The Five Things Hospitals Don't Want You to Know About Obamacare

Oregon hospitals are banking windfall profits, while providing dramatically less charity care to the poor.

Here's a quiz: What local company is sitting on the biggest pile of cash? Portland General Electric? Mentor Graphics? Nike?

Actually, it's none of those publicly traded companies. It's a nonprofit.

The state's largest hospital system, Providence Health & Services, has stockpiled nearly $6 billion in cash reserves.

That's almost twice the amount of cash Nike reported in its most recent quarterly filing.


It's also a number that makes state Rep. Mitch Greenlick (D-Portland) angry.

After a long career as a researcher at Kaiser Permanente and Oregon Health & Science University, Greenlick became the Legislature's leading health care expert.

What he sees today are Oregon's hospitals banking windfall profits—even though they are nonprofits—and providing dramatically less charity care to the poor.

"When I look at hospital reports," Greenlick says, "charity care is essentially gone."

That's significant, Greenlick and others say, because hospitals' provision of charity care was the reason nearly every Oregon hospital was exempted from paying property and income taxes.

Hospitals can thank Obamacare for the profitable situation they're enjoying.

The Affordable Care Act provided new coverage for millions of previously uninsured Americans, including hundreds of thousands of Oregonians. It also provided the state's hospitals with a cash infusion of more than $1 billion.

Two years after the Affordable Care Act's Medicaid expansion went into effect, many of Oregon's 62 hospitals—60 of which are nonprofit—are making boatloads of money. The biggest winners: large urban hospitals like Providence, Legacy Health, and Adventist Health.

Critics say the hospitals are using those profits to buy new assets, spiff up existing buildings, and lobby to protect their earnings—in other words, to benefit themselves rather than the community.

"We'd like to see them lower prices, increase access and improve quality," says Felisa Hagins, political director for Service Employees International Union Local 49. "That is not happening."

Andy Davidson, president of the Oregon Association of Hospitals and Health Systems, says the state's hospitals have made a greater commitment to reinvesting their good fortune in free care than hospitals in other states.

"We're really proud of that," Davidson says.

But at least two groups in Oregon—county tax assessors and SEIU, which represents some hospital workers—are raising an uncomfortable question: If a nonprofit no longer provides much free care, is it still a charity?

"When hospitals first started and nuns were providing medical services to the poor, that was charitable activity," says Umatilla County Assessor Paul Chalmers. "I just find it hard to swallow that they still get a charitable deduction."

Here's what changed.

1. More people have insurance.


Not long ago—as recently as 2013, in fact—15 percent of Oregonians lacked health insurance. When those uninsured citizens needed health care, they often went to emergency rooms. Most of them couldn't pay, so hospitals absorbed the cost of treating them.

Oregon is among 31 states that under Obamacare have expanded Medicaid. Oregon has done a better job than most.

Cover Oregon, then-Gov. John Kitzhaber's $300 million website, failed. Yet Kitzhaber ultimately accomplished one of his aims: Oregon signed up 430,000 new Medicaid enrollees in the past two years, a larger percentage increase than in all but four states. Now, only 6 percent of Oregonians lack insurance.

"Oregon has one of the biggest drops of uninsured in the country," says Lori Coyner, director of Medicaid for the Oregon Health Authority. "It's an enormous change."

2. More insured Oregonians means less charity care.


From a hospital's point of view, new Medicaid recipients went from being nonpaying customers to paying customers. Big difference.

Hospitals report financial results each quarter to the Oregon Health Authority. The most recent figures show that the total amount of care for which hospitals get no compensation has declined 65 percent in the past two years.

"Hospitals are doing very well," says Chuck Sheketoff, director of the Oregon Center for Public Policy. "Somebody should take a hard look at how much charity care they are providing."

3. Oregon hospitals are making a lot of money.


Hospitals are like grocery stores: lots of customers, thin profit margins.

But by two key measures that hospitals report to the state each quarter—net patient revenue and operating margin—hospitals are far better off today than they were before the Affordable Care Act.

There are a variety of ways to measure hospitals' financial performance. Net revenue per patient is perhaps the most accurate. It's simply the difference between how much a hospital receives per patient minus the cost of providing that care.

At big urban hospitals, net patient revenue is up 25 percent since the 2014 Medicaid expansion went into effect.

Davidson, director of the state hospital association, notes that hospital profits are cyclical—there have been boom and bust periods for decades. He also points to major price concessions hospitals have made on Medicare reimbursement, which will collectively cost hospitals billions in coming years.

But Dr. John Santa, who played a key role in the expansion of Oregon's Medicaid program in the 1990s, questions whether there is any group, legislative or otherwise, that has the will to compel hospitals to share their gains with their communities.

"Who's out there regulating the system," Santa asks, "to ensure windfall profits aren't happening?"

