Health Care

How Baptist Health benefits from tax exemption

Baptist Hospital of Miami opened in 1960 on Kendall Drive, beginning the growth of a healthcare system that has become the dominant force in South Florida and includes seven hospitals and 30 medical clinics spanning three counties.
Baptist Hospital of Miami opened in 1960 on Kendall Drive, beginning the growth of a healthcare system that has become the dominant force in South Florida and includes seven hospitals and 30 medical clinics spanning three counties. EL NUEVO HERALD

Baptist Health South Florida is a Miami-Dade success story.

Founded with a single hospital on Kendall Drive in 1960, it has grown into the region’s dominant healthcare system. Its seven hospitals and dozens of clinics from Coral Springs to the Upper Keys serve thousands daily and employ more people than any other local business, consistently ranking among the area’s best in customer satisfaction and quality of care.

Baptist Health is also raking in the money. The healthcare giant earned a net income of $344 million in 2014 and has amassed financial reserves of about $3 billion. It charges some of the highest rates on average among Miami-Dade hospitals, according to state data, and pays its top executives and star physicians million-dollar salaries.

And each year Baptist Health benefits from its status as a not-for-profit corporation exempted from paying income, property and sales taxes — a perk valued at about $150 million in 2014.

In return, Baptist Health — like all nonprofit hospitals — is required by the Internal Revenue Service to offer extra programs called “community benefits” to promote health. Most often, that has meant providing free or reduced-price healthcare for the uninsured and for those with Medicaid.

Last year, Baptist Health’s community benefits totaled $317 million, according to CEO Brian Keeley.

“We give more than anybody in town,” he said.

$317M Community benefit spending by Baptist Health in 2014

But while Baptist Health gives generously to free clinics and other healthcare efforts, its vast network is unavailable to many low- and middle-income South Florida residents who buy plans on the Affordable Care Act’s insurance exchange, known as Obamacare, and to those who are on Medicaid.

Baptist Health accepts only two of the nine Medicaid plans in Miami-Dade — United Healthcare and Coventry — shutting out of its network about 400,000 people, or nearly 75 percent of the county’s Medicaid population.

And among the 57 plans sold on the ACA exchange in Miami-Dade for 2016, Baptist Health accepts 29 of them — but not one of the 15 least-expensive plans on the market, and less than half of the most popular category, the so-called “silver” level coverage that offers financial aid with monthly premiums and out-of-pocket costs.

Other nonprofit hospitals, including Mount Sinai Medical Center in Miami Beach and University of Miami Hospital, accept more ACA plans and Medicaid insurers than Baptist Health does. Jackson Health System, Miami-Dade’s taxpayer-owned hospital network, accepts all ACA exchange and Medicaid plans.

Kendall resident Cindy Cassidy, a real estate agent who buys her own health coverage on the ACA exchange, says she can’t afford a plan that includes Baptist, even though its medical facilities are the closest.

“You know what the problem is — they have an absolute monopoly,” she said.

Baptist Health says growth is good business. And so is giving back to the community.

Over the past three decades, more than half of the hospitals in Florida have combined into a series of integrated systems under single ownership and governance.

Roberta Stokes, a member of Baptist Health’s board of trustees, said the group established a committee years ago to ensure that happens.

“We take very seriously the fact that we are a tremendous community resource,” she said, “and we want to make sure that all of our resources go back to assisting the community in any way possible.”

Hospital experts often categorize hospitals by three types: tax-paying, which are the investor-owned for-profits, such as HCA and Tenet; tax-exempt, which are the nonprofits, such as Baptist Health and Mount Sinai; and taxpayer-supported, which are the public hospitals, such as Jackson Health and Memorial Healthcare System in Broward.

All provide some level of charity care and community benefits. But only nonprofit hospitals are required to report those amounts to the IRS.

Since well before the passage of the ACA, Florida hospitals and health plans have been expanding and merging to gain market power, said Allan Baumgarten, a Minnesota-based healthcare industry analyst and publisher of the bi-annual Florida Health Market Review.

