A Timely Reminder: Virginia Hospitals, Even the Non-Profits, Are Very Profitable

Norfolk General Hospital, the crown jewel of the Sentara Health System, which reported annual profit of $229 million in 2013.

Norfolk General Hospital, the crown jewel of the Sentara Health System, which reported annual profit of $229 million in 2013.

One of the justifications given for expanding Virginia’s Medicaid program as part of the implementation of Obamacare is to shore up the financial condition of Virginia’s hospitals. On the assumption that Medicaid expansion would reduce the number of indigent (non-paying patients), Obamacare will cut back funds to hospitals under the established Disproportionate Share Hospital (DSH) program to help offset the cost of uncompensated care. If Virginia fails to expand Medicaid, as now seems likely, and the federal government cuts DSH funding as planned, Virginia hospitals will take a hit to the bottom line.

The debate may be academic now that Governor Terry McAuliffe has essentially punted on Medicaid expansion in the face of strong Republican opposition in the General Assembly and has proposed a scaled-down Healthy Virginia plan. But the issue still is worth revisiting. Virginia hospitals stand to lose about $386 million in payments from the DSH program between 2017 and 2022 — an average of $77 million per year. How badly will hospitals be hurt? Will cuts impair the quality of care? Do we need to worry?

Mike Thompson, president of the Thomas Jefferson Institute, a conservative think tank, has compiled the profit figures for Virginia hospitals from the Virginia Health Information Foundation. In the aggregate, in November 2013 Virginia’s hospitals had combined profits of $1.6 billion and net worth of $15 billion. The annualized DSH payments are equivalent to about 5% of 2013 profits.

One would think that hospitals should be able to absorb that hit to revenues — equivalent to a year or so of profit growth. Does the picture change when we drill into the numbers? The burden of indigent care is not apportioned equally between hospitals. Some facilities serve largely poor populations and provide extensive uncompensated care and rely more than others on the DSH funds. Also, hospital profitability varied widely from institution to institution. Several hospitals are losing money. In theory, a loss of funds could be devastating.

Thompson’s data reveals that several money-losing hospitals are part of larger health care systems; while they lose money, they feed profitable business to the tertiary care hospitals at the center of those systems, hence, they are not in danger of being shut down. Other facilities represent expansions into new markets — start-up enterprises, in effect. Their parent companies are fully prepared to bear the losses while the facilities ramp up to profitability. Then, too, there are some hospitals that appear to have serious problems. However, it’s not clear from one year’s data whether those losses are ongoing or simply the result of a one-year write-down.

It would be helpful to get a hospital-by-hospital breakdown of DSH funding and see how it compares to hospital profitability. The not-for-profit VCU Health System is reputedly the largest provider of uncompensated care in the state. But, then, it reported a profit of $130 million — a 12.8% return on equity (net worth). Would the loss of, say, $30 million a year in DSH funding be crippling? Maybe VCU could spin a tale of woe that would persuade me otherwise, but it sure doesn’t look like it.

Don’t get me wrong. Hospital profits are a good thing. Try getting your healthcare from money-losing hospitals — you won’t like it. Even not-for-profits need earnings to help fund expansions and new initiatives. But when hospitals are funded with public funds and receive special tax exemptions, the public has a right to ask tough questions.

Update: The Virginia Hospital and Healthcare Association response to Thompson’s study can be seen here. The main thrust: The data is two years old, and the financial pressure on Virginia hospitals has intensified since then.