4. Hospitals are enjoying their cash windfalls—and investing aggressively.

Hospital expansions include new Legacy labs on Northeast 2nd Avenue. (Henry Cromett) Hospital expansions include new Legacy labs on Northeast 2nd Avenue. (Henry Cromett)

The term "nonprofit" may conjure up experimental theater groups, or labors of love like the Feral Cat Coalition.

But most hospitals are nonprofits, even though many operate more like Fortune 500 corporations—competing aggressively and paying big salaries.

Hospitals directly employ 60,000 people in Oregon and, according to the hospital association, support twice that many jobs indirectly. From humble beginnings, they have evolved into large, complex businesses and are the biggest part of health care, the state's fastest-growing industry.

Because they now have more paying customers, and they don't pay taxes to government or dividends to shareholders, Oregon's nonprofit hospitals are piling up money faster than they can spend it.

Providence, which operates 33 hospitals in four states, isn't the only hospital system sitting on vast reserves.

Legacy, a far smaller operation, also has a proportionally large amount of cash on hand—enough to fund operations for 180 days even if no patients walked in the door.

In part because they get to hold on to their earnings, nonprofit hospitals accumulate cash at far greater rates than for-profit hospitals, which make up about 20 percent of all hospitals in the nation. Tenet Healthcare, based in Dallas, for instance, a publicly traded chain of 79 hospitals—more than twice as many as Providence has—ended last year with just $445 million in cash, less than 10 percent of Providence's holdings.

Providence pays its people well. The tax return Providence's Oregon operation filed for last year shows that nine employees got paid more than $1 million and another 27 got more than $500,000—and nearly all of them were administrators.

"Executive salaries at the nonprofit hospitals are outrageous," Greenlick says. "There's no other way to put it."

Oregon hospitals have been buying doctor groups and other health care assets—and expanding their footprints.

Since Obamacare went into effect, for instance, OHSU paid $50 million to buy a chunk of Moda Health. Legacy agreed to buy Silverton Hospital and 50 percent of the health insurer PacificSource, built a new $20 million lab and shelled out $5.65 million for property in Northwest Portland. Providence announced an $85 million face-lift for St. Vincent Medical Center on Portland's westside.

Providence is spending $85 million to rehab St. Vincent's Hospital in Southwest Portland. Providence is spending $85 million to rehab St. Vincent’s Hospital in Southwest Portland. (Henry Cromett)

5. Critics are asking if it's time to end tax exemptions for hospitals.

Tax assessors across Oregon have noticed the same phenomenon. A nonprofit hospital buys a medical facility that was operating as a for-profit business. The for-profit entity changes the name on the door and keeps doing what it was doing before, with one big change—it no longer pays property taxes.

Assessors have occasionally challenged nonprofit designations, winning some cases and losing others.

In Josephine County, the tax assessor denied Asante's request for a tax exemption on three physician groups the health care company purchased. But when Clackamas County earlier sought to deny Providence an exemption for an MRI facility it purchased, the Oregon tax court ruled the property should be tax exempt.

The ruling frustrated Clackamas County Assessor Bob Vroman, who points out that Oregon law reserves charitable tax exemptions for facilities that are primarily used for charitable purposes.

"We could agree that an organization offering care to anyone who walked in the door for free or reduced price might qualify for an exemption," Vroman says. "But that wasn't the case."

An SEIU researcher found that Providence, Legacy and Adventist don't just own hospitals—they own 242 properties in Multnomah County that are exempt from property taxes, saving them more than $20 million annually. It's unknown how much income tax they save—but SEIU estimates it could be as much as $26 million a year.

In 2015, the state's tax assessors sponsored legislation that sought a clearer definition of what qualifies a hospital for a charitable deduction.

Lawmakers listened politely, then sent the bill to a work group.

"We definitely found out we had less clout than the hospitals," says former Columbia County Assessor Tom Linhares, who lobbied for the assessors.

Linhares and the assessors were tugging on Superman's cape. They faced an army of more than a dozen hospital lobbyists and the Oregon Association of Hospitals and Health Systems, whose president, Davidson, is a savvy political insider with a long track record in Salem, Olympia, Wash., and Washington, D.C.

The idea of taxing nonprofit hospitals isn't new in Oregon: Then-House Speaker Vera Katz (D-Portland) considered the issue 30 years ago. Katz, who went on to serve as Portland mayor from 1993 to 2005, says she raised the issue as part of an examination of all tax exemptions.

"There was a lot of money there, even before Obamacare," Katz says. "There's a lot more now. They should absolutely take a look at whether the hospitals still deserve an exemption."

Although Oregon hospitals have benefited more from Obamacare than most, the situation is hardly unique to the state. Hospitals across the nation are experiencing record cash flows thanks to the Affordable Care Act.

And authorities elsewhere are reconsidering charitable exemptions.

