Demystifying Medicine One Month at a Time

Tag: non-profit health care

Hedge Fund to the Rescue?

Daughters-of-Charity-Health-System_3Tucked away amid the deluge of awful news from California last week was a story about a tentative deal in which a hedge fund (BlueMountain Capital Management) received a green light to manage a chain of non-profit hospitals (Daughters of Charity Health System) that is on the brink of bankruptcy. Said hospitals span the state — from San Jose to Los Angeles.

Notable facts about the deal include:

  • It’ll be the largest transaction involving a non-profit system in California history.
  • It’ll be the first time a state-level decision governing non-profit hospitals has included a hedge fund.
  • The hedge fund is paying $100 million up front for the ‘right to purchase’ the hospitals within three years. (Final costs of which will be many hundreds of millions more.)

California’s attorney general had to give her blessing to the deal. She instituted strict conditions to permit the option, which are listed at the bottom of this post. On the plus side, community-serving hospitals stay open, and stay non-profit for a period of years. They are infused with cash which a) keeps them open b) allows capital improvements c) keeps their employees working and d) keeps their pensions funded.

Potential downsides are that the hedge fund has no prior experience managing a hospital system — it will create a spin-off to do the managing. Some community advocates are worried the hedge fund will (years from now) turn the hospitals for-profit, consolidate them, shed employees, and thus hurt the various communities’ access to care.

It will be an interesting deal to watch. No one has ever said health care is simple. Or that it’s cheap.

From the San Jose Mercury News article:


  1. For 10 years, O’Connor Hospital, Saint Louise Hospital and Seton Medical Center and St. Francis Hospital in Los Angeles must operate as acute care hospitals and offer emergency services.
  2. For 10 years, Seton Coastside must operate as a skilled nursing facility with 24-hour emergency services and a minimum of 116 licensed skilled nursing beds.
  3. For 10 years, the six facilities must provide the same types and/or levels of emergency and nonemergency services to Medi-Cal beneficiaries and maintain Medi-Cal managed care contracts at each of the facilities.
  4. A sum of $180 million must be invested in capital improvement expenditures at the facilities.
  5. Charity care for needy patients and community benefits must be provided at historical levels.
  6. All facilities must meet seismic compliance requirements until 2030.

Is this a Faustian bargain or was it the only viable option?

Blue Shield (CA) Gets Stripped — and Here’s Why You Should Care

GlassHospital & Co. were in California last week, where a huge story was reported by Chad Terhune in the LA Times.

The story was picked up nationally, but given the fact that it’s about a large non-profit health insurer and a state bureaucracy, you could easily have let your eyes scan elsewhere. Or glaze over.

But I’m here to tell you why this is both fascinating and really important:

1369238178_BlueShield4WebBlue Shield, the third largest health insurer in California was stripped of its tax-exempt status. For a non-profit, that smarts. And it’s nearly unprecedented.

Non-profit institutions like hospitals, schools, charities, and religious organizations do not pay taxes, because their “business models” are about public service and/or community benefit; not about pure profit. Nevertheless, non-profits do need their revenues to exceed their expenses — typically to get re-invested in their missions, rather than, say, as dividends to shareholders — else they risk not being able to continue in business.

With more and more non-profits being urged by the public and their executives to be run “like businesses” — efficient, cost-effective, strategic — it’s no wonder that many non-profits now operate essentially like their for-profit counterparts.

Here’s the rub: when that happens, attention can drift from the mission. For a hospital, it can mean focusing more on competition and market share than on serving the public. Same for a health insurer. Blue Shield has amassed a financial reserve of $4 billion, more than four times what its parent organization requires.

What’s a non-profit doing hoarding that kind of cash?

An obscure entity called the California Franchise Tax Board issued the ruling stripping Blue Shield of its tax exempt status last August (why it took so long to become public is another story). The Tax Board determined that the business practices of Blue Shield are not consistent with the public purposes of a ‘true’ not-for-profit entity [my phrasing].

Blue Shield is appealing the decision. Apparently, this all occurred due to a whistleblower, who went to Blue Shield’s management to make his case that the company needed to act more in the public interest. Sadly, his ideas were dismissed.

