August 23, 2017; Healthcare Finance News
In spite of reduced rates of uninsured patients, nonprofit hospitals have seen a decrease in profit margin over the last year, according to new data from Moody’s Investors Services. This decrease in profit margin seems to be driven by an increase in expenses, particularly labor and pharmaceutical costs, as opposed to decreased revenue. Compared to the 2015–2016 fiscal year, operating expenses increased by about 7.5 percent while revenue grew 6.6 percent.
This comes after a two-year period of growth for nonprofit hospitals. After the passage of the Affordable Care Act (ACA), nonprofit hospitals saw an increase in visits and reimbursement. But, as the number of insured patients stabilizes, nonprofit hospitals now face declining reimbursement rates and increased supplies expenses, both of which result in declining profitability going forward.
Unfortunately, it does not look as if this picture will get better soon, especially given the current political environment that threatens to increase the uninsured population. According to Beth Wexler, a Moody’s vice president, “Higher expenses coupled with positive, albeit slower, revenue growth, contributed to lower profitability, tempered liquidity growth, and moderation of nearly all financial metrics. Tighter margins will weigh on the sector going forward.”
As profits decline, will nonprofit hospitals opt to forfeit their 501(c)(3) status in favor of a for-profit model? NPQ reported on at least one case of a nonprofit choosing to do just that, as the “cost of compliance” was too high. Based on the ACA, nonprofit hospitals must adhere to strict guidelines with regard to patient bill collection and conduct triennial needs assessments, in addition to the requirements of running a nonprofit organization in general. One hospital even lost its nonprofit status after failing to comply with the nonprofit hospital requirements set forth by the ACA. Further, nonprofit hospitals cannot charge uninsured patients more than the “generally billed” amount for a procedure, resulting in restricted income and greater compliance costs for tax-exempt hospitals.
NPQ has questioned whether any hospitals should be given nonprofit, tax-exempt status. The activities of a nonprofit hospital are arguably indistinguishable from their for-profit counterparts, with the stipulation that some additional community benefit must be provided. What impact this community benefit must have and the amount of funds that should be allocated to this function, however, is unclear. From the community perspective, in the absence of clear standards for community benefit, government or community services resulting from the tax income would possibly be more beneficial. From the nonprofit hospital perspective, if the amount the hospital would pay in taxes is less than the cost of compliance, they might as well give up their 501(c)(3) status or merge with a for-profit hospital. With these challenges and more making it increasingly difficult to remain afloat, we may see that hospitals also question the validity and value of tax exemption.— Sheela Nimishakavi