Hospitals and social investing
Health care leaders say they are willing to invest more in improving the social conditions that cause ill-health. New rules would help them follow through.
Government oversight of the nation’s 600 non-profit hospital systems is schizophrenic. Some agencies treat them like charitable organizations with the social mission of serving the sick and poor. Others treat them like profit-maximizing corporations, exploiting their tax-exempt status to build healthcare empires for the benefit of internal stakeholders.
In exchange for maintaining non-profit hospitals’ exemption from paying federal, state and local taxes, the 2010 Affordable Care Act requires hospitals conduct a community health needs assessment every three years. They must then adopt plans based on those assessments to address improving the overall health of their communities.
To maintain their non-profit status, hospitals in their annual filings with the Internal Revenue Service must disclose the dollar value of the free and discounted care they provide the poor and poorly insured. They also must document their contributions to community charities or the direct provision of uncompensated social services.
On on the other hand, the Federal Trade Commission and Department of Justice treat hospitals like any other business. They routinely subject their mergers to antitrust scrutiny, worrying that decades of consolidation have given the chains monopolistic power over pricing to the detriment of patients, consumers and private-sector payers.
In nearly 20 years of rubbing shoulders with top executives in the hospital industry (first as a freelance writer and then as editor and columnist for Modern Healthcare), I never met a non-profit health care leader who did not fully embrace the charitable entity designation even as they rigorously pursued revenue-boosting business strategies that made them appear to most outside observers as exemplars of profit maximization. “No margin, no mission,” is their mantra.
A return to profitability
In recent weeks, the healthcare trade press has been filled with stories celebrating non-profit hospital chains’ return to profitability. Cleveland Clinic this week posted a $336 million gain in the first quarter after losing $1.2 billion in 2022. Other large non-profit systems (Kaiser Permanente, Mayo Clinic, Sutter Health, Intermountain Health, for instance) have posted similar results. A few (Providence, CommonSpirit Health) remain in negative territory, but their margins are improving rapidly.
But whether the big systems that dominate the hospital industry have already returned to profitability or are still in post-pandemic recovery mode, they have one thing in common. The most significant driver of their losses last year was a huge decline in the value of their endowments, which are invested in stocks, bonds and “alternatives” like hedge, venture capital and private equity funds. As everyone with a 401(k) plan knows, 2022 was a terrible year for investors in every asset class.
Contrary to popular perception, hospital endowments were not created by generous contributions from wealthy business people anxious to see their names slapped on a new cancer treatment wing (and who also may sit on the non-profit’s board and own the construction company building the new wing). There is some of that, of course. But most of those portfolios are the accumulated surpluses and investment gains that were generated over many years from their usually profitable operations.
How much money is in this stored savings warehouse? A 2016 estimate pegged the savings accumulated by the nation’s non-profit hospitals at $500 billion. A current article in Health Affairs reviewed the recent financial filings for just ten large systems, showed $100 billion in accumulated assets in 2022 despite an 18% decline on average from the previous year.
Notably, Kaiser Permanente, the nation’s largest health care system with $42.6 billion in accumulated assets, wasn’t on that list. Nor was Cleveland Clinic, which held $13.1 billion in stocks, bonds and alternative investments at the end of 2022 after taking a 12% hit in its portfolio.
Clearly these big systems have the financial wherewithal to weather shocks to their normal operations, whether it was the steep falloff in routine health care demand during the pandemic or rising wages due to nurse staffing shortages.
That’s one of the reasons why so many small and independent non-profit hospitals have sold out in recent years. Unlike their acquirers, they didn’t have the financial cushion to weather hard times.
“If losses were driven by persistent labor and supply cost increases, then it might be reasonable to ask patients, employers, and insurers to consider these underlying cost drivers in their payments to hospitals,” the Health Affairs writers concluded. “However, when losses are driven by risky financial investments, which generated positive returns in many previous years and will do so in many future periods, it is not clear whether patients, employers, insurers, and taxpayers should be responsible for paying higher prices to offset the impact of overall market declines.”
How should those savings be used?
True enough. But the long-term, growth of those accumulated savings raises another set of questions: What are hospital chains doing with all that money? How is it being invested?
Are their portfolio managers taking the health of their communities and the nation into account by refusing to invest in companies that cause asthma and COPD-exacerbating air pollution? Are they rejecting investments in food companies that produce foods with high salt, sugar and saturated fat contents? Have they invested in fossil fuel companies, which are primarily responsible for global warming, which threatens the health of everyone on the planet?
Unfortunately, the investment portfolios created by not-for-profit investment managers are not included in their public financial filings (help me, dear reader, if you know where I can find this information). Most list their assets in broad categories like U.S. or foreign equities, government or corporate bonds, and alternative investments.
