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The Keckley Report

Not for Profit Hospitals: Are they the Problem?

By August 14, 2023No Comments

Last Monday, four U.S. Senators took aim at the tax exemption enjoyed by not-for-profit (NFP) hospitals in a letter to the IRS demanding detailed accounting for community benefits and increased agency oversight of NFP hospitals that fall short.

Last Tuesday, the Elevance Health Policy Institute released a study concluding that the consolidation of hospitals into multi-hospital systems (for-profit/not-for-profit) results in higher prices without commensurate improvement in patient care quality. “

Friday, Kaiser Health News Editor in Chief Elizabeth Rosenthal took aim at Ballad Health which operates in TN and VA “…which has generously contributed to performing arts and athletic centers as well as school bands. But…skimped on health care — closing intensive care units and reducing the number of nurses per ward — and demanded higher prices from insurers and patients.”

And also last week, the Pharmaceuticals’ Manufacturers Association released its annual study of hospital mark-ups for the top 20 prescription drugs used on hospitals asserting a direct connection between hospital mark-ups (which ranged from 234% to 724%) and increasing medical debt hitting households.

(Excerpts from these are included in the “Quotables” section that follows).

It was not a good week for hospitals, especially not-for-profit hospitals. In reality, the storm cloud that has gathered over not-for-profit health hospitals in recent months has been buoyed in large measure by well-funded critiques by Arnold Ventures, Lown Institute, West Health, Patient Rights Advocate and others. Providence, Ascension, Bon Secours and now Ballad have been criticized for inadequate community benefits, excessive CEO compensation, aggressive patient debt collection policies and price gauging attributed to hospital consolidation.

This cloud has drawn attention from lawmakers: in NC, the State Treasurer Dale Folwell has called out the state’s 8 major NFP systems for inadequate community benefit and excess CEO compensation. In Indiana, State Senator Travis Holdman is accusing the state’s NFP hospitals of “hoarding cash” and threatening that “if not-for-profit hospitals aren’t willing to use their tax-exempt status for the benefit of our communities, public policy on this matter can always be changed.” And now an influential quartet of U.S. Senators is pledging action to complement with anti-hospital consolidation efforts in the FTC leveraging its a team of 40 hospital deal investigators.

In response last week, the American Hospital Association called out health insurer consolidation as a major contributor to high prices and, in a US News and World Report Op Ed August 8, challenged that “Health insurance should be a bridge to medical care, not a barrier. Yet too many commercial health insurance policies often delay, disrupt and deny medically necessary care to patients,” noting that consumer medical debt is directly linked to insurer’ benefits that increase consumer exposure to out of pocket costs.

My take:

It’s clear that not-for-profit hospitals pose a unique target for detractors: they operate more than half of all U.S. hospitals and directly employ more than a third of U.S. physicians. But ownership status (private not-for-profit, for-profit investor owned or government-owned) per se seems to matter less than the availability of facilities and services when they’re needed. And the public’s opinion about the business of running hospitals is relatively uninformed beyond their anecdotal use experiences that shape their perceptions. Thus, claims by not-for-profit hospital officials that their finances are teetering on insolvency fall on deaf ears, especially in communities where cranes hover above their patient towers and their brands are ubiquitous.

Demand for hospital services is increasing and shifting, wage and supply costs (including prescription drugs) are soaring, and resources are limited for most. The size, scale and CEO compensation for the biggest not-for-profit health systems pale in comparison to their counterparts in health insurance and prescription drug manufacturing or even the biggest investor-owned health system, HCA…but that’s not the point. NFPs are being challenged to demonstrate they merit the tax-exempt treatment they enjoy unlike their investor-owned and public hospital competitors and that’s been a moving target.

In 2009, the Internal Revenue Service (IRS) updated the Form 990 Schedule H to require more detailed reporting of community benefit expenditures across seven different categories including charity care, unreimbursed costs from means-tested government programs, community health spending, research, and othersThe Affordable Care Act added requirements that non-profit hospitals complete community health needs assessments (CHNAs) every three years to identify the most pressing community health priorities and create detailed implementation strategies explaining how the identified needs will be addressed.

But currently, there are no federal community benefit requirements that ensure hospitals use the most accurate accounting standards for charity care and unreimbursed Medicaid services; set a minimum level of community benefit spending; require hospitals to spend on community benefit dollars on identified needs; or describe in detail the type of activities that quality as community benefit spending.

Thus, the methodology for consistently defining and accounting for community benefits needs attention. That would be a good start but alone it will not solve the more fundamental issue: what’s the future for the U.S. health system, what role do players including hospitals and others need to play, and how should it be structured and funded?