“For hospitals, in particular,” he noted in the report, “there is a sense of not wanting to be the last independent hospital standing.”

Besides gaining market power to use in negotiations with health insurers, hospitals have also consolidated to achieve economies of scale and to establish regional brands, which can give a system like Baptist Health more power to negotiate prices with insurance companies — and to stay out of health plans that might not be financially rewarding enough, such as Medicaid HMOs.

As the largest healthcare system in South Florida, Baptist Health wields considerably more leverage than other, smaller nonprofit hospitals in negotiations with insurers.

We give more than anybody in town.

Brian Keeley, CEO of Baptist Health South Florida

However, a large nonprofit system has an additional layer of responsibility to give back to the community. Many have traditionally focused their community benefit programs on training new doctors, conducting research and providing free and reduced-price care for the poor and uninsured.

But critics say a lot of that spending really just helps the hospital system.

“A lot of community benefit spending is spending to keep the hospital going,” said Sara Rosenbaum, a professor of health law and policy for George Washington University and author of a study published in the journal Health Affairs in June that estimated the size of the tax exemption for nonprofit hospitals nationwide in 2011 reached $24.6 billion.

Nonprofit hospitals claim in IRS filings that they provide $62 billion a year in community benefits, she said, and they include such expenses as fund raising, assessing health needs in the community and losses because of below-cost payments from Medicaid and charity care.

“How much are these hospitals inflating their community benefit figure?” Rosenbaum asks. “The easiest way to do that is to grossly inflate the cost of financial assistance, the cost of Medicaid because then you can claim these big shortfalls.”

In Baptist Health’s case, geography plays a key role in its delivery of free and reduced-price care, said Linda Quick, president of the South Florida Hospital and Healthcare Association.

“Their … benefit to the community definitely varies significantly by location,” she said. “The Homestead facility is an example, and probably alone does enough uncompensated care to probably be sufficient for the system as a whole.”

Baptist Health loses about $40 million a year at its Homestead Hospital, Keeley said. “We’re providing a huge amount of charity care there.”

For 2014, Baptist Health reported about 10 percent of patients were uninsured and nearly 17 percent received Medicaid.

The healthcare system acquired the struggling facility in Homestead, which used to be named James Archer Smith Hospital, in 1995 and then later invested $130 million to replace it with a new state-of-the-art center with private patient rooms, extra operating rooms and a larger emergency room.

Baptist Health also took on the costs of extra staff for the expanded Homestead Hospital, including surgeons and physician specialists, said Wayne Brackin, chief operating officer for the healthcare system.

“No one else would have invested that kind of money in what was a guaranteed, financially adverse circumstance, and is to this day, and likely will be for some time into the future,” he said.

But Homestead Hospital is something of an exception for the hospital system.

As Baptist Health expands across three counties — most recently announcing plans to enter Palm Beach County by acquiring the nonprofit Bethesda Health’s hospitals and clinics — it has chosen South Florida’s suburbs for urgent care centers, diagnostic facilities and physician practices.

“This is an important strategy,” Baumgarten said. “This is how you reach certain populations — and very deliberately — to capture a very favorable economic demographic.”

In its home turf of Kendall, where Baptist Health first set roots in South Florida, long time residents say they feel they are being excluded — even as the health system expands with a new $430 million cancer center scheduled to open this year.

With a Baptist Health hospital, an urgent care clinic and a diagnostic imaging center all within a few miles of her home in The Hammocks neighborhood of South Miami-Dade, Cassidy, the real estate agent from Kendall, said she feels surrounded by a healthcare system that remains out of her reach.

“I’ve had that experience ever since I got an Obamacare plan,” said Cassidy, 59.

You know what the problem is — they have an absolute monopoly.

Cindy Cassidy, 59, of Kendall

The closest hospital to Cassidy’s home is West Kendall Baptist, about three miles away. But, she said, “it’s no longer an option” because her Coventry Health Care of Florida plan doesn’t include Baptist. The nearest in-network hospital is Jackson South Community Hospital, about nine miles away.

