008 would remain at $998 bil since the additional $20 bil of charity care revenues is precisely offset by the $20 bil amortization of the Bargain Buy-in.
The health insurance industry also is helped nicely by the Senate Finance Committee Health Care Proposal and the new insured and better insured. My hunch is that from the new insured, its revenues increase by 20%, which translates to a core profit increase of say 25%. Thus, for 2008 as adjusted, that makes its Total Revenues $369 bil (i.e. $308 bil X 1.20) and its Core Net Income $14.5 bil (i.e. $11.6 bil X 1.25). But then this industry is hurt by some things in the Senate Finance bill, which I think this industry will probably do everything in its power to pass on, and thus I'll ignore them here.
Let me convert the above numbers to Core Net Income as a percentage of Total Revenues.....Would you believe?:
*****Publicly-held Health Insurance Industry......3.9%
*****Non-profit Hospital Industry.......................7.6%
The health insurance industry has made out like a bandit in the 2000s decade and will do even much better in the next decade under the Senate Finance Committee bill.
But look at those massive profits for the Non-profit Hospitals. For each dollar of revenue, the Non-profit hospital industry is projected to earn close to twice as much as will the publicly-held health insurance industry under the Senate Finance Committee Health Care Plan, which assumes a bargain $155 bil buy-in by the Hospital industry.
It's easy to get confused as to which industry is For-profit and which one is supposed to be Non-profit. I think the health insurance industry can make a very good assertion that the true winner with the Senate Finance Committee plan is not them, but rather is the Non-profit hospital industry.
To show how crazy high these 2008 Non-profit hospital industry adjusted margins are (i.e. 7.6%), there were 11 of the 30 Dow Industrials that had lower margins for 2008:
Hewlett-Packard......7.0%
Caterpillar...............6.9%
Verizon...................6.6%
Dupont...................6.3%
JPMorgan Chase.......5.5%
Bank of America.......5.5%
Boeing.....................4.4%
Kraft Foods..............4.3%
Wal-Mart..................3.4%
Home Depot............3.2%
Alcoa......................0.9%
And the above compares an average Non-profit hospital's gross margin with that of the premier large corporations in each industry segment, which is how the 30 Dow Industrials is constituted.
And watch out United Technologies at 8.0% and Big Oil (Chevron at 8.8% and Exxon Mobil at 9.5%), because 7.6% Non-profit hospitals is coming after you.
It looks to me like the next time the CEOs of Hewlett-Packard and Stanford Hospitals and Clinics meet for lunch, the Stanford Hospital guy might be picking up the tab.
*The key "Community Benefit" concept, which is critical in determining Non-profit hospital income taxation, must be much more precisely defined, both by the US Congress and by the FASB. Reviewing more than a hundred Non-profit hospital organization footnotes reveals how inconsistently this concept has been treated.
To start with, the Gross Patient Services Revenue amount used by hospitals is set artificially high, frequently more than double the amounts actually charged, and facilitates subterfuge by both the hospital and the health insurance company.
Let me give a simple example. Say a non-profit hospital sets a price of $1,000 for a given patient treatment. However, through negotiations, third-party payers Medicare and Medicaid negotiate a price of $500 and $400, respectively, and Health Insurance companies negotiate an average price of $600 and these three third-party payers represent 90% plus of the payers for this patient service (a health insurance 40% reduction off an artificially high price base is not unusual at all).
The non-profit hospital, as well as the health insurance company, both still assert that the customary price for this treatment is $1,000, which is pure folly. It permits the Non-profit hospitals to then substantially inflate the amount of their key Community Benefits by computing Medicaid and charity care provided to patients off of an artificially high base number (i.e. abstract foregone gross patient service revenue of $1,000, in my example). A few non-profit hospitals even go so far as to also include foregone Medicare gross patient service revenue in their Community Benefit amount disclosure.
And it also permits Health Insurance companies to falsely make the assertion in their Explanation of Benefit notice to the patient/customer that they are saving these customers a ton of money in hospital patient charges ($400, in my example)....very misleading. And then to pile on, the Non-profit hospital actually charges the uninsured patient the $1,000 inflated price, which along with many other doses of like "customary charges", results in many financial bankruptcies of sick hospital patients. That's just not right.
I think the Catholic hospitals have it right on this. In deriving their critical Community Benefit amount, they exclude all Medicare effects, they only include their actual cost of charity care provided, and for Medicaid patients, they only include the excess of their actual cost for the patient services they provided over the amount they were reimbursed by Medicaid......and they show nothing whatsoever in make-believe foregone revenues.
