The Best American Magazine Writing 2014

by The American Society of Magazine Editors

  Nonprofit Profit Makers

  To the extent that they defend the chargemaster rates at all, the defense that hospital executives offer has to do with charity. As John Gunn, chief operating officer of Sloan-Kettering, puts it, “We charge those rates so that when we get paid by a [wealthy] uninsured person from overseas, it allows us to serve the poor.”

  A closer look at hospital finance suggests two holes in that argument. First, while Sloan-Kettering does have an aggressive financial-assistance program (something Stamford Hospital lacks), at most hospitals it’s not a Saudi sheik but the almost poor—those who don’t qualify for Medicaid and don’t have insurance—who are most often asked to pay those exorbitant chargemaster prices. Second, there is the jaw-dropping difference between those list prices and the hospitals’ costs, which enables these ostensibly nonprofit institutions to produce high profits even after all the discounts. True, when the discounts to Medicare and private insurers are applied, hospitals end up being paid a lot less overall than what is itemized on the original bills. Stamford ends up receiving about 35 percent of what it bills, which is the yield for most hospitals. (Sloan-Kettering and MD Anderson, whose great brand names make them tough negotiators with insurance companies, get about 50 percent). However, no matter how steep the discounts, the chargemaster prices are so high and so devoid of any calculation related to cost that the result is uniquely American: thousands of nonprofit institutions have morphed into high-profit, high-profile businesses that have the best of both worlds. They have become entities akin to low-risk, must-have public utilities that nonetheless pay their operators as if they were high-risk entrepreneurs. As with the local electric company, customers must have the product and can’t go elsewhere to buy it. They are steered to a hospital by their insurance companies or doctors (whose practices may have a business alliance with the hospital or even be owned by it). Or they end up there because there isn’t any local competition. But unlike with the electric company, no regulator caps hospital profits.

  Yet hospitals are also beloved local charities.

  The result is that in small towns and cities across the country, the local nonprofit hospital may be the community’s strongest business, typically making tens of millions of dollars a year and paying its nondoctor administrators six or seven figures. As nonprofits, such hospitals solicit contributions, and their annual charity dinner, a showcase for their good works, is typically a major civic event. But charitable gifts are a minor part of their base; Stamford Hospital raised just over 1 percent of its revenue from contributions last year. Even after discounts, those $199.50 blood tests and multi-thousand-dollar CT scans are what really count.

  Thus, according to the latest publicly available tax return it filed with the IRS, for the fiscal year ending September 2011, Stamford Hospital—in a midsize city serving an unusually high 50 percent share of highly discounted Medicare and Medicaid patients—managed an operating profit of $63 million on revenue actually received (after all the discounts off the chargemaster) of $495 million. That’s a 12.7 percent operating profit margin, which would be the envy of shareholders of high-service businesses across other sectors of the economy.

  Its nearly half-billion dollars in revenue also makes Stamford Hospital by far the city’s largest business serving only local residents. In fact, the hospital’s revenue exceeded all money paid to the city of Stamford in taxes and fees. The hospital is a bigger business than its host city.

  There is nothing special about the hospital’s fortunes. Its operating profit margin is about the same as the average for all nonprofit hospitals, 11.7 percent, even when those that lose money are included. And Stamford’s 12.7 percent was tallied after the hospital paid a slew of high salaries to its management, including $744,000 to its chief financial officer and $1,860,000 to CEO Grissler.

  In fact, when McKinsey, aided by a Bank of America survey, pulled together all hospital financial reports, it found that the 2,900 nonprofit hospitals across the country, which are exempt from income taxes, actually end up averaging higher operating profit margins than the 1,000 for-profit hospitals after the for-profits’ income-tax obligations are deducted. In health care, being nonprofit produces more profit.