Cassidy said she pays about $300 a month for her plan and can’t afford to pay more. The cheapest plan sold on the ACA exchange in 2016 for a 59-year-old Miami-Dade resident who wants Baptist Health in her network has a premium of $557 a month.

She believes that Baptist Health’s blanket coverage of South Miami-Dade is pushing out other providers, leaving consumers with fewer alternatives.

“They can eliminate whoever they want,” she said, “and take only those that still have private insurance because they’ve taken over.” She rattled off a list of nearby hospitals that Baptist Health has purchased: Doctors Hospital in Coral Gables, Mariners in Tavernier, South Miami Hospital.

Baptist Health CEO Keeley said the system isn’t shutting out insurers. Rather, it’s the other way around.

“We reached out to them,” he said. “They said they didn’t want [Baptist Health in their networks] anymore. ... They want narrow networks because that was going to probably hurt them financially if they brought Baptist in.”

Keeley added that Baptist Health hospitals already treat any patient with a medical emergency, regardless of insurance coverage, as required of all hospitals under federal law. He said many of the health system’s ER patients are on Medicaid.

“Our Medicaid has probably doubled in the last five years,” he said, “and our charity care and community service was $317 million last year. I would challenge anybody in South Florida to even come close to that.”

7.9 percent profit margin for Baptist Health in 2014

For all Baptist Health hospitals, community benefit spending amounted to about 24 percent of total operating expenses in 2013.

Only Jackson Health System, Miami-Dade’s public hospital network, provided a greater amount of charity care in terms of total dollars and as a percentage of operating expenses, according to the state’s Agency for Health Care Administration.

In 2013, Jackson Health spent $346 million or about 26.7 percent of operating expenses on free or reduced-price care for patients. But Jackson Health also received about $350 million in taxpayer support that year — a source of revenue not available to other local hospitals.

The region’s other large, nonprofit hospitals, including Nicklaus Children’s Hospital, Mount Sinai Medical Center and University of Miami Hospital, spent less than Baptist Health for charity care in 2013, state data shows.

UM Hospital spent $32.8 million or 9.2 percent of operating expenses while Mount Sinai provided $64.1 million or 15.7 percent. Nicklaus Children’s spent $2.3 million or .5 percent.

Included in Baptist Health’s community benefit spending is funding for nonprofit neighborhood clinics in Miami-Dade and Monroe counties, including the South Miami Children’s Center, the Open Door Health Center in Homestead and the Good Health Clinic in Tavernier.

It pays physicians to provide care in the community, at a cost of about $14 million in 2014, and counts continuing medical education and medical research — both allowed under IRS guidelines — as expenditures that benefit South Florida.

There is a sense of not wanting to be the last independent hospital standing.

Allan Baumgarten, hospital and healthcare analyst

Part of the problem, though, is that IRS guidelines do not specify the amount of charity care or community benefits that nonprofit hospitals must provide, said John Colombo, a law professor at the University of Illinois and an expert in tax-exempt organizations.

“There are no statutory definitions of the concept,” he said. “The result is that most hospitals are very aggressive in claiming that expenses constitute community benefits, even if those expenses help the hospital.”

Included in the $317 million figure that Keeley cited for Baptist Health was $110.5 million in medical care for the uninsured and an additional $150.8 million in below-cost payments from Medicaid.

Baptist Health also spent $56 million on other community benefits, including health fairs, educational programs, free screenings for cholesterol, blood pressure and osteoporosis, and a study required under the ACA to assess local healthcare needs.

Those efforts reflect, in part, growing pressure for nonprofit hospitals to justify their tax exemptions. In Missouri, a nonprofit hospital system was singled out for aggressive debt collection practices that financially ruined uninsured patients. In Illinois, the state’s Supreme Court upheld a decision by state officials to yank the tax exemption from a nonprofit hospital system for not providing enough charity care.

