How much profit is it appropriate for a not-for-profit hospital to make? In a quasi-market economy, even not-for-profits need to make some profit — not only to ensure their long-term financial viability but to invest in expansions, renovations, new services and the like. But how much profit? One percent of revenue? Two percent?
The Roanoke Medical Center, the flagship hospital of the Carilion Health System, reported net patient revenue of $612 million (plus $6 million in other revenue) in fiscal 2006, the most recent year provided by the Virginia Health Information Foundation. That was sufficient to generate $37 million in operating income, not including a non-operating gain of $43 million. Thus, this particular “not for profit” entity generated $80 million in profit that year.
That’s an operating profit margin of 5.7 percent, and a total profit margin of 12.9 percent. Those numbers include, by the way, the $42 million the hospital spent that year on uncompensated “charity care,” which is the traditional justification given for allowing not-for-profit hospitals to block competition through the Certificate of Public Need process and jack up their charges to paying patients.
In the previous post, Peter Galuszka highlights the findings of today’s Wall Street Journal about the extraordinary pricing power that Carilion Health System enjoys in the western Virginia medical marketplace. Carilion possesses near-monopoly control over hospital services in the Roanoke Valley and surrounding counties. Not surprisingly, its charges are the highest in the state, the WSJ reports — even higher than in markets with higher labor costs. What’s more, its profits are massive.
Carilion does play a positive role in the Roanoke community, contributing to civic, philanthropic and economic-development endeavors. But does that excuse such massive profits? Isn’t the foremost mission of a not-for-profit hospital to provide affordable, quality healthcare?
Getting back to my original question, what’s an appropriate level of profitability for a not-for-profit hospital? There’s one obvious benchmark in Roanoke — the for-profit Lewis-Gale Medical Center. There, according to VHIF data, the Fiscal 2006 operating profit was $8.4 million on $189 million in revenue — a margin of 4.4 percent.
When the not-for-profit hospital makes a profit margin that’s 75 percent higher than that of the for-profit hospital, I’d say the Roanoke Valley needs to have a “come to Jesus” meeting with the board members of Carilion.
