Are non-profit hospital mergers making things better or worse?

Hyundai brings more to the table with its new 2018 Sonata
Grant Miller


In business, it is taken as Gospel that mergers are a good thing.

You’ll hear phrases like “economies of scale” and “acquired efficiencies” and the obliquely vague “synergistic benefits.” It might make sense when talking about two small banks or mid-sized manufacturers. When it comes to hospitals and healthcare, it’s a different story.

Take Baptist Hospital. It was founded in 1960 on a vast tract of land covered with rockland pine scrub and palmettos at the corner of Galloway Road and Kendall Drive. There was little in the area. Dadeland Mall wouldn’t open as a small open-air shopping center for another two years.

From Baptist’s humble beginning, it has grown to a 728-bed hospital that serves about 32,000 in-patients and 72,000 emergency out-patients a year. The parent entity, Baptist Health South Florida has acquired hospitals as far north as Boynton Beach and as far south as Marathon in the Keys.

Its website shows that it operates 106 separate medical units and controls the practices of 245 physicians. It has almost 20,000 employees and over 3,000 doctors have privileges. That’s a lot of fingers in a lot of pies.

As a not-for-profit hospital, Baptist is not supposed to be profit-driven. But a look at its most recent audited income statement shows that it had what it terms “Excess of Revenues Over Expenses” of almost $250 million, giving it a bigger “profit” than industrial aluminum giant Alcoa. And that’s just in the past year.

One advantage that Baptist and other non-profits have over other entities is that it pays income taxes only on the money made by a handful of its for-profit subsidiaries. And it pays no ad valorem taxes. Its Kendall campus has an assessed total value of almost $385 million, yet it pays no property taxes, even on the portions of the office towers it rents out to unaffiliated entities. And it pays nothing in property taxes on its other hospitals, either.

Jackson Memorial, owned by the county’s Public Health Trust, doesn’t pay any taxes, either. Mount Sinai on Miami Beach is assessed by the Property Appraiser at $121 million, with $109 million of that exempt. Mercy Hospital, actually owned by HCA, is assessed and taxed at about $144 million of property value.

Healthcare is not price driven. Someone involved in a head-on collision on S. Dixie Highway won’t stop the ambulance until he can do a price comparison of the x-rays, MRIs, room rates, surgery, and pharmacy costs before telling the EMTs which hospital to go to.

The website maintains a database with average costs for 50 typical hospital treatments at 197 hospitals throughout the state of Florida. The birth of a child at Baptist averages $21,876. Baptist is able to negotiate a rate of insurance company reimbursement of about 48 percent or $10,575. The cost of childbirth at Jackson Memorial is $16,793, but Jackson only collects $6,432 from insurance companies. The Baptist mother has to come up with $11,301 while the Jackson Memorial mom is expected to pay less: $10,550. Mount Sinai charges about what Baptist does for the birth, but only manages to collect about what JMH gets from the insurance companies. In fact, the findings of several studies show that having a single dominant non-profit hospital in a market actually can raise patient costs between 26 to 40 percent.

How does Baptist do this? It’s in a stronger bargaining position when it comes to negotiating its reimbursement rates with insurers because is controls a much larger percentage of the market than any other non-governmental hospital. A 40- or 100-bed hospital can’t demand the same reimbursement rate that Baptist can.

If medical care were a normal business whose customers shopped on price, then a hospital with Baptist’s market clout might be expected to offer lower prices because of the volume of patients that it treats.

It doesn’t because it doesn’t have to.

Those who study the effect of hospital mergers have been looking for empirical evidence pointing in one direction or another, trying to answer the question of how consolidations affect patient prices. Researchers are finding that the goal of mergers, to generate cost savings and improve the quality of care, are falling short. The data points to the fact that almost all of the consolidations fail to achieve these goals.

Instead, hospital mergers will continue as a way to capture greater and greater market share, expand financing and cash flow options. In all too many cases, mergers are a way to enhance the personal egos of the organizations’ leaders than to enhance health outcomes or lower costs.

The healthcare industry, from doctors to hospitals to pharmacies and drug makers consume about one-fifth of our Gross Domestic Product, the measure economists use to weigh the amount of goods and services produced each year. That’s over $10,000 for every man, woman, and child in this country.

