by James C. Sherlock
Moody’s Investor Service, which follows hospital finances and bond issues, has reported[1] that the nationwide nonprofit hospital median operating margin reached 1.7% in FY 2018. The same report defined sustainability operating margins at 2.5% and stated:
Revenue growth remained a major hurdle as hospitals faced ongoing reimbursement challenges and weak inpatient volume growth relative to outpatient visits. … Reimbursement difficulties were underscored by a reported decline in commercial revenue as a percent of gross revenue, while reliance on less lucrative Medicare increased.
Sounds dire and is, but not here. Virginia hospitals never had it as good as they did in 2018. Compared to the rest of the country, Virginia’s nonprofit hospitals constituted an enormous statistical outlier, something north of four standard deviations from the mean.
I list below the 2018 operating margins of Virginia’s not-for-profit (not-for-tax) and government hospital systems from highest to lowest. These figures are calculated by dividing the 2018 operating income by the same year operating revenue[2] of all of the acute and critical access hospitals in each system.
- VCU Health System – 13.2% – 2 hospitals (Richmond)
- Augusta Health – 12.6% – 1 hospital (*Staunton/Waynesboro)
- Children’s Health System (CHKD) – 10.3% – 1 hospital (* Norfolk – only pediatric hospital in Eastern Region)
- Inova Health System – 9.6% – 5 hospitals (*Northern Virginia)
- Sentara Health System – 8.8% – 11 Virginia hospitals (*Hampton Roads)
- Centra Health, Inc. – 8.4% – 3 hospitals (*Lynchburg)
- Ballad Health – 7.4% – 6 Virginia hospitals (*SW Virginia)
- Valley Health System – 7.2% – 4 hospitals* (*Eastern Shenandoah Valley)
- Riverside Healthcare Association – 6.9% – 5 hospitals (*Northern Neck and Eastern Shore)
- Mary Washington Healthcare – 5.6% – 2 hospitals (Fredericksburg/Stafford)
- University of Virginia Health – 5.3% – 1 hospital
- Bon Secours Mercy Health – 5% – 8 (now 11 in 2020) Virginia hospitals (in both Richmond and Hampton Roads areas)
- Carilion Clinic – 4.5% – 6 hospitals (*Roanoke area)
- Chesapeake Regional Healthcare – 3% – 1 Virginia hospital
- Sustainability operating margin – 2.5%
- National median nonprofit operating margin – 1.7%
- Novant Health – 1.2% – 3 Virginia Hospitals (Manassas/Haymarket/Culpeper)
- Virginia Hospital Center – 0.6% – 1 hospital (Arlington)
- regional monopoly
I will share just a single observation here and follow up with dedicated columns on many of these “nonprofit” systems, but we will start at the top, the scandalous profits that the VCU Health System, a state hospital authority, extracts from its patients and which are largely unreported in the press.
Consider how the VCU Health System Authority is defined in the Code of Virginia. “The Virginia Commonwealth University Health System Authority is established as a public body corporate, public instrumentality, and political subdivision of the Commonwealth“ directed to “operate and manage general hospital and other health care facilities, engaging in specialized management and operational practices to remain economically viable”[3].
To begin, the VCU Health System Authority receives an annual appropriation of over $27.6 million[4] from the state budget to support 238 instructional and administrative faculty positions. You will wonder why when you read the rest of this.
The combined operating margins of VCU Health hospitals in 2018 and 2017 were 13.2% and 14.7% respectively compared to a national sustainability operating margin of 2.5%. Operating income exceeded $475 million for the two years. If the services of VCU hospitals had been priced to achieve economic viability (sustainability) margins, their combined operating income in those two years would have been slightly over $85 million.
The Medical College of Virginia Foundation, a 501(c)3 nonprofit public charity, has a mission “to inspire and steward philanthropy throughout the MCV campus of Virginia Commonwealth University”. In other words, it manages and dispenses the accumulated reserves. Its net assets or fund balances at the end of 2017 were almost $557 million.5]. One of the foundation’s board members, an employee of the staffing agency used by the foundation, was paid $755,438. Another was a member of the investment firm used by the foundation. He was paid $706,469. The Foundation granted $24 million dollars to VCU-Medical College of Virginia in 2017.
Noting these huge surpluses and the needs to their south, I wrote a letter to the CEO of VCU Health in June of 2019 recommending the acquisition from Community Health Systems of its three failing hospitals south of Richmond in an area of very poor public health, poverty and the highest concentration of African American citizens in Virginia. I never received a reply. Thankfully Bon Secours, a Catholic charity in a far weaker financial position in Virginia than state-controlled VCU Health, stepped in to take on this challenge.
It is fair to ask Dr. Michael Rao, Ph.D., President of VCU and VCU Health System and Chairman the VCU Health System Authority Board of Directors, what was done with the extra $390 million management charged patients in 2017 and 2018 and why that was more important than lowering prices. It is also fair to ask him his concept of the mission of VCU health.
Finally, the Governor and the General Assembly may wish to ask why, given the ongoing violation of the state charter of the VCU Health System Authority, Dr. Rao remains in his post.
James C. Sherlock, a Virginia Beach resident, is a retired Navy Captain and a certified enterprise architect. As a private citizen, he has researched and written about the business of healthcare in Virginia.
Update: Pamela Lepley, vice president for university relations at Virginia Commonwealth University, responds here.
Update: Margaret Ann Bollmeier, president of the Medical College of Virginia Foundation, responds here.
[1] Not-for-profit and public healthcare – US: Preliminary medians – Profitability holds steady as revenues and expenses converge; Moodys Investor Services; 2019
[2] vhi.org
[3] § 23.1-2401. Authority established; powers, purposes, and duties
[4] Budget Bill – SB30, Office of Education, Item 217, State Health Services (43000)
[5] IRS Form 990, Return of Organization Exempt from Income Tax, 2017
