- Report Published -
|Health Care Institutions' Diversification Into Commercial Sector and Its Impact on Small Business and Health Care Costs|
|Virginia Health Services Cost Review Council|
|HJR 237 (1992)|
|House Joint Resolution Number (HJR) 237 (Appendix 1)' agreed to during the|
1992 Session of the Virginia General Assembly, requested the Virginia Health
Services Cost Review Council (VHSCRC) to examine health care institutions'
diversification into the commercial sector and its impact on small business and health
care costs. In addition, the VHSCRC was to elicit testimony and comment concerning
the impact of health care institutions' commercial diversification from citizens, small
business owners, hospital representatives, and agencies of the Commonwealth.
To prepare this report, the VHSCRC first undertook a literature review of
current publications and positions of individuals and advocacy groups related to
"unfair competition". It then undertook an analysis of the Commercial Diversification
Surveys (CDS) which the VHSCRC has issued for the years 1988 through 1992.
Finally, the VHSCRC solicited written comment from a wide variety of interested
parties and organizations.
The literature review gave no definitive answer as to whether "unfair
competition" exists. Numerous complaints of unfair competition have been brought
against the nonprofit community and nonprofits have countered with their own
assertions that their income-producing activities further their exempt purposes. The
review revealed only anecdotal evidence to substantiate claims of unfair competition.
Anecdotal evidence has numerous limitations, but no definitive empirical studies have
been designed or conducted to address the issue.
The literature review also revealed activity at the federal and state levels
designed to address unfair competition. The principal federal public policy response
to the possibility that tax exempt status may result in unfair competition is the tax
on the unrelated business income of nonprofit organizations. However, problems
have been identified in the administration of this tax. Claims of lax enforcement of
the unrelated business income tax have been leveled against the IRS.
In the states, the Business Coalition for Fair Competition has been addressing
issues related to activities it sees as unfair competition. It has drafted and published
the Model State Unfair Competition Bill which is designed to prohibit government
agencies, institutions of higher education and nonprofit organizations from providing
goods and services that can be provided by for-profit business. The bill is based on
laws passed in Arizona, Colorado, and Iowa. The American Bar Association
Committee on Exempt Organizations opposes this model bill as it relates to non-profit
Available data from the CDS proved to be most useful in describing the nature
and extent of diversification and competition from nonprofit hospital affiliates. It was
limited in its ability to clarify the impact of nonprofit hospital diversification on small
business and health care costs.
An analysis of the CDS revealed that diversification is a popular strategy
among Virginia nonprofit hospitals but tends to be more extensive in organizations
having larger numbers of beds. Nonprofit hospitals engage in a number of different
patient care related and unrelated activities including: home health; outpatient
radiology, CT scan, and MRI; urgent care; other outpatient services; long term care;
pharmacy; medical equipment; insurance; physician billing; collection; fitness and
wellness; real estate; and management and consulting services. Competition may
be most extensive, as judged from gross revenues earned, in the patient care related
areas 06 outpatient services other than radiology, CT scan and MRI; long term care
services; and medical equipment and supplies. In nonpatient care related activities,
competition may be strongest from holding company activities; real estate
management and rental; and management and consulting services. Unfortunately,
the types of business activities undertaken by holding companies can not be
determined from the data.
Virginia nonprofit hospitals tend to dominate their consolidated organizations.
During 1992, they earned 92 percent of the gross revenues of all consolidated
organizations and over 96 percent of net profits.
The CDS indicate that assets and equity may not be employed as productively
in affiliates as in hospitals. The median return on assets and return on equity tend
to be lower among affiliate organizations than among nonprofit hospitals. For-profit
affiliates of nonprofit hospitals perform more poorly than their nonprofit
counterparts, as judged by median profitability ratios. In fact, the median
profitability ratios of for-profit affiliates of nonprofit hospitals have been zero or
negative over the years, while the median profitability ratios of nonprofit affiliates
have consistently been positive.
No determination can be made regarding why for-profit af€iliates perform more
poorly than nonprofit affiliates; however, judging from median profitability ratios, for-
profit affiliates seem poorly situated to monetarily support the nonprofit activities of
the larger corporation or lower the cost of health care. While, nonprofit affiliates are
profitable, it is impossible to determine how their profits are used.
Although the VHSCRC actively sought their input, the feedback from
interested parties and advocacy organizations from both the small business
community and nonprofit hospitals was not sufficient to fully develop and respond to
the issues raised in HJR 237.
Because determination of "unfairness" requires value judgements, it will
always be difficult to study the extent of unfair competition between nonprofit
hospitals and for-profit business. However, specific questions related to competitive
advantages that nonprofit hospitals may enjoy over for-profit competitors could be
investigated if additional legislation is enacted.
Some of these questions include: (1) Do nonprofit hospitals limit referrals to
their own affiliates (captive referrals)? (2) Do nonprofit hospitals charge lower prices
than for-profit firms providing the same services in the market area? (3) How
efficiently are services provided through affiliates? (4) Do nonprofit hospitals avoid
taxes on income generated in their for-profit subsidiaries? (5) Are after-tax profits
channeled back to the nonprofit hospital or a foundation that raises money for the
Recently collected information on related party transactions collected by the
VHSCRC pursuant to SB 518 (1992) may be useful in answering some of these
questions. It is therefore suggested that a continuing resolution be adopted to have
the VHSCRC further study these issues.
In addition, to more filly address the questions specified above, legislation will
be required to authorize the VHSCRC to gather information on: (1) the types of
services offered by each subsidiary; (2) the amount or number of each type of service
provided; (3) referral information; (4) capital investments (past and new); (5) labor
information; and (6) information concerning mergers or sales of subsidiaries including
the proceeds of such sales and uses of these funds.