Are Stand Alone Children’s Hospitals Part of the Health Care Problem or Part of the Solution

Venturing into An Area Where Few Commentators Want to Go



Nemours Children's Hospital in Orlando will rank
among the more expensive children’s hospitals
ever built when it is completed next year

(Photo by Joe Burbank



Kaiser Health News has undertaken a study of 39 large, independent non-profit  Children’s Hospitals.  They wanted to take a look at the economics of the operations of these units.  The natural assumption is that a hospital devoted to children would be operated by dedicated professional who were devoted to maximizing the amount of care provided for children, regardless of  remuneration to the institution or themselves.  Alas that has not turned out to be the case. (Thanks to Aaron Carroll of The Incidental Economist for the reference)

The Kaiser study produced some surprising results.  The first one is how much money these “Non-Profit” institutions are making.

In 2009, the elite children’s hospitals reported $1.5 billion in profits – what nonprofits call surpluses. The top 10 alone earned more than $800 million in profits. Children’s Hospital of Philadelphia reported a $197 million surplus

Uh oh, and what about executive compensation, which usually goes along with making a lot of money in the private sector.

In 2009, most CEOs at the nation’s largest children’s hospitals were paid $1 million or more, public tax returns show. Randall L. O’Donnell, CEO of Children’s Mercy Hospital in Kansas City, led the list at almost $6 million, including a special payout of $4.1 million based on his years of service. Five other CEOs collected more than $2 million. Many of the executives received hefty bonuses, country club memberships, cars or other perks.

And what about the charity of these non-profits, well there is this

The 39 largest hospitals, KHN found, had accumulated $21 billion in stocks, bonds, real estate and other investments as of 2010 – more than enough to provide an entire year’s worth of medical care for free They had net assets – the equivalent of net worth for nonprofits – of $23 billion . . . Even with their tax breaks and wealth, top children’s hospitals provide relatively little charity care. On average, about 2 percent of what children’s hospitals spend is for free medical care, according to the National Association of Children’s Hospitals and Related Institutions (NACHRI), an industry group. Some of the largest and richest children’s hospitals spend less than one percent

And in terms of costs of care, well given how much money these hospital are making and how much they are paying their CEO’s one would expect the costs to be pretty high.  One would be right

The big, freestanding children’s hospitals generally have a huge advantage in the marketplace: They face little competition and provide an essential service, giving them leverage to negotiate favorable prices with health insurers. At some, charges have risen sharply, increasing two to three times inflation, records and interviews show. That has encouraged aggressive expansion and spending on new facilities, costly technology and executive pay.

 In fact, their costs have risen so much that

Children’s Hospital of Boston, arguably the nation’s best known hospital for children, listed $2.6 billion in stocks and other investments in bond filings.

Last year, the 400-bed hospital was cited as having some of the highest charges in Massachusetts in a report critical of hospital charges filed by State Attorney General Martha Coakley.  Hospital officials declined numerous requests for an interview, but noted on their website that they have lowered the rate of their increases.

There are major efforts on the part of these institutions to help the community

In an e-mail, a spokeswoman noted that Texas Children’s used more than $80 million of its own money to fund research, teaching and other community-based initiatives as part of its charitable mission. Other children’s hospitals point to clinics and public health programs as examples of their community outreach. They say those efforts exceed the value of their tax exemptions.

But what is happening now is that these institutions are engaging in major and very costly expansions. 

There are other reasons for high costs. Many of the new hospitals are architectural showcases. They feature atriums, rooftop gardens, indoor playgrounds, flat panel televisions, on-demand movies and video games and work stations for parents, among other amenities.

Martin Gaynor, an economist at Carnegie Mellon University who has written extensively about hospital spending, says he was stunned when he toured the new Pittsburgh hospital. “I couldn’t believe it,” he said. “It’s a beautiful, beautiful facility. It’s a very nice facility for the families and kids.

“It’s a very awkward question to ask,” Gaynor added, “but at some point one wonders just how nice does this have to be?”

So don’t expect health care costs at children’s hospitals to come down soon.