Among the 11 most industrialized countries, the U.S. ranks last for health outcomes, equity, and quality. All that spending has yielded poor health outcomes and a worsening life expectancy when compared with these other countries according to a 2018 report from The Commonwealth Fund.

That makes the advantages that non-profit hospitals all the more egregious. They can generate “profits” which are never taxed, avoid taxes in their properties, accumulate a war chest with which to buy out smaller competitors, and pay for it all by either keeping prices artificially high or even raising them.

So what’s the solution? Prohibiting hospital mergers? Encouraging them? Single payer health system? Going back to the old healthcare system with its gaping holes in the safety net?

What we need is a willingness to put politics aside, and maybe even profits, and to look at our health system with unjaundiced eyes, rather than being blind cheerleaders for local institutions. If the primary goal is to give value to shareholders or to increase market share, then our present system is adequate. But if instead we want our healthcare system to improve the health of everyone at a reasonable cost, to improve the quality of life, and to increase longevity, we need to start over.

We would appreciate your ideas, input, suggestions, and criticisms about this opinion piece, so feel free to comment below!

Shortly after this piece was published, The New York Times published a When Hospitals Merge to Save Money, Patients Often Pay More, click here to read the full article.

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  1. Grant, you’re inspection is too shallow, and a bit inaccurate. Most of the time the patient doesn’t have to come up with the balance after the negotiated rate, only the deductible. That aside, the real problem is the networks and negotiated rate. As a small business person, I’m funding the employees at large corporations like IBM and Amazon, because they negotiate lower rates while I can’t. So what do you do? You have to go beyond what you are talking about:
    1) Make it work like auto repairs. Insurance companies don’t get to have networks, I can go anywhere to get myself fixed and they have to take my insurance. Conversely, if the insurance company has to pay unless the rate is excessive and outside of accepted guidelines. If I can pick my providers instead of the insurance telling me who I can see then the competition will keep prices down.
    2) Everyone has to buy insurance individually. Then we are all competing against each other, not the bullies against us. If an employer wants to REIMBURSE insurance, then that can be a benefit.
    3) I don’t care if doctors are employees or contractors, but I want ONE BILL from the hospital. Not ten. That’s their job, to present a united front..
    4) Health care shouldn’t be a for-profit business for anybody. That should be illegal. It’s a necessity, not a choice. That doesn’t mean you can’t make good money, but having to answer to stockholders kills hospitals, drug companies, equipment providers and everybody else.

    That’s just a few things to start with, I have more.

  2. Grant, Baptist Health South Florida does a lot of charitable work in healthcare. I recall Baptist Hospital writing off approximately $1M on one patient alone, with no insurance, who was fighting for his life for an extended period of time. Baptist has the ability to negotiate a better than average reimbursement from insurance companies due to the number of Baptist hospitals in South Florida, blame that on smart business negotiations. Yes, Baptist makes a profit but has to reinvest the same to remain a not-for-profit organization, and in the meantime provides quality healthcare to South Florida residents.

  3. I agree with you in many ways and I agree with several of the comments. Basically, the comments suggest that (once again) you have only looked at part of the picture. What about the charitable work that Baptist has done for South Miami? Wouldn’t it be nice if Baptist invested in providing affordable housing in some of the housing projects that are going up near it in South Miami. Wouldn’t it be great if Baptist decided to go as solar as possible on all its real estate holdings to help lower the reliance on dirty (read: health damaging) ways of manufacturing electricity? Wouldn’t it be wonderful if Baptist provided scholarships for healthcare professions to the youth of the communities it sits in?

  4. Joel above has a good start. One thing that has never been tried is to eliminate anti-competitive regulations and let competition work to keep prices and quality in line. My son was charged $84K for a gall bladder removal, 3-day stay (written off, no insurance), I was charged ~35K for tumor removal, 36-hr stay. After insurance, I paid ~$400. Such charges are insane.