The issues facing the U.S. health industry are complex. The role hospitals will play is also uncertain. If, as polls indicate, the majority of Americans prefer a private health system that features competition, transparency, affordability and equitable access, the remedy will require input from every major healthcare sector including employers, public health, private capital and regulators alongside others. It will require less from DC policy wonks and sanctimonious talking heads and more from frontline efforts and privately-backed innovators in communities, companies and in not-for-profit health systems that take community benefit seriously.

No sector owns the franchise for certainty about the future of U.S. healthcare nor its moral high ground. That includes not-for-profit hospitals.

The darkening cloud that hovers over not-for-profit health systems needs attention, but not alone, despite efforts to suggest otherwise. Clarifying the community-benefit standard is a start, but not enough. Are NFP hospitals a problem? Some are, most aren’t but all are impacted by the darkening cloud.


Today’s report that at last count, 96 have died and many more deaths are anticipated in the Maui wildfire reminded me that caregivers at Maui Health, the Island’s only major hospital, will be working overtime to care for the Island’s population physically and emotionally long after the fire is put out and media coverage subsides. It’s a 501C3 Not for Profit hospital!


Letter to IRS Commissioner Daniel Werfel and Commissioner Edward T. Killen Tax Exempt and Government Entities Division from US Senators Elizabeth Warren (D-MA), Raphael Warnock (D-GA), Bill Cassidy (R-LA) and Charles Grassley (R-IA) August 7, 2023 ttps:// on Nonprofit Hospitals.pdf

“Costs and Quality After Independent Hospitals Are Acquired by Health Systems” Elevance August 8, 2023

Elisabeth RosenthalYour Exorbitant Medical Bill, Brought to You by the Latest Hospital Merger” KFF News August 11, 2023

Are Indiana “not-for-profit” hospitals hoarding money? State Senator Travis Holdman

Hospital Charges and Reimbursement for Medicines: 2023 Update Analysis of Markups Relative to Acquisition Cost The Pharmaceutical Research and Manufacturers of America August 2023


Re: Excerpts from Letter to IRS from US Senators 8/7/23: “We write today regarding our concern over the growing amount of medical debt and the role your agencies can play in providing greater transparency and oversight into nonprofit hospitals, which hold a portion of this debt.

More than half of the approximately 5,000 community hospitals in the United States operate as private, nonprofit organizations. Under IRS rules, nonprofit hospitals that provide “benefits to a class of persons that is broad enough to benefit the community” may qualify for tax exemptions.4 One study estimated that these exemptions were worth over $28 billion in 2020.

We are alarmed by reports that despite their tax-exempt status, certain nonprofit hospitals may be taking advantage of this overly broad definition of “community benefit” and engaging in practices that are not in the best interest of the patient. These practices – along with lax federal oversight – have allowed some nonprofit hospitals to avoid providing essential care in the community for those who need it most.”

Letter to IRS Commissioner Daniel Werfel and Commissioner Edward T. Killen Tax Exempt and Government Entities Division from US Senators Elizabeth Warren (D-MA), Raphael Warnock (D-GA), Bill Cassidy (R-LA) and Charles Grassley (R-IA) August 7, 2023 ttps:// on Nonprofit Hospitals.pdf

Re: Excerpts from Elevance Policy Institute Study 8/8/23: “This retrospective claims study used hospital admissions data from Elevance Health affiliated commercial health plans in 20 states between January 1, 2012, to December 31, 2018. The analysis compared independent hospitals that merged with a hospital system and hospitals that remained independent.

Independent hospital mergers with health systems have exposed consumers, employers, and other payers to higher prices without a commensurate increase in quality of or access to hospital care. Instead, quality and access generally declined, while hospitals realized cost savings, following acquisition…

Hospitals experienced large cost efficiencies after system acquisition. Operating expenses declined by 6% above market trend, at the acquired hospital following system ownership, without any offsetting increase in costs at the acquirer system.”

“Costs and Quality After Independent Hospitals Are Acquired by Health Systems” Elevance August 8, 2023

Re: Excerpts of Rosenthal Article 8/11/23: “After decades of unchecked mergers, health care is the land of giants, with one or two huge medical systems monopolizing care top to bottom in many cities, states, and even whole regions of the country. Reams of economic research show that the level of hospital consolidation today — 75% of markets are now considered highly consolidated — decreases patient choice, impedes innovation, erodes quality, and raises prices…

The newest challenge is how to handle the growing number of cross-market mergers, where huge health systems in different parts of a state or of the country join forces. While the hospitals are not competing for the same patients, emerging research shows that these moves result in higher prices, in part because the increased negotiating clout of the enormous health system forces companies that cover employees in both markets to pay more in what previously was the cheaper region…

Indeed, a number of states — red and blue — are now gingerly floating moves to directly rein in prices. This year the Indiana Legislature, for example, banned hospitals from charging facility fees for visits outside of the hospital. The lawmakers even considered fining hospitals whose prices were more than 260% of the Medicare rate — though they deferred that move for two years in the hope that the threat would encourage better behavior.