Three Illinois hospitals lost their nonprofit status in 2011 for providing insufficient community benefit. In 2014, the California Legislature yanked the nonprofit status of one of the biggest health care companies operating in that state—Blue Shield of California. Although Blue Shield is a health insurer, not a hospital, tax advocates take heart from that change.

The Oregon State Public Interest Research Group, a consumer-rights advocacy organization that has pushed for lower health insurance rates, is paying attention.

"Hospitals are still charging everyone too much," says Jesse Ellis O'Brien of OSPIRG. "We'd like to see them lower prices. Another option would be to change their tax status and start taxing them."

In 2014, SEIU threatened ballot measures that would have required a minimum amount of charity care, increased transparency, and limited executive pay.

SEIU's Hagins says hospital charges remain confusing and opaque and the public has a difficult time obtaining information about hospital quality and outcomes. "It's really time for things to change," Hagins says.

SEIU is close to Gov. Kate Brown and House Speaker Tina Kotek (D-Portland), a favorable situation for its desire to rein in or redistribute hospital revenues.

It's election season, and nearly every Democratic candidate running for office in Oregon is focused on one thing—raising new tax revenue. Two perennial ideas, sales taxes and higher personal income taxes, have been shunted aside this year in favor of Initiative Petition 28, a proposed tax on corporations with sales of more than $25 million a year.

That proposed corporate tax increase could result later this year in the most expensive ballot measure in Oregon history.

Yet Oregon's elected officials aren't tapping hospitals' windfall profits.

"Questions around decreased charity care in light of fewer uninsured patients are legitimate," says Kristen Grainger, a spokeswoman for Gov. Kate Brown. "It's too soon to tell if Oregon needs to make changes, but any changes in Oregon must acknowledge the need for adequate resources for state and local government services."

House Speaker Tina Kotek says it may be time to dust off Oregon's community benefit requirements. "With regard to hospital assets and property taxes, I would like to see consistent application of property tax exemptions in every county," Kotek said in a statement, "and those exemptions should only apply to real property on which activities providing substantial community benefit are occurring."

Portland City Commissioner Amanda Fritz, a former psychiatric nurse, is more frank: She says hospitals should be taxed.

"I think it's a tremendous idea," Fritz tells WW. "I'd be happy to work on it."

SEIU's Hagins says it's time for Oregon politicians to face down the charities that no longer provide significant charity.

"If hospitals want to operate as nonprofits in Oregon and have a charitable mission, they have to live that mission," Hagins says. "But our hospitals are falling short right now."


Voodoo Accounting

One of the arguments hospitals use to defend their nonprofit status is to tally up the millions in "community benefit" they offer. Hospital association director Andy Davidson says even under Obamacare, Oregon hospitals will continue to provide as much community benefit as ever.

However, a look at the components of that "community benefit" is revealing.

Here's how it works.

Hospitals have a list of prices for their services—sometimes called the "chargemaster." Except nobody actually pays those fictional prices.

Private insurers negotiate a volume discount. Government insurance payers—Medicare and Medicaid—which account for about 60 percent of hospitals' revenues, pay significantly less than what hospitals say is the cost of providing service.

Hospitals classify the difference between their costs and what they get from government insurers as "community benefit."

That frustrates state Rep. Mitch Greenlick (D-Portland), chairman of the House Committee on Health Care, and other critics.

Imagine a car dealership that lists a new Subaru for $30,000 but agrees to sell it for $20,000. That concession simply reduces the dealership's revenue.

But when a hospital agrees to accept less than it would like to get paid—$30,000 in this example—and accepts $20,000, the hospital calls the difference "community benefit," and gets credit for that amount.

When the Affordable Care Act passed, the idea was that hospitals would reinvest the windfall from newly insured patients into genuine community benefit—education and research.

But Greenlick notes that most of the community benefit Oregon hospitals report—two-thirds of it in 2014—is just the "underpayment" for government reimbursements.

At 529-bed Providence St. Vincent, of the $134 million in community benefit the hospital reported last year, just $17 million was charity care. Three-quarters of the $134 million total—$101 million—was what the hospital claims is underpayment from federal reimbursements.

Greenlick says that methodology, which all hospitals employ, is disingenuous.

"It's completely absurd," Greenlick says. "Reimbursement from government payers is not really underpayment."

Brian Willoughby, community benefit manager for the Legacy system, disagrees. "If we are doing work for less than our costs, that's a real number," Willoughby says. Costs are different at each hospital, of course, and there is little transparency to allow consumers to determine whether costs are accounted for properly.

Some observers think the voodoo accounting of community benefit could be the undoing of hospitals' tax exemptions.

"Hospitals have always had impressive buildings, and big profit margins have come and gone," says Gary Young, director of the Northeastern University Center for Health Policy and Healthcare Research. "But what's going to make people really angry is if the community benefit isn't there. That could be the tipping point for policymakers." NIGEL JAQUISS.

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