Valley Health brings in millions of dollars tax-free,
but it also gives millions away
By Jason Kane
The Winchester Star
January 12, 2009
Winchester — Free medical care for some area residents costs big bucks for health-care systems such as Valley Health.
Tens of millions of dollars, in fact, are given away each year by the nonprofit organization.
“Our mission is to help the entire community, regardless of ability to pay,” said Michael Halseth, president and chief executive officer of the Winchester-based system that operates five hospitals in the Northern Shenandoah Valley.
But with generous tax breaks from the city, state, and federal governments, many critics say nonprofit hospitals are receiving a terrific deal without providing enough give-backs to the communities they serve.
In 2007 — the last year for which data were available — Valley Health spent more than $56 million on charity, bad debt, and uncompensated care, including community education, health screenings, and similar projects.
Of that, $18.9 million went toward assisting those who couldn’t afford to pay for health services, $10.8 million was absorbed as a loss for caring for Medicaid patients, and $17.5 went toward bad-debt write-offs.
“We try to work with folks,” said Craig Lewis, the organization’s chief financial officer. “Especially if people are going through struggling times, as they are now with the economy.”
In exchange for their goodwill, nonprofit hospitals escape the vast majority of state and local income, property, and sales taxes — in addition to federal taxes. That can add up to hefty savings in growing markets such as Winchester.
At the moment, no federal guidelines specify the percentage of charity care nonprofit hospitals must provide to their communities.
Institutions such as Winchester Medical Center are simply expected to care for those who walk through their doors without the ability to pay.
In effect, Valley Health will provide patients with free service — even complicated procedures such as open-heart surgery — if their income falls below 200 percent of the federal poverty guidelines. For a family of four, that’s roughly $40,000 per year.
For individuals whose incomes fall between 201 and 300 percent of the federal poverty guidelines, the system offers discounts to its normal fees on a sliding scale.
Lewis said this policy is fairly generous compared to other hospitals in the state. WMC ranks 14th out of 83 Virginia hospitals in the amount of charity dollars it provides. That number would be higher if the area had as many low-income families as central Richmond, for example, he said.
“We could have a more liberal policy of writing off bills but not have as much charity care — percentage-wise — as other hospitals, simply because the demographics of our community don’t allow us the opportunity to take care of more people for free,” Lewis said.
Fear of monopoly
Between 2001 and 2006, the combined net income of the 50 largest nonprofit hospitals jumped nearly eight-fold — to $4.27 billion — according to a Wall Street Journal analysis of data from the American Hospital Directory.
Under federal law, the revenues that remain at the end of a year for a nonprofit organization must be funneled back into the company to bolster programs, equipment, and facilities.
Within Valley Health, that money rarely goes toward bringing down costs for patients, Halseth said.
“We’ve already kept our prices within the lowest quartile in Virginia for years and years,” he said. “A lot of times we’re in the lowest 10 percent.”
Rate increases over the past several years have been between 3 and 5 percent — set to keep pace with inflation.
The primary concern that some people have with nonprofit regional systems such as Valley Health is that their tax breaks will allow them to purchase every health facility in the area, creating a monopoly and later driving up prices.
Last year alone, the company acquired hospitals in Luray and Romney and Berkeley Springs in West Virginia.
The organization now includes Winchester Medical Center, Warren Memorial Hospital in Front Royal, Shenandoah Memorial Hospital in Woodstock, Page Memorial Hospital in Luray, and Hampshire Memorial Hospital in Romney. It is awaiting permission from West Virginia authorities before officially beginning to operate War Memorial Hospital in Berkeley Springs.
Valley Health also oversees the Winchester Rehabilitation Center; Valley Home Care of Winchester, Front Royal, and Woodstock; Urgent Care of Winchester; Quick Care of Stephens City; and Valley Pharmacy of Winchester.