  Nonetheless, hospitals like Stamford are able to use their sympathetic nonprofit status to push their interests. As the debate over deficit-cutting ideas related to health care has heated up, the American Hospital Association has run daily ads on Mike Allen’s Playbook, a popular Washington tip sheet, urging that Congress not be allowed to cut hospital payments because that would endanger the “$39.3 billion” in uncompensated care for the poor that hospitals now provide either through charity programs or because of patients failing to pay their debts. Based on the formula hospitals use to calculate the cost of this charity care, that amounts to approximately 5 percent of their total revenue for 2010.

  Under Internal Revenue Service rules, nonprofits are not prohibited from taking in more money than they spend. They just can’t distribute the overage to shareholders—because they don’t have any shareholders.

  So, what do these wealthy nonprofits do with all the profit? In a trend similar to what we’ve seen in nonprofit colleges and universities—where there has been an arms race of sorts to use rising tuition to construct buildings and add courses of study—the hospitals improve and expand facilities (despite the fact that the United States has more hospital beds than it can fill), buy more equipment, hire more people, offer more services, buy rival hospitals, and then raise executive salaries because their operations have gotten so much larger. They keep the upward spiral going by marketing for more patients, raising price,s and pushing harder to collect bill payments. Only with health care, the upward spiral is easier to sustain. Health care is seen as even more of a necessity than higher education. And unlike in higher education, in health care there is little price transparency—and far less competition in any given locale even if there were transparency. Besides, a hospital is typically one of the community’s larger employers if not the largest, so there is unlikely to be much local complaining about its burgeoning economic fortunes.

  In December, when the New York Times ran a story about how a deficit deal might threaten hospital payments, Steven Safyer, chief executive of Montefiore Medical Center, a large nonprofit hospital system in the Bronx, complained, “There is no such thing as a cut to a provider that isn’t a cut to a beneficiary. … This is not crying wolf.”

  Actually, Safyer seems to be crying wolf to the tune of about $196.8 million, according to the hospital’s latest publicly available tax return. That was his hospital’s operating profit, according to its 2010 return. With $2.586 billion in revenue—of which 99.4 percent came from patient bills and 0.6 percent from fundraising events and other charitable contributions—Safyer’s business is more than six times as large as that of the Bronx’s most famous enterprise, the New York Yankees. Surely, without cutting services to beneficiaries, Safyer could cut what have to be some of the Bronx’s better non-Yankee salaries: his own, which was $4,065,000, or those of his chief financial officer ($3,243,000), his executive vice president ($2,220,000), or the head of his dental department ($1,798,000).

  Shocked by her bill from Stamford hospital and unable to pay it, Janice S. found a local woman on the Internet who is part of a growing cottage industry of people who call themselves medical-billing advocates. They help people read and understand their bills and try to reduce them. “The hospitals all know the bills are fiction, or at least only a place to start the discussion, so you bargain with them,” says Katalin Goencz, a former appeals coordinator in a hospital billing department who negotiated Janice S.’s bills from a home office in Stamford.

  Goencz is part of a trade group called the Alliance of Claim Assistant Professionals, which has about forty members across the country. Another group, Medical Billing Advocates of America, has about fifty members. Each advocate seems to handle forty to seventy cases a year for the uninsured and those disputing insurance claims
. That would be about 5,000 patients a year out of what must be tens of millions of Americans facing these issues—which may help explain why 60 percent of the personal bankruptcy filings each year are related to medical bills.

  “I can pretty much always get it down 30 percent to 5 percent simply by saying the patient is ready to pay but will not pay $300 for a blood test or an X ray,” says Goencz. “They hand out blood tests and X rays in hospitals like bottled water, and they know it.”

  After weeks of back-and-forth phone calls, for which Goencz charged Janice S. $97 an hour, Stamford Hospital cut its bill in half. Most of the doctors did about the same, reducing Janice S.’s overall tab from $21,000 to about $11,000.

  But the best the ambulance company would offer Goencz was to let Janice S. pay off its $995 ride in $25-a-month installments. “The ambulances never negotiate the amount,” says Goencz.