Under that latter category, Kaiser, for instance, listed $20.3 billion in private equity investments in 2022, which was nearly half of its portfolio’s total value. One has to wonder if Kaiser, or any other hospital chain with a large alternative investment portfolio, owns one of the private equity-owned nurse staffing companies that have been gouging hospital systems that use outside contractors to cope with labor shortages.
The social investing rounding error
In recent years, community activists and social entrepreneurs have pushed hospital systems to invest in projects that directly address what some health care policy wonks call “the social determinants of health,” but the Center for Medicare and Medicaid Services now refers to as “health-related social needs.”
This strategy has two parts. The first involves using hospital systems’ stored savings to invest in private sector projects that provide jobs, housing, grocery stores and social services in impoverished neighborhoods. The second looks to hive off some of the hospital’s current revenue into financial aid for housing vouchers, food supplementation, and other social services that have the potential to reduce overall health care costs.
A simple example of the latter: Say a low-income family on Medicaid lives in a vermin-infested housing project without air conditioning. The asthmatic child in that family is rushed to the emergency room three times a year during severe attacks, costing the insurer overseeing Medicaid spending over $25,000. The following year, the managed care organization hires an exterminator to visit routinely and buys an air conditioner for the apartment. If those moves prevent one ER visit, it has more than paid for the investment.
Given that the U.S. spends less on social services and income support than most other advanced industrial countries, both approaches make a lot of sense. Yet hospital systems have barely scratched the surface of their capacity to make such investments.
One survey, published the month before the pandemic shutdown in March 2020, identified every public announcement by a hospital of a direct financial investment that addressed a social need between January 2017 and November 2019. It counted $2.5 billion in 78 unique investments by 57 health systems. Two-thirds of the money went for housing. The second largest involved investments that created permanent jobs .
Even if that amount has quadrupled in the past three years to bring the total to $10 billion, that would still represent less than 2% of the hospital systems’ total investment portfolio. And compared to the $1.4 trillion that the U.S. spends on hospital care each year, it qualifies as a rounding error.
A similar pattern can be seen in the data for hospital spending on charitable care and community benefits, which comes out of operating revenue and is reported annually to the IRS. A new study in the Milbank Quarterly reports non-profit hospitals spend about 7.5% of their total operating budgets on community benefits. However, 85% of that reflected uncompensated care, which includes what hospitals claim is the difference between Medicaid reimbursement and actual costs as well as charity care. This accounting ignores the fact that hospitals with pricing power (i.e., most of them, especially in large systems) can make up for those shortfalls by charging higher prices to their commercially insured patients.
The study found only about 5% of community benefits investments in the first three years after passage of the ACA were for social care services. “The vast majority of community benefits spending is toward unreimbursed care,” the study authors concluded. They also found “community benefits spending for social care services may be particularly focused on direct patient support services rather than more community-focused services.”
A new regulatory scheme needed
The rhetoric of most major hospital system officials suggests they are open to investing more of their portfolios in projects that address the social inequities that drive ill-health. Such investments could provide adequate housing, end food deserts, improve local transportation options, address mental health needs, and build facilities that house community social services like after-school daycare, sports facilities and job training.
But rhetoric isn’t action. The government could adopt a number of policies that would encourage more such investments. Here are three ideas.
First, it could require hospitals (and non-profits generally) to annually disclose the individual stocks, bonds and other holdings in their investment portfolios. The Financial Accounting Standards Board could help by defining what constitutes a legitimate social investment and require that they be reported separately within the “alternative investment” category.
The principle behind such disclosure is simple. Communities where hospitals operate deserve to know how much of its accumulated savings is being invested in productive assets in their own communities. This level of specificity will facilitate an honest debate about the extent to which they are meeting their social obligations and earning the tax exemption that helped create the surpluses.
Second, the IRS should issue a rule eliminating “underpayments” by Medicaid from their community benefit reports. Every payer in the U.S. health care system (Medicare, Medicaid and the privately insured) pays a different price for the same service. When that’s the case, the only line item that matters is the bottom line. When that is positive, as it is in most years for most hospital systems, then payment in aggregate is sufficient to cover the cost of charity care.
Since payers in aggregate are paying the cost of charity care, then that, too, should be eliminated from community benefit reporting. After all, the system has already socialized that cost by spreading it over the hospitals’ paying customers. When it’s paid for by raising someone else’s prices, it isn’t a community benefit, it is an accounting trick.
Finally, CMS should establish a standard for community benefit spending adequacy and set specific guidelines for what counts in that category. A good round number would require 10% of investments and 5% of operations revenue be invested in addressing the health-related social needs of community residents. Since so many of the non-profits hospital chains that control 70% of the hospital beds in the U.S. are affiliated with religious organizations, there should be no qualms about embracing a requirement that they tithe to the community.
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