Based on my extensive sample of the financial statements, mostly audited ones, of 25 Big Catholic Non-Profit Hospital Organizations and 136 Big Non-Catholic Non-Profit Hospital Organizations, whose Total Operating Revenues in fiscal year ended (FYE) 2010 totaled $427.1 bil, my best estimate is that these 161 Big Non-Profit US Hospitals comprised 38% of the Total Operating Revenues of all US Non-Profit Hospitals in 2010.
These 161 Big Non-Profit Hospital Organizations generated $17.2 bil of Hospital Operating Income(HOI) in FYE 2010. When I project that over all US Non-Profit Hospitals, my best estimate is that Total Hospital Operating Income (HOI) of all Non-Profit Hospitals in FYE 2010 totaled $45.2 bil.
This Hospital Operating Income includes as deductions Depreciation Expense, Bad Debt Expense, and for the most part, Interest Expense on all Debt. There is very little Investment Income included in Hospital Operating Income. The predominant portion of Investment Return Income and Losses is shown by these Hospital Organizations below Hospital Operating Income, as Non-Operating Income.
Also, my best estimate is that the Total Net Assets (i.e. Excess of Total Assets over Total Liabilities) of all Non-Profit Hospital Organizations presently is a bit above $700 bil, and that their Total Investments in Debt and in Equity Securities are just short of $600 bil.
This $700 bil of Total Net Assets represents predominately the cumulative untaxed Hospital Operating Profits and cumulative untaxed Investment Return Income of all of these Non-Profit Hospital Organizations, for all years since inception.
From my extensive sample of these 25 Big Catholic and 136 Big Non-Catholic, Non-Profit Hospital Organizations, here are the most recent percentage increases in Total Hospital Operating Income over the immediately preceding year:
……………………………...........Catholic………......Non-Catholic
Annual FYE 2009…………......19%........................34%
Annual FYE 2010…………......27%........................19%
Year to Date FYE 2011…….....14%........................25%
Three Year Annual Average..20%.......................26%
The Affordable Health Care Plan results in a substantial portion of the uninsured, getting insurance, and also results in many of the underinsured, getting better insurance.
Thus, Hospital Operating Income of all Hospital Organizations should increase sharply starting in 2014, due to the elimination of a good chunk of the Bad Debt Expense, and the addition of presently unrecorded Charity Care Income.
I think it would be wise to get a better handle on just how much Hospital Operating Income and Investment Income these Non-Profit Hospital Organizations will be generating in the long term, under the new Affordable Health Care Plan. Then everyone will be in a better position to understand if there are any excessive profits in the Non-Profit Hospital Industry, and if so, just how much.
Granted, there is a lot of uncertainty in making this computation. However, it’s just an objective mathematical computation, given certain assumptions, which will all be laid out.
The first assumption is how much will their annual percentage increase in Hospital Operating Income be.
Even in the horrible job environment of the past roughly three years, where the number of uninsured and the number of underinsured have both increased sharply, the three-year annual increases in total HOI have been superb…..averaging 20% for the Catholic Hospitals, and averaging an even higher 26% for the Non-Catholic, Non-Profit Hospital Organizations.
Thus, other than for 2014, when there should be a substantial increase in the number of both insured and better insured, I conservatively used an average annual increase in HOI of 12% per year, stepping down the much higher average actual HOI percentage increases of the most recent three years of 20% to 26%.
It is difficult to precisely measure the increase in HOI from both the Bad Debt Expense elimination and from the Charity Care Income pick-up, starting in 2014. In my below analysis, I am assuming that Bad Debt Expense gets reduced by 60% and also that 40% of the estimated Charity Care Income increases HOI, both in 2014.
My Bad Debt Expense estimates are based on the actual amounts recorded by these Hospital Organizations. My estimates of Child Care Costs, at cost, are based on the actual amounts disclosed by the Catholic Hospitals, and then conservatively estimating the amount related to the Non-Catholic Hospitals, by multiplying the ratio of Bad Debts Expenses of Non-Catholic Hospitals to Bad Debts Expenses of Catholic Hospitals by the Catholic Hospital Child Care Cost numbers.
I am excluding in my below analysis the amounts that the Hospital Industry agreed to pay in as part of the Affordable Health Care Plan. I just don’t have the numbers here.