If the Congress writes this "Community Benefit" language properly, including a clear quantification of tests, the CBO scoring on this one will be off the charts. After the new health care legislation totally kicks in, I predict that there will be many non-health care companies like McDonald's, Disney, Coke, Wal-Mart, Procter & Gamble, IBM, AT&T, Wells Fargo, Citigroup, Bank of America, Exxon Mobil and even Devry that will be able to show more dollars of "Community Benefit" than the majority of the Non-profit hospitals. But yet these non-health corporations pay US income tax on their first dollar of taxable income.
*When I do the math starting four years out, when the present health care proposed legislation totally kicks in, and including continuing interest income and dividend income, there are going to be many Non-profit hospital organizations generating ongoing Net Operating Income as a percentage of Total Operating Revenues in the double digit percentages. I think it is obscene for a Non-profit hospital to generate profits like that, and it is also obscene for Big Hospital lobbyists to lobby for that result. These Big Hospital lobbyists aren't just lobbying with Senators, they are also effectively lobbying against both US citizens and US businesses.
I think the massive transfer of wealth from individuals and businesses to the Health Insurance Industry in the 2000s decade was horrible for the US economy. And when I trace this cash, just where did it end up? Mostly in the hands of Health Insurance Company stockholders in stock buybacks.
Likewise, a massive transfer of wealth from individuals and businesses to these Non-profit hospitals in the 2010s decade will also be horrible for the US economy. Such a deal, we get a double health care cost whammy in the 2010s decade....a second decade of sky-high health insurance costs and also a dramatic increase in payments to Non-profit hospitals.
And where will that Non-profit hospital cash end up? I think when many of these Non-profit hospitals start seeing their profits rise briskly, they will open up their spending spigots for unwise things like unreasonable employee raises, excessive bonuses, higher employee benefits, special studies by consultants, too many temporary hires and other unnecessary frills, and patients will still have steep hospital charges for aspirins.
But also, a lot of this massive inflow of cash will be added to the Non-profit hospital investment treasure chest, which is now nearly at $500 bil. These additional Non-profit hospital windfall profits, coupled with a good eight-year stock market run (that I think will make the Clinton stock market performance seem modest), driven mainly by wise Obama Administration initiatives and oversight, should result in this Non-profit hospital investment treasure chest more than doubling to comfortably above $1 trillion by the end of the next decade.
But still, it will be a Pyrrhic victory for the Non-profit hospitals, because this $1 trillion investment treasure chest will have been built up on the backs of financial bankruptcies of countless numbers of very sick patients and their families, on the much inflated insurance costs paid and to be paid by both businesses and individuals, and on the windfall profits for Non-profit hospitals unwisely voted in by the US Congress.
I think the hospital industry has acted horribly in the health care deliberations. There is no way that Senate Six Pack would have agreed to Big Hospital's larcenous $155 bil pact, if they were given all of the relevant facts that Big Hospital had at its disposal, concerning the past very strong financial operating earnings, the massive financial treasure chest buildup of Non-profit hospitals, and the incredibly favorable impact of the new insured and better insured on Non-profit hospital future operating results.
In its negotiations, it appears to me that Big Hospital wasn't playing fairly and wasn't acting in good faith, but then its behavior here was very consistent with the incredible amount of greed I see from extensively studying the Non-profit hospital industry. After a while, I find that the many hospital financial statements and footnotes start jumping off the computer screen and start talking to me, loaded with avarice.
I think, or at least I hope, that a huge majority of the US Congress will see what happened here and make the proper adjustments to the health care bill to make sure that US individuals and businesses are not unfairly financially damaged by the unconscionable deal that Big Hospital struck.
Also, I think once a Non-profit hospital starts delivering continuing Net Operating Income as a percentage of Total Operating Revenues in the 6% to 9% range, effectively the "Non" in the Non-Profit description is inaccurate. And that is consistent with my earlier recommendation that all Non-profit hospitals should pay income tax on any net operating profit north of 5%.
* Some Fair Tax on Hospitals Options---
***** I think another both fair and easy annual tax to assess on the Non-profit hospital industry would be a tax for the hoarding of Net Assets. This annual tax could be computed as simply 1% of Net Assets. Since Total Net Assets of Non-profit hospitals are now roughly $600 bil, then this tax would be $6 bil in total for the first year. A key incentive here is to get the highly profitable Non-profit hospital organization to reduce Patient Service Fees, rather than just hoarding huge amounts of Net Earnings in both Net Assets and Investments on the balance sheet.
***** A second additional fair tax on the Non-profit hospital industry would be an additional tax each year on the arbitrage investment income.
