Three Mecklenburg County nonprofit hospitals ranked in the Top 100 most profitable U.S. hospital systems, according to a recent study in the journal Health Affairs.
The Top 100 hospitals each netted $63 million to $302 million from patient care in 2013, the most recent year for which data from Medicare was available. Details about Mecklenburg hospitals:
▪ Novant Health Presbyterian Medical Center ranked 47th, with earnings of more than $92 million in net income from patient care in 2013.
▪ Carolinas Medical Center-Mercy and Carolinas Medical Center-Pineville, owned by Carolinas HealthCare System, jointly ranked 54th with combined earnings of $85 million in net income from patient care in 2013.
No other North Carolina hospitals made the list. The only South Carolina hospital was Grand Strand Regional Medical Center in Myrtle Beach, which ranked 49th.
The findings reinforce those in a 2012 series published by the Observer and the News & Observer in Raleigh. That series, “Prognosis: Profits,” reported that many Charlotte-area nonprofit hospitals generate some of the nation’s largest profit margins and, despite the recession, amassed billions of dollars in reserves.
Officials of the two Charlotte hospital systems questioned the results, explaining that the financial condition of single hospitals doesn’t give an accurate picture of their overall systems.
“You need to look at the entire health care system before you make conclusions about how successful or profitable somebody is,” said Greg Gombar, chief financial officer at Carolinas HealthCare.
For the Health Affairs article, Gerard Anderson and his co-author, Ge Bai from Washington and Lee University, analyzed 2013 net income for patient-care services, based on Medicare cost reports.
The researchers did not analyze “overall profit margin,” which would include income from other sources, such as donations and investments. “We wanted to focus just on the patient care activities,” Anderson said, “…because hospitals claim that they lose money on patient care.”
Gombar questioned the decision to base research on data from what he called “antiquated” Medicare reports.
“I don’t agree with the conclusions,” Gombar said. “They haven’t changed this reporting system since 1984.”
Gombar said Medicare cost reports for hospitals don’t reflect the reality that Carolinas HealthCare also operates physician groups, nursing homes and a behavioral health hospital that “have low margins or negative margins.”
Fred Hargett, Novant’s chief financial officer, agreed: “In some cases we have facilities that are more profitable than others, and they are supporting other facilities that are needed in the community but may not be able to have the income necessary to reinvest as appropriate.”
Winston-Salem-based Novant is a $3.8 billion private, nonprofit group with 14 hospitals in three states – including four in Mecklenburg. The system paid its CEO $2.6 million in 2014, and it has $2.6 billion in reserves.
Carolinas HealthCare is an $8 billion public, nonprofit enterprise that owns or manages about 40 hospitals across the Carolinas. The system paid its chief executive officer $6.6 million in 2015, and it has $3 billion in reserves.
Gombar said a health system’s profitability should be calculated as a percentage of revenue and compared to other systems. Based on reports by Standard & Poor’s and Moody’s rating agencies, he said, “Our margins are actually close to the median of other large double-A-rated health systems. They’re right in line.”
For 2014, S&P listed the median operating margin for AA-rated health systems at 5.3 percent of total operating revenue; Moody’s reported a median of 4.8 percent.
Carolinas HealthCare’s operating margin that year was 3.1 percent of revenue. Novant had an operating margin of 4.4 percent in 2014.
Hospitals dominate markets
Like the newspapers’ series, the Health Affairs study found that consolidation of hospitals in large systems results in more profit because they can dominate their markets.
“If you’re a dominant hospital in a community, you can negotiate very high rates with Blue Cross and United and other (private) insurers,” co-author Anderson said. “An insurer has to have them in their network. That gives the hospitals a lot of ... leverage to negotiate higher payments.
“When hospitals charge a lot, insurers have to raise their premiums. All of us are paying higher premiums when hospitals are making higher profits.”
In addition to higher premiums, there can be higher prices for care, Anderson said. “You might be paying $5,000 for a service, but it’s only costing them $4,000 to provide it.…They’re collecting a lot more money than they’re spending. That’s how they earn a profit.”
Gombar and other Carolinas HealthCare leaders say profits support their mission of caring for all patients, wealthy or poor. “Without margin, you can’t have the mission,” retiring CEO Michael Tarwater has said.
Hospital officials say they need to pay competitive salaries to attract talented leaders and must operate like businesses to survive in turbulent times. Having healthy margins and reserves helps the system maintain a good credit rating, build new facilities and add technology.
Unlike for-profit companies, which use their profits to pay dividends to stockholders, nonprofit hospitals must plow extra revenue back into their organizations. Hospital officials say some projects are offered without regard for profit.
In 2014, Carolinas HealthCare opened its Davidson psychiatric hospital, which was projected to lose about $30 million over the first five years. But Tarwater said it was “the right thing to do.”
Also, the system’s four primary-care clinics in Charlotte serve more than 70,000 low-income patients a year who might otherwise have relied on more expensive emergency rooms for basic care.
Hargett said Novant is using its income to build a new orthopedic hospital in Charlotte, a community hospital in Mint Hill and a new outpatient center for heart and cancer care “to better serve our patients.” He said the system also provides free health screenings to underserved patients.
Hospitals are among the largest property owners and employers in many communities. Nonprofits receive state and federal tax breaks. “To justify their exemption from corporate income and property taxes, nonprofit hospitals are expected to provide community benefits and keep their prices affordable,” the study said.
The IRS doesn’t specify how much nonprofits should give back in “community benefit.” But research has shown that the value of tax breaks for nonprofit hospitals has doubled over the past decade, which adds fuel to a longstanding debate on whether they give back enough to the public.
If nonprofit hospitals are making a lot more money than they’re spending and not paying taxes, Anderson said, “I would wonder why.”
Gombar said Carolinas HealthCare spent about $1.6 billion, for “community benefit” in 2014. “That’s one out of every five dollars. It’s significant.”
The $1.6 billion includes $320 million in charity care, the practice of forgiving all or part of a bill for uninsured and indigent patients. It also includes the cost of what system officials call “unpaid government debt” because Medicare and Medicaid programs don’t compensate for the actual cost of treating patients.
Novant provided $639 million in community benefit in 2014, including $135 million in charity care. That’s about 18 percent of expenses.
The Washington Post contributed to this article.