  A manager at Stamford Emergency Medical Services, which charged Janice S. $958 for the pickup plus $9.38 per mile, says that “our rates are all set by the state on a regional basis” and that the company is independently owned. That’s at odds with a trend toward consolidation that has seen several private-equity firms making investments in what Wall Street analysts have identified as an increasingly high-margin business. Overall, ambulance revenues were more than $12 billion last year, or about 10 percent higher than Hollywood’s box-office take. It’s not a great deal to pay off $1,000 for a four-mile ambulance ride on the layaway plan or receive a 50 percent discount on a $199.50 blood test that should cost $15, nor is getting half off on a $7,997.54 stress test that was probably all profit and may not have been necessary. But, says Goencz, “I don’t go over it line by line. I just go for a deal. The patient usually is shocked by the bill, doesn’t understand any of the language, and has bill collectors all over her by the time they call me. So they’re grateful. Why give them heartache by telling them they still paid too much for some test or pill?”

  A Slip, a Fall, and a $9,400 Bill

  The billing advocates aren’t always successful. Just ask Emilia Gilbert, a school-bus driver who got into a fight with a hospital associated with Connecticut’s most venerable nonprofit institution, which racked up quick profits on multiple CT scans then refused to compromise at all on its chargemaster prices. Gilbert, now sixty-six, is still making weekly payments on the bill she got in June 2008 after she slipped and fell on her face one summer evening in the small yard behind her house in Fairfield, Conn. Her nose bleeding heavily, she was taken to the emergency room at Bridgeport Hospital.

  Along with Greenwich Hospital and the Hospital of St. Raphael in New Haven, Bridgeport Hospital is now owned by the Yale New Haven Health System, which boasts a variety of gleaming new facilities. Although Yale University and Yale New Haven are separate entities, Yale–New Haven Hospital is the teaching hospital for the Yale Medical School, and university representatives, including Yale president Richard Levin, sit on the Yale New Haven Health System board.

  “I was there for maybe six hours, until midnight,” Gilbert recalls, “and most of it was spent waiting. I saw the resident for maybe fifteen minutes, but I got a lot of tests.”

  In fact, Gilbert got three CT scans—of her head, her chest, and her face. The last one showed a hairline fracture of her nose. The CT bills alone were $6,538. (Medicare would have paid about $825 for all three.) A doctor charged $261 to read the scans.

  Gilbert got the same troponin blood test that Janice S. got—the one Medicare pays $13.94 for and for which Janice S. was billed $199.50 at Stamford. Gilbert got just one. Bridgeport Hospital charged 20 percent more than its downstate neighbor: $239.

  Also on the bill were items that neither Medicare nor any insurance company would pay anything at all for: basic instruments and bandages and even the tubing for an IV setup. Under Medicare regulations and the terms of most insurance contracts, these are supposed to be part of the hospital’s facility charge, which in this case was $908 for the emergency room.

  Gilbert’s total bill was $9,418.

  “We think the chargemaster is totally fair,” says William Gedge, senior vice president of payer relations at Yale New Haven Health System. “It’s fair because everyone gets the same bill. Even Medicare gets exactly the same charges that this patient got. Of course, we will have different arrangements for how Medicare or an insurance company will not pay some of the charges or discount the charges, but everyone starts from the same place.” Asked how the chargemaster charge for an item like the troponin test was calculated, Gedge said he “didn’t know exactly” but would try to find out. He subsequently reported back that “it’s an historical charge, which takes into account all of our costs for running the hospital.”

  Bridgeport Hospital had $420 million in revenue and an operating profit of $52 million in 2010, the most recent year covered by its federal financial reports. CEO Robert Trefry, who has since left his post, was listed as having been paid $1.8 million. The CEO of the parent Yale New Haven Health System, Marna Borgstrom, was paid $2.5 million, which is 58 percent more than the $1.6 million paid to Levin, Yale University’s president.

