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Wednesday, October 02, 2019 1:00 am

Cost of not-for-profit care

Indiana's hospitals posting jaw-dropping numbers, study reveals

Michael Hicks

On the web

Ball State study finds big profits for not-for-profit hospitals:

Read the study at projects.cberdata.org/165/indiana-healthcare-monopoly

Michael Hicks is the George and Frances Ball distinguished professor of economics and the director of the Center for Business and Economic Research at Ball State University.

Several weeks ago, a concerned citizen sent me a financial summary of Indiana's not-for-profit hospitals. He asked that I look into the issue of excessive profits by these systems.

I was skeptical that the issue would be relevant. Profits are critical to an economy; they serve as a guide to pricing and investment decisions and reward the men and women who create value. The demonization of profits is a sure sign of unformed thought. Moreover, not-for-profit hospitals have explicitly chosen to forgo profits as part of their operations, so I doubted the financial summary would reveal anything important.

I was mistaken.

What I discovered will deeply anger every Hoosier and should embarrass most hospital administrators and board members. I also expect it to cause significant changes to state policy with respect to these hospitals. This is likely to change the way we tax them, regulate their competitors and enforce antitrust laws. It will surely lead to civil litigation involving billions of dollars of excess profits.

It turns out the not-for-profit hospital industry and its network of clinics is the single most profitable industry in Indiana. These profits are so large that, when accumulated, they account for roughly 9% of the state's total economy. As of 2017, this industry had accrued more than $27 billion – yes, billion. Yet, the not-for-profit industry in Indiana pays virtually no taxes and invests almost none of those profits locally. That money is invested in Wall Street, not Main Street.

However, they do charge Hoosiers a premium to access health care.

Earlier this year, a Rand Corporation study found that hospitals in Indiana were charging among the highest prices in the nation. While the hospital association has been fighting this excellent study, it is surely correct. I am confident the Rand study is right because I mapped these hospitals and compared the Rand price data with the lack of competition in each health care market.

In places where there is little competition, such as Fort Wayne, consumers pay more than twice the cost for a typical medical treatment as they do in places with the most competition. This is how these hospitals accrued excess profits that are roughly 12 times larger than the entire state of Indiana's Rainy Day Fund.

This windfall of profits has happened fairly recently. In 1998, the typical Hoosier spent $330 less than the average American for health care. We now pay $819 more per person than does the average American. The only factor that can explain this is growing monopoly power among our not-for-profit hospitals.

If you are not shocked by this, nothing can shock you. In a typical post-recession year, these excess profits were so large that they shaved almost 30% off economic growth in the state. Let me highlight some particularly egregious examples.

Parkview Hospital is the most blatant example. In one recent year, Parkview Hospital in Wabash earned a 48% profit rate. By comparison, Walmart, which also has a store in Wabash, had a profit rate of 3.12% that year. Parkview Hospital's profit absorbed a full 4.1% of the county's gross domestic product.

Using data from a ProPublica investigative website, I found IU Ball Memorial Hospital enjoyed a lavish 23.8% profit in that year. This was more than $100 million, or a full 2.5% of the county's GDP. Despite this, the president of Ball Memorial recently begged the city of Muncie to subsidize new luxury apartments so his doctors could live downtown.

That subsidy will cost Muncie Community Schools more than $2 million, which just so happens to be about two days of profits at the not-for-profit IU Ball Memorial Hospital.

There are literally dozens of other outrageous examples reflecting an appalling lack of governance at not-for-profit hospitals.

To be fair, there are a few hospitals that choose not to participate in this plunder of their patients and communities. These good actors, along with the not-for-profit community as a whole, are hapless victims of this outrageous monopolization of health care in our state. I feel especially sorry for the faith-based community which will surely be linked unfairly to some of these institutions. They should be among the first to call for legislative intervention and governance change in these hospitals.

Local governments are also victims. The most profitable industry in our state pays no property tax and no income tax, but overcharges schools, and city and county governments for health care. There is almost certainly a tax reckoning coming for not-for-profit hospitals, which will add much to the coffers of local government.

Maybe the only good news in all of this is that this situation is a plaintiff attorney's dreamscape. There is a $27 billion settlement pool alongside the most abundant evidence of anti-competitive behavior I have ever seen. If you lead a school, business or municipal government that has paid health care expenses in Indiana, find a good trial lawyer, or better yet a class-action specialist.

This news about Indiana is now attracting national attention as an example of a health care system run amok. This is the most shocking thing I have seen in more than two decades of public policy research.

Monopoly pricing at hospitals is likely a contributor to our state's nearly 10-place decline in health rankings over the past two decades.

The most similar modern phenomenon I have witnessed is the effect of strip-mining on many Appalachian communities.

To place this in historical context, the profit rates at Indiana's not-for-profit hospitals are larger than anything the Gilded Age robber barons were able to secure. In this observation is a final lesson.

In the process of vetting this study with several colleagues, I shared it with one lifetime Republican and veteran of two GOP administrations. His response was simply that this is the single best argument for Warren/Sanders-style  health care reform he had ever seen. He is not wrong, and that alone should prompt quick legislative, regulatory and legal action.