Given the above assumptions, here’s my detailed computation of projected Total Hospital Operating Income for all Non-Profit Hospitals for each of the next 20 years:
……………………………............mils of dollars
2012.........................................56,685
2013.........................................63,487
2014.......................................141,734*
2015.......................................158,742
2016.......................................177,791
2017.......................................199,126
2018.......................................223,021
2019.......................................249,784
2020.......................................279,758
2021........................................313,329
Ten-year Total 2012-2021...1,863,457
2022........................................350,928
2023........................................393,040
2024........................................440,204
2025........................................493,029
2026........................................552,192
2027........................................618,455
2028........................................692,670
2029........................................775,791
2030........................................868,885
2031........................................973,152
Ten-year Total 2022-2031....6,158,346
* The huge growth in HOI in 2014 over 2013 is due mainly to the substantially lower Bad Debt Expense as well as to the pick up of Charity Care Income, both the result of the Affordable Health Care Plan causing many of the previously uninsured then getting insurance, and many of the previously underinsured, then getting better insured.
Yeah, that's $8.0 trillion of Total Hospital Operating Income over the next 20 years.....and not a dime of it is income taxed.
In addition, there will be substantial amounts of Investment Return Income by Hospital Organizations that are not included in the above projected Hospital Operating Income numbers.
I conservatively assumed an average annual investment return of 6% on the Average Investment Balance of Non-Profit Hospitals. I added the annual Hospital Operating Income to the Investment Balance, in computing the annual Investment Return Income. I assumed that the total hospital property cash additions are offset by total non-cash depreciation expense.
And below here are the related estimated annual Investment Return Income for each of the next 20 years.
..................Annual................Annual
.................Average............Investment
...............Investment........Earnings @6%
....................(in millions of dollars)
2012..........628,343...............37,701
2013..........726,129...............43,568
2014..........872,308...............52,338
2015........1,074,884..............64,493
2016........1,307,644..............78,459
2017........1,574,561..............94,474
2018........1,880,109.............112,807
2019........2,229,318.............133,759
2020.......2,627,847.............157,671
2021........3,082,062.............184,924
Ten-year Total 2012-2021...960,192
2022........3,599,114.............215,947
2023........4,187,044.............251,223
2024........4,854,889.............291,293
2025........5,612,799.............336,768
2026........6,472,178.............388,331
2027.......7,445,832.............446,750
2028........8,548,145.............512,889
2029........9,795,264.............587,716
2030.......11,205,318.............672,319
2031.......12,798,655.............767,919
Ten-year Total 2022-2031..4,471,154
Yeah, when you combine the above Total Hospital Operating Income and Total Non-operating Investment Returns, given all of the above assumptions explained earlier, the Total Earnings of all Non-Profit Hospital Organizations comes to $2.8 trillion over the next 10 years(2012 to 2021), and to an amazing $10.6 trillion over the second 20 years(2022 to 2031).....and all of it will be untaxed.
Is that excessive? Clearly, but what should be done?
As one suggestion, I think that the US government should take wise steps to reduce the egregious Non-Profit Hospital Organizations' annual percentage increases in HOI.
As a perspective, if the above assumed 12% average annual percentage increase were cut precisely in half to 6%, after all, these are Non-Profit Organizations, the Total Estimated Hospital Operating Income over the next 10 years drops from $1,863 bil to $1,230 bil, or by $633 bil. And over the next 20 years, this Total Estimated Hospital Operating Income drops from $8,022 bil to $3,619 bil, or drops by an incredible $4,403 bil.
And the above estimated Hospital profits exclude those of For-Profit Hospitals, which are quite substantial.
As a second suggestion, I think that the US government should take wise steps to reduce the egregious Total Bottom-line Earnings as a percentage of Total Operating Revenues of Non-Profit Hospitals. When I run the numbers, starting in 2014 and in every year thereafter, this key ratio for Non-Profit Hospitals in the aggregate, on an after-tax basis, will be higher than that of the majority of the pristine companies in the 30 Dow Industrials.
If this second suggestion were enacted, and resulted in bringing down the aggregate profit margin ratio to what, in all fairness, a Non-Profit Organization should be operating at, the Total Hospital Operating Income would drop by substantially more than the $4.4 bil reduction over the next 20 years resulting from my first suggestion.
Clearly, the opportunity to reduce the US Deficit dramatically, by removing a good chunk of the excess profits generated by Non-Profit Hospital Organizations through lower Medicare and Medicaid fees paid by the US Government, is just huge.
Also, in all fairness, immense pressure should be placed on these Non-Profit Hospitals to reduce fees charged to all insured patients.....and if effective, this should result in both businesses and individuals paying much less for their health care costs, with a resultant nice bump up in long-term US economic growth and in sustainable robust job creation.
In closing out this post....Is this where we want to be as a country where the US unemployment rate is 9.2%, the US Debt level is $14.5 trillion, but yet, given the above assumptions, the Non-Profit Hospital Industry is projected to generate Total Earnings of $13.4 trillion over the next 20 years, and with not a dime of it taxed?
