Non-profit hospitals like Salem Health* receive significant financial breaks that most corporations, such as “for-profit” hospitals, do not. Historically, these benefits are provided in exchange for the good the hospital does in the community, such as charity care.
But the medical economic landscape was rocked by the Affordable Care Act, and not just in Salem but also across the nation. Exempt from many federal, state, and local taxes, relieved from having to support Salem police and fire departments or parks, Salem Hospital now experiences windfall profits, pays its CEO more than twice the salary of the President of the United States while planning millions of dollars of construction projects with City-authorized bonds. Meanwhile, it provides dramatically less charity care to Oregon’s needy.
In the wake of a report released last week by the Oregon Health Authority (OHA) that described an electrifying jump in the profitability of non-profit Oregon hospitals, Oregon state legislators, unions, and health professionals are examining the way non-profits like Salem Hospital operate and wondering if the old rules still make sense.
Salem Hospital is wealthy
In February 2016, Fitch Ratings’ Annual Report said Salem Hospital showed “strong profitability” and increased the hospital’s financial rating from “A” to “A+.” The upgrade reflected the hospital’s near-80 percent market share and its third consecutive year of excellent operating margins. Like all “non-profit” institutions, hospitals like Salem Health pays neither property tax nor dividends to shareholders. This helps them retain cash at a significantly higher rate than “for-profit” hospitals can.
The Hospital reports that in September 2012 it had $345.9 million in unrestricted cash investments, while three years later it had $491 million in unrestricted cash investments. Between 2014 and 2015, profitability for hospitals across the country climbed a whopping 146.2 percent.
One way to assess a hospital’s financial viability is to measure the difference between what it receives for a patient’s care and how much that care costs it. Salem Weekly calculated this number over several years using OHA figures; during the first three quarters of 2012, per-patient profit was $457—in the first three quarters of 2015, per-patient profit jumped to $1,781.
A report released in May 2016 by the Johns Hopkins Bloomberg School of Public Health found that non-profit hospitals actually generate more profit than “for-profit” hospitals. The most lucrative “non-profits” establish monopolies in their communities, which allows them to mark up prices charged to private insurers. In a press release, researcher Gerard Anderson said, “The system is broken when non-profit hospitals are raking in such high profits.”
Many factors contribute to the Hospital’s wealth
The Affordable Care Act, which entered the picture in 2014, hugely improved the bottom line of hospitals like Salem Health. In 2013, 15 percent of Oregonians had no health insurance; they often used emergency rooms for health care. When they couldn’t pay, hospitals absorbed these costs as part of the “charity care” their non-profit advantages required.
But the ACA changed all that, expanding Medicaid eligibility and introducing the health insurance exchange. By 2015, the number of uninsured in Oregon dropped to just 5.3 percent. Thousands of individuals who would have required financial assistance from hospitals became hospital’s paying customers. As a result, across Oregon, uncompensated care has fallen 65 percent in two years.
“At one level the Affordable Healthcare Act has worked,” says Rep. Rob Nosse (D – Portland). Nosse is employed with the Oregon Nurses Association, is Vice-Chair of the House Interim Committee on Health Care and currently chairs a work group on prescription drugs. “One of the ideas behind the ACA was to get as many people as possible covered with insurance and that has happened,” he says. “In the recent past a lot of charity care was bad debt—care that was given that was just written off because the Hospital could not collect payment. Now hospitals are being reimbursed.”
Nosse and Rep. Mitch Greenlick (D – Portland) are collaborating on legislation that will examine Oregon non-profit hospitals’ charity care and “community benefit” in the coming session. “Truthfully,” Nosse says, “we need to look at where charity care dollars and community benefit dollars are being spent and what it means to be a non-profit hospital. We have to create a value proposition that’s good for hospitals, good for our communities, and good for health care workers.”
