Nonprofit hospitals' investment losses shouldn't be subsidized by taxpayers: health economists

Nonprofit hospitals' losses in 2022 as a result of risky financial investments should not be subsidized by taxpayers or commercial payers, according to an analysis from health economists published March 24 in Health Affairs

"Asking these constituents to foot the bill for hospitals' investment losses not only lacks justification but will insulate hospitals from the consequences of their investment decisions, motivating less fiscally responsible behavior in the future," the authors wrote.

The three authors from RAND Corp., Manhattan College and Johns Hopkins University said that investment losses were the primary driver of financial losses among some of the nation's largest nonprofit health systems in 2022, accounting for about 85 percent overall.   

To arrive at that conclusion, the researchers analyzed the overall profit margins, including operating and nonoperating activities, at 10 large nonprofit systems that all reported negative profit margins in the second quarter last year: Advent, Ascension, Advocate Aurora, CommonSpirit, Mass General Brigham, Sutter, Trinity, UPMC, Northwell, and Providence.

On average, overall profit margins declined from 9 percent in 2021 to -6 percent in 2022. While patient care revenue slightly increased by 0.73 percent from 2021 to 2022, investment income declined by 185 percent during the same period as stock markets struggled. Financial losses also stemmed from increased labor and supply costs.

"If losses were driven by persistent labor and supply cost increases, then it might be reasonable to ask patients, employers, and insurers to consider these underlying cost drivers in their payments to hospitals," the authors wrote. "However, when losses are driven by risky financial investments, which generated positive returns in many previous years and will do so in many future periods, it is not clear whether patients, employers, insurers, and taxpayers should be responsible for paying higher prices to offset the impact of overall market declines."

The analysis strikes a similar tone as MedPAC's annual March report to Congress, where the group of Medicare experts wrote that general acute care hospitals don't need a significant increase in 2024 Medicare rates to stay afloat — the report did acknowledge that hospitals saw more volatile cost increases in 2022 compared to years prior and some safety-net hospitals will likely need higher reimbursements.

While many systems across the country reported a dire combination of declining operational and investment income in fiscal 2022, some smaller systems have shown signs of improved investment returns in the latter half of 2022 and into 2023.

Matt Swafford, CFO of Bend, Ore.-based St. Charles Health, spoke with Becker's in March about how hospitals' investment income and operating income should be discussed separately because of their different timelines.

"The real crisis in healthcare is operational," he wrote in a recent LinkedIn post. "They are two different components of financial performance with two totally different risk profiles and risk horizons. Operations require daily/weekly/monthly/annual ongoing performance and risk management work. Investment portfolios need a five-year horizon for ongoing performance and risk assessment."

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