Taking away a non-profit’s tax-exempt status is a harsh punishment, and very rarely implemented. Exactly five years ago, I blogged about an Illinois hospital that had its tax-exempt status stripped. That gives you some sense of the rarity of such an action. What could this decision portend for other revenue-starved states?

I’m Astounded, Too

Senator Chuck Grassley of Iowa, as of this month the Chair of the Senate Judiciary Committee, has led a decade-long crusade to make our nation’s non-profit hospitals more accountable to the public.

GrassleyOfficialPhotoAfter all, the reasoning goes, non-profit hospitals are tax exempt because they provide community benefit. How this standard is defined has been the crux of the issue.

Hospitals always face a share of patients that are uninsured, who are therefore unable to meet the high costs of hospitalization. Depending on their location, some non-profits care for more non-insured patients than others. Of course, the Affordable Care Act (Obamacare) was designed in part to greatly lessen the number of uninsured among us — a win for those patients, and for the hospitals that struggle financially because of non-collected fees. The American Hospital Association (AHA) supported the passage of the Affordable Care Act under the premise that nearly all patients would become paying customers.

Since not all states (>20) have agreed to expand their Medicaid pools in spite of generous new federal funding, there are still millions of uninsured patients straining the finances of hospitals. Businesses (non-profit hospitals included) have a right to collect payment for services rendered. But how aggressive should non-profit hospitals be in pursuit of unpaid fees?

Propublica, a non-profit investigative journalism enterprise, has researched the billing practices of non-profit hospitals in six states. What they found ‘astounded‘ Senator Grassley: aggressive collection practices including lawsuits, wage garnishing, and the placement of liens on personal property. These practices are legal, but skirt the ethical notion of helping our fellow humans. If sick people are rendered health care services but then put into collections, the results can be emotionally, financially, and even physically catastrophic. To me it certainly seems counterproductive to bully members of your community, who more than likely will continue to be customers.

Stay tuned to find out if Sen. Grassley and his committee do anything to rein in these practices. My guess is we’ll see an attempt made to more clearly define the community benefit standard and put limits on what extent hospitals can go to for collecting unpaid bills. One option: taking away a hospital’s non-profit status if it continues engaging in such aggressive collection practices.


RIP: EB (1931-2015)

“Let’s play two!”

"Let's play two!"


Good news/bad news from the world of medicine last week. Both stories from the business section of the NY Times and “business of health care” reporter Reed Abelson.

The bad news first: Huron Hospital, a community hospital in East Cleveland, will be closed down by its corporate overlord, the Cleveland Clinic. Like many community hospitals, Huron has declining numbers of admissions and isn’t staffed or equipped to provide the cutting edge care [e.g. transplant, cardiac surgery, or interdisciplinary cancer treatment] favored by behemoth academic medical centers.

I’m sentimental about Huron’s closure for many reasons:

  1. One man's ceiling is another man's floor?

    Further evidence of Cleveland’s decline. After all, Cleveland ranked #5 on Newsweek’s list of dying American cities.

  2. Huron was originally built on part of the estate of John D. Rockefeller, one of America’s original “robber barons.” Rockefeller also bequeathed a nice sum to start a university on the south side of Chicago.
  3. I rotated at Huron as a medical student, working in the ER; I learned a thing or two about suturing and triage.

The Cleveland Clinic makes it clear that closing the inpatient hospital is a business decision. CEO Toby Cosgrove acknowledges that the decision is a difficult one. The hospital is not only considered a local public resource; it’s the largest employer in the community of East Cleveland.

The news is not entirely bleak, however: The Clinic plans to open an outpatient family health center on the site. “When we took over the hospital, we signed up to look after this community,” Cosgrove said.

Contrast the Clinic’s decision with that of Blue Shield of California. The non-profit health insurer made news by unilaterally declaring that it will limit its annual “profit” to a maximum of two percent of revenues. Monies earned over that figure are plowed back to the company’s members, most often in the form of credits on premium payments.

This in effect helps subsidize the cost of insurance for members of that plan.

Sounds good, but you have to wonder:

If a non-profit insurer is making enough “profit” to offer premium credits, you’d think they could just charge lower premiums in the first place. After all, when we talk about annual double digit inflation in health care, isn’t our insurance premium the first place we feel the pain?

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