With the FTC becoming more aggressive and legislatures considering such measures, perhaps hospital systems will heed the warnings and behave more like the care providers they’re meant to be and less like monopoly businesses.”

Elisabeth RosenthalYour Exorbitant Medical Bill, Brought to You by the Latest Hospital Merger” KFF News August 11, 2023

Re: hospital markups for prescription drugs: “Hospital markups are driving up patients’ out-of-pocket costs, which particularly hurts patients living paycheck-to-paycheck and those in need of extensive medical care. This is yet another example of how medicines are being used to pad the profits of hospitals, insurers and PBMs at the expense of patients.

Despite a myopic focus on drug spending, roughly 30% of every dollar spent on health care in the United States can be attributed to hospitals. Almost 4 times more is spent on hospitals than on retail prescription medicines annually, and this trend is predicted to continue for the foreseeable future…

It’s important to take a holistic look at the U.S. health care system when considering any policy changes. As policymakers continue to deliberate on health care costs and affordability, they should factor in the increasing role hospitals play in driving costs for patients and the broader health care system.”

Stephen J. Ubl, president and chief executive officer of PhRMA. On release of PhRMA sponsored Moran Study of Hospital Drug Price Mark-ups “New Analysis Shows Hospitals Mark Up Medicine Prices 500%” August 2, 2023 New Analysis Shows Hospitals Mark Up Medicine Prices 500% | PhRMA

Other notable quotables from last week:

Re: Adventist-Multiplan Lawsuit: “This case seeks to redress Plaintiff Adventist Health System Sunbelt Healthcare Corporation’s (“AHS”) injuries caused by a multi-year, ongoing conspiracy among competing commercial health insurance payors to reduce the re imbursements they pay to healthcare providers for out-of-network healthcare services. This conspiracy was organized and orchestrated by Defendant MultiPlan, Inc. (“MultiPlan”) and embodied in a series of written agreements between MultiPlan and virtually every other significant health insurance payor in the United States. MultiPlan has admitted (a) that these agreements exist and (b) that it competes against the other health insurance payors with whom it has entered into these agreements. Therefore, MultiPlan is jointly and severally liable per se for all of the damages caused by those agreements…The effects of MultiPlan’s horizontal repricing agreement with its competitors have been dramatic. By 2020, MultiPlan was using its repricing tools to underpay 370,000 out-of- network claims per day for over 700 health insurance companies, resulting in a total underpayment of approximately $19 billion per year to healthcare providers.”

Adventist Health System Sunbelt Healthcare Corporation, Plaintiff, v. MultiPlan, Inc., Defendant Case 1:23-cv-07031 Document 1 Filed 08/09/23

Re: Transparency in higher education: “A number of university trustees, faculty and staff members are calling for more transparent financial data that they can access about their schools in the wake of a Wall Street Journal investigation that highlighted large spending increases at 50 state flagship universities.

Some contacted the Journal, after it published its article Thursday, asking for information that would give them a better understanding of spending patterns at their schools. That’s in part because some universities provide only minimal information to those with oversight, for instance handing trustees pie charts or high-level summaries rather than detailed budgets, as the Journal’s investigation found.”

Fuller, Korn “Colleges Urged to Produce Better Information on How They Spend Money” August 11, 2023


Moody’s: Hospital margins improving but pre-pandemic recovery distant: Per Moody’s report last week:

Moody’s Investors Service

Study: Hospital mark-ups for prescription drugs: Per the Moran analysis of “hospital markups and margins by site of service for the 20 individual medicines that commercial payers cover that account for the largest share of per member per month (PMPM) spending” for 2021:

  • The hospital markup ranged from 234-724% averaging 500% + for the 20 medicines analyzed.
  • 340B hospitals are reimbursed, on average, almost three times the discounted 340B price of a medicine.
  • Most hospitals (83%) charged patients and insurers more than double the cost of medicine: 53% marked up medicine 200- 400%, 17% set prices at least seven times more than what the hospital paid for the medicine; 8% of hospitals set prices more than 1,000% higher than what the hospital paid.