And most recently in Morristown, New Jersey, a local nonprofit hospital system agreed to pay $26 million to Morristown to end a court dispute over the hospital not paying property taxes.

In his ruling against the hospital, New Jersey Tax Court Judge Vito Bianco concluded that if all nonprofit hospitals operated the same way as the Morristown Medical Center, “then for purposes of the property tax exemption, modern nonprofit hospitals are essentially legal fictions.”

Indeed, many nonprofit hospitals operate just like their for-profit counterparts. They build aggressively, charge high rates and create networks of subsidiaries and affiliates so intertwined that it becomes difficult to distinguish the nonprofit activities from the for-profit endeavors.

But tax exemption provides clear advantages to nonprofit hospitals.

Investor-owned, for-profit hospitals in Florida fork over millions of dollars a year in taxes. HCA’s East Florida division, composed of 14 hospitals, paid $131 million in taxes in 2013, according to its annual report. Tenet’s Florida system of nine hospitals pays about $21 million in property and sales taxes.

Baptist Health paid about $11.5 million in taxes last year, including about $3.5 million for some non-exempt properties, $3.6 million in sales taxes, and about $652,000 in unemployment taxes.

“For-profit businesses provide community benefits, too — including paying taxes,” Colombo said. “So why do nonprofit hospitals get to cry ‘community benefit!’ and get tax exemption?”

Under the Affordable Care Act, nonprofit hospitals are required to assess health needs in their community and draft a plan to address those gaps.

Baptist Health owns six nonprofit hospitals and additional nonprofit affiliates, including an outpatient services group that owns and operates 30 diagnostic imaging and urgent care centers, and a fund-raising arm. But the healthcare system’s annual tax returns show it also owns about two dozen for-profit affiliates, including a real estate management company, physician practices and two debt collection agencies.

Though those affiliates contribute millions to Baptist Health’s bottom line, Brackin the chief operating officer said those endeavors do not detract from the health system’s core responsibilities.

“All of the things that go into causing us to be a fiscally responsible business are secondary to the mission,” he said. “The DNA of the organization, the origins of Baptist Hospital were that they were community members in league with a number of the early Baptist ministers of Miami.”

Baptist Health’s system-wide board of trustees — each hospital also has a governing board — includes a number of South Florida clergy and other community members who insist the health system does all it can, Brackin said.

That includes missions to help disaster victims in Haiti, and other spending that can sometimes be “invisible,” he said, such as higher nurse-to-patient ratios than other hospitals.

Still, critics says nonprofit hospitals too often benefit from activities that market their brands and generate patient referrals, such as community health fairs and free cancer screenings.

“Guess what happens if a screening detects a possible problem?” said Colombo of the University of Illinois. “There is a high chance the person will be referred to a doctor or clinic affiliated with the hospital, so that this person eventually becomes a paying patient.”

Brackin acknowledges the marketing aspect of health fairs, but he said there’s an important distinction depending on the location.

“If you said we’re doing a health fair at Dadeland Mall, then that’s maybe one thing,” he said. “But if we’re doing a health fair down at Harris Field in Homestead, Florida City, that’s an entirely different thing because everybody that we uncover there at this stage of the game is likely to be [uninsured or under-insured]. It’s certainly not a business move.”

Daniel Chang: 305-376-2012, @dchangmiami

Baptist Health South Florida by the numbers

  • 7 hospitals (Baptist Hospital, Baptist Children’s Hospital, Doctors Hospital, Homestead Hospital, Mariners Hospital, South Miami Hospital and West Kendall Baptist Hospital)
  • 30 outpatient and urgent care facilities in Monroe, Miami-Dade and Broward counties
  • 1,481 patient beds
  • 15,000 employees
  • 2,200 affiliated physicians
  • $344 million net income in 2014
  • 14 percent total margin in 2014
  • $317 million in community benefit spending in 2014
  • $3 billion in assets in 2014
  • $11.5 million taxes paid in 2014
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