Salem Hospital also benefits from City municipal bonding structure. In 1974, the City of Salem created the Salem Hospital Facility Authority. This public agency, with little public or media scrutiny, formulates tens of millions of dollars of municipal bonds for the hospital’s capital construction. Authority meetings are not held at City Hall but in the Salem Hospital Board Room. There, it issues tax-exempt bonds to the hospital for capital construction and other enterprises. In 2013, the Authority approved a debt issuance of up to $75 million in revenue bonds for hospital capital construction.
Salem Hospital, the largest non-governmental employer in town, enjoys a location near four city parks (Pringle Park, Bush’s Pasture Park, Pringle Creek Trail, and Deepwood Estate). These properties temper noise, sight, and air pollution, and provide value to potential and current employees alike—and the Hospital, because of its tax-exempt status, pays nothing to help or maintain them.
Administrative pay versus worker pay
Salem Hospital provides “market-competitive pay and benefits to attract and retain a skilled workforce at all levels,” says Sherryll Hoar, communications director for Salem Health. To determine market rates for executive compensation, Hoar says the hospital uses an external consulting firm with expertise in executive compensation for similarly sized hospital systems and “the final compensation decision is made by our community volunteer Board of Trustees.”
Salem Hospital’s 2014 tax return showed that then-CEO Norm Gruber received $1,128,108 and Cheryl Nester Wolfe, then-chief administrative officer, received $605,350 in compensation. Nester Wolfe became CEO in fall 2015. Her compensation, according to a source inside the hospital with “highly reliable” information, is now more than $1.4 million per year. (Salem Weekly made repeated requests to verify Nester Wolfe’s figure for accuracy, but the Hospital declined them.)
A 2014 Journal of the American Medical Association report on non-profit hospital executive performance. The report showed that CEO compensation was associated with technology and patient satisfaction – but not with processes of care, patient outcomes, or community benefit.
In the past few years, a number of efforts have been made, primarily by Democratic legislators and unions, to address high CEO compensation in nonprofit hospitals. Among them:
• Earlier this year, Rep. Susan Johnson of Connecticut proposed requiring nonprofit hospitals whose leader’s salaries are more than $500,000 to pay municipal property taxes.
• In 2015 the Massachusetts Nurses Association sought to create a ballot initiative that would fine any hospital that paid its CEO more than 100 times the earnings of the lowest paid employee.
• In June 2016, SEIU in California proposed capping hospital CEOs salaries at $450,000 per year—the amount paid to the President of the United States.
With a PhD in Medical Care Organization, Rep. Mitch Greenlick is a Professor Emeritus at Oregon Health Sciences University and was Vice President of Keizer Foundation Hospital. He’s chair of the Health Care Committee in the Oregon House. “There is no question in my mind that [CEO] salaries have become too high,” he says. “I’m not saying to take away their non-profit status on the basis of these high salaries. But I’m saying they should show a little restraint.”
Two years ago, according to Oregon SEIU 49’s Felisa Hagins, the union began several ballot measures to address hospital CEO compensation. However, then-governor John Kitzhaber suggested that a work-group consider the matter instead. Hagins says SEIU may return to a ballot approach if it doesn’t see enough progress with the group. “SEIU continues to be concerned about the concentration of wealth at the administration level in hospitals,” she says, “while many people who provide excellent patient care are struggling to make a living wage and don’t have affordable health care for themselves and their families.”
In “The High Cost of Low Wages in Oregon,” a 2014 report from University of Oregon Labor Education and Research Center, analysts found that many who receive “SNAP” food benefits are actually employed by very wealthy companies. “Major corporations employ the largest numbers of low-wage workers who rely on public assistance because of their low wages and lack of benefits through their job,” the report said. “Safety net services for low-wage workers are a de facto taxpayer subsidy that boosts corporate profits.”
General medical and surgical hospitals employed 1,805 of the Oregon workers enrolled in SNAP in January 2014, according to the report. Low-wage employees in hospitals often work in food service, housekeeping and laundry. Bureau of Labor Statistics show that a hospital-nursing assistant in Salem earns $14.24 per hour. A physical therapist aide earns $13.42 per hour. An EMT makes $16.57 per hour. Salem Hospital employs no union workers.