“Hospital Charges and Reimbursement for Medicines: 2023 Update Analysis of Markups Relative to Acquisition Cost” Moran Company August 2023

“New Analysis Shows Hospitals Mark Up Medicine Prices 500%” August 2, 2023 New Analysis Shows Hospitals Mark Up Medicine Prices 500% | PhRMA

Public Health

Study: food insecurity during Covid: The primary policy intervention for food insecurity is the Supplemental Nutrition Assistance Program (SNAP), which in 2022 served more than 21.5 million households and distributed more than $114 billion in benefits. SNAP, which is federally funded but state administered, delivers monthly monetary allotments to households to help reduce food insecurity.  Researchers analyzed the association between changes to Nebraska’s rejection of additional Supplemental Nutrition Assistance Program (SNAP) funding and public health during the COVID-19 pandemic. Findings:

“Nebraska’s rejection of additional funding for SNAP recipients was associated with increases in food insecurity (1.61%), percentage of inpatient beds filled by patients with COVID-19 (0.19%) and percentage of inpatient beds filled (2.35%) …the rejection of emergency allotments in Nebraska was associated with increased food insecurity.  Additionally, this intervention was associated with an increased rate of hospitalizations for COVID-19 and non–COVID-19 causes.”

Lavallee et al “Supplemental Nutrition Assistance Program Emergency Allotments and Food Security, Hospitalizations, and Hospital Capacity” JAMA Network Open August 9, 2023;6(8):e2326332. doi:10.1001/jamanetworkopen.2023.26332

Study: Weight loss challenging: In this cohort study of 18, 461, 623 US patients with overweight and obesity, the annual probability of 5% or greater weight loss was low (1 in 10) but increased with higher initial BMI. The annual probability of reducing BMI to the healthy weight category was less likely, especially for individuals with initial BMI of 45 or higher…Findings of this study suggest that clinicians and public health efforts can focus on messaging and referrals to interventions that support individuals with excess weight in achieving and sustaining meaningful weight loss.”

Kompaniyets et al “Probability of 5% or Greater Weight Loss or BMI Reduction to Healthy Weight Among Adults With Overweight or Obesity” JAMA Netw Open. 2023;6(8):e2327358. doi:10.1001/jamanetworkopen.2023.27358


Pitchbook Q2 2023 Healthcare Services Report: Private equity activity:

  • 164 total deals in Q2 (estimated)
  • 820 total deals in TTM (estimated)
  • -23.7% QoQ change in deal count
  • -30.9% YoY change in Q2 deal count
  • -24.9% TTM change in deal count

“Healthcare services PE deal activity dipped unexpectedly in Q2 2023…With the federal funds rate now set at 5.5%, heavily leveraged platforms are straining under growing debt service costs and impending maturity walls. This has led to a significant deceleration in add-on M&A by many of the largest groups, especially in physician practice management (PPM) roll-up categories such as dental, vision, and veterinary…Healthcare specialist managers also have a growing arsenal of dry powder to deploy. According to recent PitchBook research, fundraising by healthcare specialist PE firms skyrocketed in 2021 and has remained elevated through the first half of 2023 despite depressed fundraising for the asset class as a whole.”

Note: in the physician services space, 4 firms (Shore Capital, Webster, Petra and Endurance) completed 70% of deal activity—mostly add-on’s to existing platforms. (Keckley)

Pitchbook Healthcare Services Report 2Q 2023 August 11, 2023


Study: Physician income: The 60-page yet-to-be published National Bureau of Economic Research (NBER) analysis of physician income is based on tax records and multivariate analyses for 985,000 physicians’ earnings from 2005 to 2017. Highlights:

  • Annual earnings average $350,000 and comprise 8.6% of national healthcare spending in 2017.
  • Health policy has a major impact on the margin: 25% of physician fee revenue is driven by Medicare reimbursements accrues to physicians personally.
  • “Limited entry for some specialties, combined with regulated pricing, generates powerful interests to protect these ex-post rents. When entry is restricted, higher government payments are extra valuable for incumbents” p. 2)
  • “The top 1% of physicians averages $4.0 million in annual earnings: 10 times average annual earnings in the sample and more than twice the average earnings in the top 5%. Second, business income is crucial for the top earners. 80% of physicians in the top 1% report business income of at least $25,000, compared to 44% in the top half and 35% overall. The share of earnings coming from non-W-2 sources is also substantially higher among top earners: 85% for physicians in the top percentile, but 6% for an average physician. Third, top earners are 67% more likely than the average physician to attend top-5 medical schools and 38% as likely to work in primary care… Top earners are 6 times more likely to be neurosurgeons, which is one of the most human capital investment-intensive specializations.” (p.18)