“I would say that fear [of monopoly prices] simply hasn’t been borne out in our history,” Lewis said. “Yes, it’s nice having our regional hospital and system base, but I don’t see us using it in an adverse way for the community.”
A charge for reform
Statewide, the amount of community benefit provided by Virginia’s tax-exempt hospitals exceeded the value of the exemptions by more than $195 million, according to the Virginia Hospital and Healthcare Association.
But that number can be deceptive.
“A lot of hospital systems across the country were putting in everything but the kitchen sink,” Lewis said.
In September, the Government Accountability Office released a report concluding that significant variation existed in the types of activities nonprofit hospitals define as community benefit, as well as the ways hospitals measure the costs of these activities.
Sen. Chuck Grassley, R-Iowa, has been spearheading a charge for reform, recently saying: “As long as there’s such uncertainty and inconsistency in the definition of community benefit, it’ll be impossible to gauge whether the public is getting a fair return for the billions of tax dollars that tax-exempt hospitals don’t pay.”
This year, the Internal Revenue Service rolled out new 990 reporting forms for nonprofit hospitals that require them to report costs rather than charges, and restrict them from qualifying bad debt and Medicare shortfalls in their definition of community benefit.
Grassley seemed partially satisfied, but pledged to continue pushing for minimum levels of charity care.
“While the new IRS Form 990 will help, Congress may need to fill in the blanks since hospitals still get to choose how they calculate their costs,” he said.
Part of Grassley’s worry is that hospitals — especially the nonprofit ones, due to their tax exemption — generate hundreds of millions of dollars and too often use their surplus funds unwisely.
Where the money goes
For 2009, Valley Health expects the retail price (gross revenue) of all of its services to be $1.1 billion.
After subtracting insurance, Medicare, Medicaid, and charity care, it should earn a net revenue of $693 million, with expenses of $659 million.
That leaves many wondering what Valley Health officials do with the $34 million left over.
The company invests a portion of its surplus in stocks, bonds, and other assets.
“We try to be good stewards of the money,” Lewis said. “We try to make sure we have a balanced portfolio, to diversify risks and provide optimal returns [often used for building campaigns].”
A portion of the money is used to finance new facilities, such as the $17.1 million Wellness and Fitness Center on WMC’s Amherst Street campus or the upcoming $178 campus expansion, which will nearly double the size of the flagship hospital.
Some funds go back into programs to provide flu shots, informational seminars, or resources for free medical clinics throughout the area.
Lisa Zerull, a registered nurse who has been working for Valley Health for 19 years, helped the company to devise a number of successful community-based programs.
Her ideas “don’t generate revenue but do generate community support,” she said.
In 1993, for instance, Zerull helped to establish a group of nurses who visit the homes of frequent hospital visitors to help them with tasks such as medicine compliance, dietary changes, and exercise.
By preventing health problems before they occurred, the hospital saved money on the patients’ monthly trips to the emergency room.
“The program is still in existence, which speaks to its success,” Zerull said.
And then there are the ventures which have been raising eyebrows.
Among them: Valley Health recently opened ShenSpa — a branch of Shenandoah Memorial Hospital in Woodstock that offers manicures, pedicures, waxing, and facials.
Or the new Wellness Center. A number of Winchester gyms lodged complaints with city officials before the center opened, saying Valley Health’s nonprofit status gives the facility an unfair advantage.
In turn, local leaders asked Valley Health to pay property taxes on the facility, Lewis said.
Still, officials say the spa, the gym, and other such ventures are all approved by the company’s board of volunteer community leaders — another requirement of a nonprofit hospital.
“Our board is always sensitive to our charity care policies, assuring that we’re being as fair to our communities as we can possibly be,” Halseth said.
Even if management is not thinking exclusively about consumer benefit — whether regarding charity care or the impact of a spa within a nonprofit business structure — Halseth said, “I assure you our boards are. And it’s healthy for us to have a board not just looking out for us.”
— Contact Jason Kane at firstname.lastname@example.org