  “You really can’t compare the two jobs,” says Yale–New Haven Hospital senior vice president Vincent Petrini. “Comparing hospitals to universities is like apples and oranges. Running a hospital organization is much more complicated.” Actually, the four-hospital chain and the university have about the same operating budget. And it would seem that Levin deals with what most would consider complicated challenges in overseeing 3,900 faculty members, corralling (and complying with the terms of) hundreds of millions of dollars in government research grants, and presiding over a $19 billion endowment, not to mention admitting and educating 14,000 students spread across Yale College and a variety of graduate schools, professional schools, and foreign-study outposts. And surely Levin’s responsibilities are as complicated as those of the CEO of Yale New Haven Health’s smallest unit—the 184-bed Greenwich Hospital, whose CEO was paid $112,000 more than Levin.

  “When I got the bill, I almost had to go back to the hospital,” Gilbert recalls. “I was hyperventilating.” Contributing to her shock was the fact that although her employer supplied insurance from Cigna, one of the country’s leading health insurers, Gilbert’s policy was from a Cigna subsidiary called Starbridge that insures mostly low-wage earners. That made Gilbert one of millions of Americans like Sean Recchi who are routinely categorized as having health insurance but really don’t have anything approaching meaningful coverage.

  Starbridge covered Gilbert for just $2,500 per hospital visit, leaving her on the hook for about $7,000 of a $9,400 bill. Under Connecticut’s rules (states set their own guidelines for Medicaid, the federal-state program for the poor), Gilbert’s $1,800 a month in earnings was too high for her to qualify for Medicaid assistance. She was also turned down, she says, when she requested financial assistance from the hospital. Yale New Haven’s Gedge insists that she never applied to the hospital for aid, and Gilbert could not supply me with copies of any applications.

  In September 2009, after a series of fruitless letters and phone calls from its bill collectors to Gilbert, the hospital sued her. Gilbert found a medical-billing advocate, Beth Morgan, who analyzed the charges on the bill and compared them with the discounted rates insurance companies would pay. During two court-required mediation sessions, Bridgeport Hospital’s attorney wouldn’t budge; his client wanted the bill paid in full, Gilbert and Morgan recall. At the third and final mediation, Gilbert was offered a 20 percent discount off the chargemaster fees if she would pay immediately, but she says she responded that according to what Morgan told her about the bill, it was still too much to pay. “We probably could have offered more,” Gedge acknowledges. “But in these situations, our bill-collection attorneys only know the amount we are saying is owed, not whether it is a chargemaster amount or an amount that is already discounted.”

  On July 11, 2011, with the school-bus driver representing herself in Bridgeport superior court, a
judge ruled that Gilbert had to pay all but about $500 of the original charges. (He deducted the superfluous bills for the basic equipment.) The judge put her on a payment schedule of $20 a week for six years. For her, the chargemaster prices were all too real.

  The One-Day, $87,000 Outpatient Bill

  Getting a patient in and out of a hospital the same day seems like a logical way to cut costs. Outpatients don’t take up hospital rooms or require the expensive 24/7 observation and care that come with them. That’s why in the 1990s Medicare pushed payment formulas on hospitals that paid them for whatever ailment they were treating (with more added for documented complications), not according to the number of days the patient spent in a bed. Insurance companies also pushed incentives on hospitals to move patients out faster or not admit them for overnight stays in the first place. Meanwhile, the introduction of procedures like non-invasive laparoscopic surgery helped speed the shift from in-patient to outpatient.

  By 2010, average days spent in the hospital per patient had declined significantly, while outpatient services had increased even more dramatically. However, the result was not the savings that reformers had envisioned. It was just the opposite.

  Experts estimate that outpatient services are now packed with so much hidden profit that about two-thirds of the $750 billion annual U.S. overspending identified by the McKinsey research on health care comes in payments for outpatient services. That includes work done by physicians, laboratories, and clinics (including diagnostic clinics for CT scans or blood tests) and same-day surgeries and other hospital treatments like cancer chemotherapy. According to a McKinsey survey, outpatient emergency-room care averages an operating profit margin of 15 percent and nonemergency outpatient care averages 35 percent. On the other hand, inpatient care has a margin of just 2 percent. Put simply, inpatient care at nonprofit hospitals is, in fact, almost nonprofit. Outpatient care is wildly profitable.