  5. To echo and focus on what was said earlier by Joel Mussman, the difference between the negotiated rates and the billed amount is actually written off by the healthcare provider. The patient has to pay their share of the deductible/copay/coinsurance of the negotiated rate not the billed amount. The hospital can bill whatever they want to the insurance company – Lets say $20K. However, if the negotiated rate is $9000, $9000 is the number the insurance company and patient will pay depending on the health plan contract. Therefore if you have no insurance, you will be billed the full $20K. It makes no sense, but that’s the way it works.

    Networks are a way that insurance companies control their losses. Unfortunately that forces patients to see doctors in those networks. Not necessarily the most convenient in distance or more reputable for their need.

  6. Yes, “Economies of scale” is a term created by those who benefit one way or the other by monopolies. Anti-Trust laws should apply to the healthcare industry as well. However, Big Pharma, government regulations created to limit opening medical facilities, as well as, the relative small number of medical schools all play a role in the excessive cost of healthcare. Campaign finance reform is the solution for we know that special interests who are involved in political campaigns will make sure that the status quo continues to benefit themselves or their clients.

  7. The write offs are allowable as losses on corporate taxes, or in the case on non profits the yearly ledger. So when a hopsital or Dr’s office charges you 12 k on a procedure with a pre-negotiated 8k cost, they get paid 8k. Then, they get the write off which “reduces” profits, taxable or not. There’s no incentive there for them to bill less, indeed to do so would cost them more in taxes. Welcome to $24.00 asprin tablets…

    • That is part of the regulations that need to go. Competition is the real way to go, not Socialist single-payer systems that force everyone to wait forever for treatment.

  8. Great job Grant at bringing this to our attention & long over due. What exactly do they do for the community that a good FOR PROFIT system could not do cheaper & better ? It’s a big business with highly paid executives & employees at average or below wages especially in nursing. All of these types of businesses including expensive schools eg. Palmer Trinity etc. should be paying their fair share like the rest of us. They claim they invest in the community but does that mean that another branch in another location counts as an investment in the community & to whom ? This whole non-profit idea is gone way too far & for too long. Baptist is now competing with the Marriott at the expense of the same citizens that pay maximum taxes & insurance rates to support it’s outrageous & inconsiderate expansion,

  9. You have only touched the surface. Baptist does offer quality medical care, but it is the most expensive south of Manhattan. There is loop hole in the law that enables them to charge and collect much higher fees of ambulatory imaging and testing in their outpatient facilities. They can charge as if it the hospital campus. A cat scan at any of the Baptist facilities will be between 5 and 10 times any of the non hospital facilities. This was similar to other hospitals. If a patient has a 20% co pay this can be costly. If he has co-insurance he pays nothing, and the insurance will just pay more. Which in the long run will cost everyone more. Any procedure is also multiples of independent facilities. If cost were published it might be more competitive. Baptist and other hospitals are most interested in making money. By law must give a certain amount of care for indigents.

    You are on the right course, but the problem is complex and huge. And as long as there is politics, little will be done for the patient

  10. Grant, congratulations on a well researched and rational piece. In answer to some who offer a multitude of additional explanations, many of which are accurate, the bottom line is the bottom line. There are always so many opportunities to offer more charity care, to lower rates, to provide more staff, but they are rejected in favor of higher profits. And, for what purpose? A not for profit is not pressured by its stockholders. Adding to the coffers instead of to the welfare of patients and community is in direct opposition to the very mission and vision of Baptist Health.

  11. I agree with Grant Miller but he should also have added that although Baptist is “not for profit” its business executives earn salaries of hundred of thousands and even millions of dollars. How can an “administrator” make more than a brain surgeon?

  12. Not-for-profit doesn’t mean that a hospital must be unprofitable. It means that excess income is reinvested into the mission rather than distributed to shareholders. There’s an old saying in the charity world: “No margin, no mission”. Income is necessary to sustain and grow the services (and the jobs) being provided.

    Not-for-profits are a powerful driver of quality of life in our community. There is tremendous benefit, well beyond the property taxes which aren’t assessed, to having higher education and healthcare in our back yard. As a long-time board member of both community hospitals and a larger healthcare system, I can confirm that these institutions know that they must lower costs while improving quality, improve price transparency and meet community needs, all while preserving convenient access to care. It’s a tough task that is not likely to be accomplished by small hospitals alone, or without the support of the communities they serve.


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