Nonprofits: how much is too much?
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The record $523 million profit reported this fiscal year at the University of Pittsburgh Medical Center has raised questions of how a nonprofit organization can be such a money machine.
"Was it because of their monopolistic power, or because they're that much more efficient than other health-care providers?" asked Paul Lodico of the Mon Valley Unemployed Committee, a local consumer group.
UPMC officials say it's clearly a matter of efficiency.
The health system has consolidated business functions such as billing, collection and legal services for its 18 hospitals, and now operates these and other "back office" functions more efficiently, said Robert DeMichiei, the chief financial officer.
The same holds true for clinical services, with UPMC consolidating some services such as obstetrics in fewer hospitals while moving other services from crowded hospitals in Oakland to outlying centers.
Finally, UPMC is saving money by better managing the way it buys supplies from vendors. By using both its size and innovative ordering technology to get better deals, UPMC aims to avoid fueling even higher profit margins at the drug and medical device companies from which it buys products, said Mr. DeMichiei.
"We're running it like a for-profit, we want to be efficient," he said. "But by doing so, those profits aren't going into a shareholder's pocket. They're going back into the community."
Even so, not everyone is celebrating UPMC's success. People struggling to pay rising health insurance premiums voice dismay at all the good profit news among the region's nonprofits, whether its UPMC or Highmark Inc., the region's dominant health insurer with a surplus at last count of more than $2.8 billion.
"If Highmark and/or UPMC were among the nation's leaders in assuring affordable, high quality health-care access in the areas they serve, earning profits would be much less of a concern to payors," said Cliff Shannon of SMC Business Councils, a Churchill-based group that helps small businesses buy coverage.
"Both organizations have done -- and are doing -- some good things," he said. "But I think it's fair to say that the profits that each have been earning in recent years ought to spur at both organizations significantly greater efforts to improve care and rationalize unnecessary costs."
The especially good year at UPMC for the fiscal year that ended in June was a bit unusual, said Mr. DeMichiei, because it reflected exceptionally good investment results. UPMC earned $205 million from investments last year -- nearly a 12 percent return -- but officials say they can't count on that kind of success every year.
Take away those investment profits, and UPMC's profit margin -- as it would be calculated by Moody's Investors Service -- was at the average for hospitals with an AA bond rating.
In Pennsylvania, UPMC and six other nonprofit hospitals and health systems have attained this bond rating, according to an August report from Moody's, and nearby rival the Cleveland Clinic has earned the AA rating as well. The Cleveland Clinic had revenue of $4.051 billion for its fiscal year ended December 2005, and a profit of $289 million -- about 7.1 cents of profit for every dollar of revenue. (UPMC had an 8.7 percent profit margin on revenue of nearly $6 billion for fiscal 2006.)
Two other bond rating agencies, however, put UPMC at an A+ -- not quite an AA. A higher rating means a company can borrow money at lower interest rates.
"We need to continue to demonstrate strong profitability and continue to strengthen our balance sheet in order to achieve a AA rating from all of the major rating agencies," Mr. DeMichiei said. "We have to be financially stable, financially strong and the measurement we use for that is we want to be AA rated."
Nonprofit status is not a function of how big or small an organization's profit is, Mr. DeMichiei added. Instead, it signifies a difference in how profits are handled -- either distributed among shareholders, or put toward community benefits.
UPMC provides millions of dollars of support for the medical school and other training programs at the University of Pittsburgh.
In 2006, UPMC provided community services valued at nearly $60 million, Mr. DeMichiei said. He added that the health system provided more than $55 million in charity care, as valued in the hospital's true cost for services.
"Every day, there's someone who comes in, who has no money, and gets all the services we have to offer," said Robert Cindrich, the general counsel at UPMC.
There are also intangible benefits such as providing some medical services that otherwise wouldn't be available locally and drawing patients from around the region, Mr. Cindrich said.
But questions about the profitability remain.
Mr. Lodico, the consumer advocate, wonders if UPMC will put its profits toward a new initiative to expand access to health care. Such an effort is needed, he said, as the ranks of the uninsured in the country grow.
Mr. Shannon, the small-business leader, said health insurance subscribers believe they are paying a premium to receive services at UPMC hospitals. That willingness to pay more could end, given the profitability.
"As it becomes more apparent that UPMC is a high-cost provider, and as it becomes more difficult for employers and consumers to finance health care, it seems to me that the predictable, rational and appropriate response will be for payors and consumers to indirectly and directly take their business to hospitals and systems that deliver health care in the most efficient way," he said.
But Mr. DeMichiei insists that UPMC is efficient already, and does not receive premium payments from health insurers compared with other hospitals.
"We are generally paid the same as other hospitals in the region," he said.
Which led Mr. Cindrich to a conclusion that he volunteered was facetious.
"We can get out of your media spotlight by being inefficient and making no money," he said. "Of course, our credit rating will go down, and we won't be able to build a brand new Children's Hospital. [But by being] inefficient and sloppy and not making any money, then no one would criticize us."
First Published August 27, 2006 12:00 am