“We are very concerned at the number of health care workers who are living below the poverty line who work at hospitals, and the economic policies hospitals have put in place keeping many workers struggling to survive,” Hagins says. “Policies like scheduling just under the hours to get health care, having high deductible and high cost-sharing health care plans…while paying non-profit CEOs millions of dollars a year.”
Dr. Leslie Hendrickson spent 11 years with Oregon Medicaid and has been a national consultant for decades, conducting research and fiscal analyses on the cost and performance of government health programs.
Some of the factors that keep CEO compensation so high, says Dr. Hendrickson, include that their pay ultimately reflects the pay of senior staff, making other administrators less likely to discourage generous reimbursement. Hendrickson also notes that hospital board members, who are usually community business people or donors, feel uncomfortable challenging high compensation figures. “Boards tend to be polite among themselves,” he says, “and persons suggesting compensation cuts or lower hiring salaries run a risk of being perceived as ‘disruptive’ or ‘not a team player.’”
Hendrickson does not believe much will change until state’s legislatures or governors are willing to somehow cap salaries. He says, “we have a country rich in intellectual capital, and there is no doubt in my mind that you could cut these salaries in half and still find competent people to operate hospitals.”
The equivalent of what it takes out
Because Salem Health doesn’t pay property tax on its large (12 square blocks) and prosperous campus, it spends nothing to support Salem’s underfunded police or fire departments, its parks, or public transit.
“Tax-exempt status enables hospitals to provide vital services to their communities,” says Sherryll Hoar. “Erosion of that tax-exempt status in any form would have a damaging effect on a hospital’s ability to provide community benefit…Salem Health takes its community commitment very seriously. In 2014, Salem Health provided nearly $100 million in community benefit…[an increase of] more than $3 million over the previous year.”
With its exemplary financial rating and a $628,000 (2014) advertising and promotion budget, Salem Health alienated numbers of the Salem community when it spent $50,000 in 2015 to defeat a ballot measure that would have provided the city and surrounding areas with weekend and later week-night bus service. At a charge of 2 cents for every $10 of payroll, the tax, the hospital said, would have cost it $600,000 the first year. Its donation to a political PAC, critics say, may have violated IRS non-profit tax law.
“My biggest disappointment with Salem Hospital is that no one knows what they’re up to,” says Hospital neighbor John Prohodsky. “They do not share their plans with the public; they do not view the public as partners.”
The Hospital has sparked grievances with neighbors on several issues in recent years, on topics ranging from its removing all Oregon State School for the Blind buildings to create a new rehabilitation facility, to its destruction of protected significant Oregon White Oaks to its purchase of a nearby home from an elderly couple under a false name.
Meanwhile, the hospital’s capital spending in tax-exempt bonds for construction is projected to be $55 million in fiscal year 2016, $43 million in fiscal year 2017, and $49 million in fiscal year 2018.
Oregon House Speaker Tina Kotek, in response to a question about the plunging level of Salem Health’s charity care, says, “There is an expectation that non-profit hospitals in Oregon provide measurable benefits to the communities they serve in order to maintain their tax-exempt status. In 2007, with HB 3290, the Legislature instituted required community benefit reporting, which includes charity care. We should revisit that reporting and update it to reflect what ‘community benefit’ looks like in an ACA health care world.”
*Salem Hospital is now correctly named “Salem Health, an OHSU Partner,” but is still called Salem Hospital by people in the community. We use the terms interchangeably.
Contributing author to this story, Jon Christenson studied health care delivery systems and organizations at the University of Oregon. He also attended the Danish Royal Academy of Fine Arts in town planning. In 2009, he served as chief of staff to Oregon State Senator Margaret Carter, Co-Chair of the Joint Committee on Ways & Means.