***** A third additional fair tax on the Non-profit hospital industry would be to break down each hospital organization into its tax-exempt hospital segment and its financial institution segment, and then on the latter, to tax at 35% each year all of its income.
***** A fourth additional fair tax on the Non-profit hospital industry, in order to deal with the obscenely high profts of any hospital organization, would be a refinement of the tax rate on income, when ongoing Net Operating Income as a percentage of Total Revenues exceeds 5%. In cases where this percentage exceeds 10%, I think that this 35% tax rate should be doubled to 70%, on all excess income above the 10% threshold. And then in cases where this percentage exceeds 15%, the tax rate should move up from 70% to 90%, on all excess income above the 15% threshold.
***** A fifth additional fair tax on the Non-profit hospital industry deals with the windfall profits of the past. I would have each Non-profit hospital organization compute its cumulative untaxed income, as well as its cumulative Total Revenues, since its inception through the end of tax year 2009. And then in its 2009 tax return, there will be a windfall profits tax at 35% on the extent that this cumulative untaxed income exceeds 5% of cumulative Total Revenues.
***** A sixth additional fair tax would be the levying of a windfall profits tax on all Proprietary Hospitals. Perhaps a fair windfall profits tax rate is an additional 10% each year.
***** A completely different way to compute the tax that Non-profit hospitals are to pay in each future year is to make them all pay income tax on their first dollar of taxable income, just like all C Corps do. And then the tax rates on all income as a percentage of Total Revenues would be in some scheme like this:
.....Up to 5% of Total Revenues...20% Tax Rate
.....Above 5% and below 10% of Total Revenues...35% Tax Rate
.....Above 10% and below 15% of Total Revenues...70% Tax Rate
.....Above 15% of Total Revenues...90% Tax Rate
And all of these Non-profit hospitals would receive a refundable tax credit in each year for a certain percentage of their total actual cost of charity care, precisely defined in a manner close to the way the Catholic organizations have done it. One thing I really like about this approach is that a Non-profit hospital that is under financial pressure, and makes little in the way of income, and perhaps even generates a loss, and still does a great job in delivering charity care, could be entitled to an income tax refund, instead of paying income tax in a given year.
***** I think if Big Non-profit Hospital, has to choose between cutting Medicare fees and paying income taxes, it would choose the former. The higher the pretax earnings, the greater the risk for state income taxes and property taxes.
* Small Rural Non-profit and Local Governmental Hospitals
I have to say that I am really perplexed by the claims of so many lobbyists of small rural hospitals that the new health care legislation will just run many of these hospitals out of business. Instead, I think that nearly all of them will be getting substantial bumps in operating earnings from the new health care legislation.
I tested this by studying the rural hospitals in Indiana, which have filed audited financial statements with the Indiana Dept of Health.
Many rural hospitals are included as part of much larger organizations, which I covered earlier. Thus in the aggregate, I previously concluded that these large hospital organizations will be doing exceptionally well with the new health care legislation.
Thus, now I will study all Indiana non-profit and governmental rural hospitals, outside of the larger cities, which are separate organizations, which also filed audited financial statements with Indiana’s Dept of Health for 2008 and 2007, and which had annual revenues greater than $50 mil.
There were 16 of these separate Indiana hospital organizations.
Below, I show in the second column, the average Actual Core Net Operating Income (NOI) as a percentage of Total Operating Revenues (TOR) for 2008 and 2007. This Core NOI excludes ongoing interest and dividend income, but includes interest expense. Three of the 16 hospitals had average losses in Core NOI’s. The largest loss one of the three was recently acquired by a much larger hospital organization.
Also below, I show in the third column, the average Adjusted Core NOI as a percentage of Total Operating Revenues (TOR) for 2008 and 2007. This Adjusted Core NOI assumes a 60% reduction for actual Bad Debts Expense incurred in each year as well as a 40% increase in patient service revenues from charity care provided disclosed in each year’s footnotes, both due to the impact of the new health care legislation. Ongoing interest and dividend income is excluded and so is the impact of any Buy-in Cost by the Hospital Industry.
