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Fatal System Error

Private nonprofit hospitals, which benefit from huge tax breaks, fail to care for the East Bay's poorest residents — and now one public hospital is on the verge of collapse.



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In recent years, John Muir has also donated a total of $3 million to DMC to help keep it afloat, while Kaiser has given $20 million to the San Pablo hospital.

Representatives of Kaiser — which reported a 2013 net income of $2.7 billion for all of its nonprofit operations — declined to be interviewed for this story. In an email, spokesperson Marc Brown provided me with some charity care data and defended Kaiser's record of caring for low-income people and the uninsured.

He stated that roughly 250,000 people — 7 percent of Kaiser's members in Northern California — receive charitable care and coverage through its various subsidized programs. Kaiser's Medical Financial Assistance program, which helps cover care costs for low-income and uninsured patients, spent 43 percent of its 2013 funding on non-Kaiser members, he stated. And in 2013 in Northern California, Kaiser provided $639 million worth of uncompensated care, meaning costs that patients or third-party insurers didn't pay, which Kaiser then covered, he added. Kaiser covered those costs through its hospitals and its health plan, he stated. Of that total, Kaiser spent $13 million in Richmond and $12 million in Oakland, he stated.

Brown also argued that Kaiser emergency departments are open to all patients, and stated that from January through September of 2014, 39 percent of Kaiser Richmond emergency patients and 15 percent of Kaiser Oakland emergency patients were non-Kaiser members. Brown further urged against a comparison between Kaiser and other hospitals, arguing that Kaiser's model supports ongoing care outside of the emergency department that state data don't reflect. "Through charitable care and coverage, Kaiser Permanente is subsidizing the full range of care for patients and families, inside and outside the hospital," he wrote.

Healthcare advocates say that nonprofit hospitals across the state could do a better job of treating the neediest patients, and activists and lawmakers have repeatedly proposed solutions that they say could go a long way in creating a more balanced system.

In California, a number of studies on the investments of nonprofit hospitals have driven legislative proposals aimed at increasing transparency around how hospitals report their charitable activities. A 2007 report from the State Auditor's Office found that the charity care investments of the state's nonprofit hospitals and for-profit hospitals were virtually the same — uncompensated-care costs averaged 3.6 percent of net patient revenues for nonprofits and 3.5 percent for for-profits.

And a 2012 report by the research arm of the California Nurses Association, found that cities and counties in the state lose more than $1 billion each year due to the tax breaks they give nonprofit hospitals and the payments these municipalities make to hospitals to provide care for the poor.

The Greenlining Institute, a Berkeley-based public policy group, has done some of the most in-depth research on the topic — analyzing not only charity care, but also broader community benefit investments of nonprofit hospitals. The group released a report in 2013 that examined California's seven largest nonprofit hospital systems, including Kaiser and Sutter, finding that they spent an average of 7.2 percent of their operating budgets on community benefits.

Greenlining's investigation found that Kaiser hospitals' total community benefit spending, as a percent of operating expenses, was one of the lowest of the seven hospital systems it studied — 5.3 percent in 2010 and 4.8 percent in 2011. That's despite the fact that Kaiser is the largest hospital system in the state.

And in terms of its upstream community benefit spending — meaning investments in public health efforts outside of direct hospital care — Kaiser hospitals spent three times more on research and education (which can include residency programs) than they did on community benefit programs that directly support vulnerable populations, Greenlining reported.

Sutter Health, the state's third largest nonprofit system, spent 6.1 percent of operating expenses on community benefits in 2010 and 10.3 percent in 2011, the report found.

Carla Saporta, Greenlining's health policy director and an author of the study, said it was very difficult to assess if community benefit dollars were actually reaching people in need, adding, "When you can see what decisions are being made, it appears it's about the bottom line of the hospital and not actually about community health needs."

The IRS allows nonprofit hospitals to claim that healthcare grants they receive can count toward their community benefit requirements, enabling nonprofits to count money — such as a National Institutes of Health award — as a public benefit investment, according to Saporta. Another loophole allows hospitals to use the "education" category as a way to claim community benefits for spending that is primarily for marketing purposes, such as mailers that may have some educational value, but are largely promotional, she said.

Greenlining and the California Nurses Association have twice pushed for legislation that would beef up reporting requirements for nonprofit hospitals. The hope is that clearer or stricter standards would make hospitals' budgets and spending decisions more accessible to the public — and would ultimately pressure them to do a better job. In 2013, Assemblymembers Bob Wieckowski (D-Fremont) and Rob Bonta (D-Oakland) introduced Assembly Bill 975, which would have required hospitals with operating revenues that exceed 10 percent of operating expenses to publicly justify their tax exemptions.

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