The Dose - JK Wall

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Health Care & Life Sciences / Life Science & Biotech

Get ready to see for-profit religious hospitals

July 17, 2013

I have to say it: the not-for-profit label worn by Indianapolis' hospitals is meaningless for just about everyone but the IRS.

Fact is, the executives leading those organizations are as profit-focused as any car dealer or street corner food vendor. If anything, they're coveting black ink more than ever.

That much was clear last month when St. Vincent Health, at the behest of its parent organization, St. Louis-based Ascension Health Alliance, laid off about 865 people.

St. Vincent’s cuts were just a small part of 4,700 jobs eliminated nationwide by Ascension, according to an executive who was laid off at St. Mary Medical Center, an Ascension subsidiary in Evansville.

Ascension, the nation’s largest chain of Catholic hospitals, wants to boost profits from its operations substantially. Any business would.

But Ascension faces extra pressure to focus on cutting costs, because both government health plans and private health insurers are holding the line on reimbursement rates. And Ascension, like all hospitals, needs to keep its profit margins healthy to satisfy its public bondholders.

Ascension’s hospital operations turned a profit of 3.7 percent in its most recently reported financial year, up from 2.7 percent the year before. That’s good but not great for a hospital system.

The 4,700 jobs eliminated represent just 4 percent of Ascension’s total work force of 122,000 people, but the cuts still could give a sizable boost to Ascension’s profit margin. A 4 percent cut to salaries and benefits would have saved Ascension about $325 million in its most recently reported fiscal year, which ended June 30, 2012. Its profit margin would have jumped up to 5.7 percent.

Profit-focused management is hardly unique to St. Vincent and Ascension. Indiana University Health, for example, tried to boost its profit margins over the past decade with aggressive building and marketing campaigns. It even, for a time, started new hospitals using for-profit structures and investment capital from physicians.

Some find this business-minded approach to medicine morally reprehensible. Hospitals, however, see themselves as using business practices to help them advance a worthwhile cause—human health. In this view, profits are not the purpose of the organization, but rather a necessary ingredient for sustaining that mission over the long-term.

“No margin, no mission” is the phrase often used by health care executives, particularly those leading religious, not-for-profit hospitals.

With exactly this mindset, Ascension launched in 2011 the Ascension Health Care Network as a for-profit joint venture with Oak Hill Capital Partners, a Wall Street private equity firm. The network’s goal is to use some of Oak Hill’s $30 billion asset chest to acquire struggling Catholic hospitals in order to keep them alive.

“Of course, the reason this issue is on the table at all is that there are Catholic hospitals across the country that are facing the question of whether they are going to be able to continue to survive, to thrive in the long run,” explained Leo Brideau, CEO of the Ascension Health Care Network. He noted that “in many cases we’re talking about whether they will even survive over the next five years or so.”

Brideau made those comments during a March 2012 conference at Seton Hall University in New Jersey. The proceedings of that conference were published this year as a book titled, “Is a For-Profit Structure a Viable Alternative for Catholic Health Care Ministry?” You can read the book here.

Ascension’s executives clearly think they can meld their Catholic mission and a for-profit status.

“The point is, ‘for-profit’ describes our tax status; it doesn’t describe our purpose. Our purpose is continuing the healing ministry of Jesus—that is our purpose,” Brideau said. “And so, whether not-for-profit or for-profit, we use our capital in very much the same ways; but in either case we have to provide a return on investment to our bondholders and to our shareholders.”

One thing Brideau did not address in his speech was whether a for-profit structure would affect the amount of free care provided. A 2006 analysis by the Congressional Budget Office, using data from Indiana and four other states, not-for-profit hospitals provide a tick more uncompensated care than their for-profit peers—4.7 percent of their operating expenses, compared with 4.2 percent at for-profit hospitals.

That said, I suspect we'll see other not-for-profit hospitals, perhaps even some here in Indianapolis, turn to a for-profit strategy to deal with financial pressures. Sensing exactly that kind of trend, the Catholic Health Association passed a rule in 2011 that allowed Catholic hospitals to keep their membership after converting to a for-profit organization, pending a study of the issue by a task force. And that's certainly what Ascension's Brideau expects.

“I believe that there is no question that for-profit tax status can be entirely consistent with maintaining the Catholic health ministry," he said. "In fact, I would argue that in today’s world it is necessary, beyond simply being appropriate.”

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