..................................................................................Two Years
......................................................Two Years..........2007-08 With
.................................................Actual 2007-08..New Health Care
..................................................................................Legislation
…………………………………...............Core NOI as a..Adjusted Core NOI
……………………………………...............% of TOR………..as a % of TOR
Indiana Smaller City Hosp
Jackson County Schneck Hosp………..9.7%....................17.6%
Hendricks Regional Hospital……………5.9%.....................10.9%
Withan Hospital Lebanon………………..5.4%.....................12.1%
Hancock Regional Hospital……………..4.4%.....................10.0%
Major Hospital Shelbyville………………4.3%....................11.3%
Bloomington Hospital…………………….4.2%......................10.5%
Marion General Hospital…………………3.2%......................10.2%
Union Hospital Terre Haute…………….3.1%...................... 9.7%
Dearborn County Hospital………………3.0%...................... 9.2%
Good Samaritan Hosp Vincennes…....2.4%..................... 7.5%
Floyd County Memorial Hosp………...2.0%..................... 9.3%
Johnson Memorial Hosp……………......1.6%..................... 6.9%
Henry County Hospital…………...........1.3%...................... 5.4%
Logansport Hospital……………………...(0.1%)……………......5.8%
Howard County Hosp Kokomo……....(0.5%)…………....... 4.6%
Cardinal Health Muncie……………......(3.3%)……………..... 5.5%
Average of All 16 Hospitals...............2.9%................. 9.2% Whoa!
Clearly, in the State of Indiana, the rural, smaller city non-profit and local governmental hospitals will be helped out immensely by the new health care legislation. As you can see from the above schedule, the average Core Net Operating Income (NOI) as a percentage of Total Operating Revenues (TOR) for 2008 and 2007 combined increases by an amazing 6.3%, going from 2.9% to 9.2%, assuming the new health care legislation took full effect in both 2008 and 2007. And even if you assumed a more conservative bad debt reduction of 50% and lower charity care provided of 30%, the 9.2% drops just a little to 8.0%, which is still a substantial 5.1% improvement in margins.
I think the hospital industry lobbying for Medicare plus 5% is another very good illustration of the unbridled greed prevalent in this industry. And some hospital industry lobbyists are seeking even much more than Medicare plus 5%.
*Catholic hospitals have a bit lower net operating income as a percentage of revenues than do Non-Catholic hospitals. The main reason is that the critical bad debt expense as a percentage of revenues for Catholic hospitals is on average 1.7% higher than it is for Non-Catholic hospitals.
*Local governmental hospitals have a much lower net operating income as a percentage of revenues than do Non-Catholic, Non-profit hospitals. Substantially higher bad debt expense as a percentage of revenues, of about 4.5% in my sample, is the driver of the difference here.
*It would be really helpful for financial transparency if all US acute-care hospitals, including all Non-profit ones, all state and local government ones, and all for-profit Proprietary ones, were required to submit audited financial statements, including related footnotes, annually to the US Dept of Health and Human Services, which would make them all available online for review by all citizens. Included as part of these audited financial statements should be all compensation paid to the top five highest paid hospital organization executives, similar to what is disclosed in proxy statements of US publicly-held companies. And I think the past two years of audited statements should be presented shortly after health care legislation is passed. And frankly, I really don't understand why a Non-profit health care company that operates in many states and has annual revenues of $40 bil doesn't presently show its audited financial statements on its web site.
*Lastly, I think that when you put together the above entire report, Non-profit hospitals have made out like bandits already and will be cleaning up even more so with the new health care legislation. Like the health insurance industry, the Non-profit hospital industry desperately needs much more competition to bring the exorbitant prices of patient care down.
I think an excellent vehicle to use here is a massive expansion of the very cost effective VA Medical Centers, which many veterans and others speak so highly of. I think the long-term goal should be to have a VA Medical Center system that can properly service as patients all veterans and their families. Just think what a potential military recruit might think about this package....a College Education plus Lifetime Health Care for you and your family at any world-class VA Medical Center at a cost somewhat below market insurance premium rates. And especially after many recent TV views of our military fighting overseas in incredibly dangerous situations, I think that's the least we can do for anyone who serves so bravely for our country in the military. And because the VA Medical Center can deliver the patient treatment for substantially lower cost than the non-profit hospital, the long-term health care cost curve is bent, to boot.
=============================================
In recent posts, I showed how the financial strength of Big Non-profit Hospitals has substantially improved during the Obama Administration, subsequent to when the above article was written. The total Net Assets of Catholic Hospitals are up a very healthy 28%, and of Big non-Catholic Non-profit Hospitals are up a spectacular 39%, both in just the most recent two years.
My next two posts will be an update on the Operating Profits of Catholic Hospitals and on Big non-Catholic, Non-profit Hospitals. As a prelude, these two posts will show the vast improvement in Operating Profits of Big Hospitals in just the most recent two years, subsequent to when the above article was written.
But the question that I think has to be answered....In all fairness, just like Health Insurance Corps should, shouldn't all Hospital Organizations also be reducing their stiff prices in order to both patriotically and compassionately help reduce total US health care costs, to help suffering US individual hospital patients, to ease the health care burdens on US businesses, and to soften both the crushing US Federal Deficit and the many State Government severely-stressed Budgets?