Who Values Human Capitalists’ Human Capital? The Earnings and Labor Supply of U.S. Physicians NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2023

PWC: physician employment trend: 74% of physicians now employed by hospitals or corporate entities:

Time period Number of physicians* % of Physicians
January 2019 375.4 62.2%
January 2020 391.0 64.5%
January 2021 423.8 69.3%
January 2022 484.1 73.9%

PwC, Medical cost trend: Behind the numbers, June 2023

Study: Physician workforce adequacy in rural markets: Background: In 2020, Medicare spent $16.2 billion on graduate medical education, but only 2% of Medicare-funded residency training occurred in rural areas. The lack of residency training in rural and underserved areas worsens the maldistribution of physicians because physicians who spend at least half of their residency training in rural and underserved areas have odds 5 times higher to practice in those areas after residency compared with those who trained elsewhere. To address this, Congress created 1000 new residency slots targeted toward training in rural and underserved areas.

Analysis: “The allocation of residency slots underrepresents the rurality of the population living in HPSAs. Although 32.10% of people living in primary care HPSAs are in rural communities, only 5% of the programs receiving residency slots trained their residents for at least half (≥50%) of their residency in rural HPSAs.  These findings suggest that the methods used by Congress for distributing residency slots ensured that more residency training occurs in urban HPSAs, but fell short of expanding training opportunities in rural HPSAs. Without a congressional mandate to evaluate residency slot distribution, policymakers may not know whether their distribution methods are achieving their policy goal.”

Rains et al “The Distribution of Additional Residency Slots to Rural and Underserved Areas” JAMA. August 9, 2023. doi:10.1001/jama.2023.14452

No Surprises Act court challenge by TMA:  A Texas federal judge has sided with the Texas Medical Association for a third time in its series of legal challenges over the No Surprises Act, this time over a 600%  hike in administrative fees when seeking dispute resolutions.

“The TMA filed the lawsuit in January — its fourth challenging provisions of the rule — arguing that the fee hike restricts many physicians’ ability to seek arbitration when an insurer offers insufficient payment for care. The lawsuit came after federal agencies announced in October the administrative fees would remain $50 in 2023. Two months later, the agencies announced the fee would increase to $350 beginning in January 2023 “due to supplemental data analysis and increasing expenditures in carrying out the federal [independent dispute resolution] process since the development of the prior 2023 guidance.”

“HHS loses another No Surprises Act lawsuit”


Study: hospital prices negotiated by insurers: Johns Hopkins’ researchers analyzed the ratio of commercial-to-MA prices negotiated by the same insurer, in the same hospital and for the same services, using 2022 price information disclosed by hospitals from 2,434 hospitals and 118 insurers across 200,000 settings and services.

Findings: “Insurers negotiated median hospital prices for commercial plans that were two to three times higher than their MA prices in the same hospital for the same service. The median commercial-to-MA price ratio in the same hospital varied, from 1.8 for surgery and medicine services to 2.2 for laboratory tests and emergency department visits and 2.4 for imaging services. In multivariable Poisson regression analysis, higher ratios were associated with system-affiliated, nonprofit, and teaching hospitals, as well as with large national insurers. These findings reflect the differences in financial incentives and regulatory policies in the commercial and MA markets. Because insurers respond to differing incentives by obtaining different negotiated prices across markets, policy and practice efforts that alter incentives for insurers may have the potential to lower commercial prices.”

Meiselbach et al “Hospital Prices For Commercial Plans Are Twice Those for Medicare Advantage Plans When Negotiated by The Same Insurer “ Health Affairs August 2023 No Access

CMS Medicare Advantage Bonus Payments for 2023: The Centers for Medicare and Medicaid Services announced these bonus payments totaling $12.8 billion for 2022: United (29%), Humana (18%) and Aetna (11%) will get the majority (58%).

Spending on Medicare Advantage Quality Bonus Payments Will Reach at Least $12.8 Billion in 2023 KFF August 9, 2023


Commerce Department: In July, the headline CPI rose 0.2% for the second consecutive month. However, on a year-ago basis, the CPI was up 3.2%, a slight acceleration from the 3% year-over-year gain in June.

“Though the inflationary fever is breaking, consumer sentiment is still downbeat from a historical perspective…Wages are now outpacing inflation, which should bring a cheer to consumers. However, they also perceive that real incomes remain battered by last year’s bout of alarmingly high inflation. Inflation-adjusted average hourly earnings are 3% below their pre-pandemic trend.”

US Department of Commerce Bureau of Labor Statistics August 10, 2023