Tony Megna outside a Genesis Health Care facility

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Health Centers Criticize Kaiser Health News Story About Profit Margins

Community health center advocates have strongly criticized a new Kaiser Health News (KHN) investigative report that found that some health centers have large profit margins.

The article found that nine of the nation’s nearly 1,400 health centers reported profit margins above 20% in three or all of the last four years. The national average is 5%, KHN said.

The National Association of Community Health Centers (NACHC) said the story “paints a grossly inaccurate picture” of health centers’ finances by focusing on “data representing fewer than 1% of health centers nationwide.”

The story ran first on Friday online in The Washington Post and was KHN’s lead story yesterday. The 340B program’s role in generating health center revenue is a thread that runs through the article.

KHN is widely respected and lets others republish its content for free. The health center profit margin article likely will be read by many nationally.

It is the latest in a recent string of blows for health centers involving 340B. The story ran just days after Boehringer Ingelheim became the eighth drug maker to impose 340B pricing conditions on health centers when they contract with outside pharmacies. The story also came on the heels of a failed Republican attempt in the U.S. Senate to amend a major Democratic drug pricing, climate change, and taxation bill to require health centers to make insulin and injectable epinephrine available to patients at or below 340B price.

“A Need for Greater Federal Scrutiny”

Two healthcare policy experts interviewed for the article—Johns Hopkins University professor Ge Bai and University of Oklahoma assistant professor Ganisher Davlyatov—told KHN that “the surpluses alone should not raise concerns if the health centers are planning to use the money for patients,” the article said.

Bai and Davlyatov added, however, “that the high margins suggest a need for greater federal scrutiny of the industry and whether its money is being spent fast enough,” the article continued.

“No one is tracking where all their money is going,” said Davlyatov, who has led or collaborated on other research on health center chief executives’ pay and its relationship to clinical performance and on where health centers choose to expand.

“The centers have to provide enough benefit to deserve their public tax exemption, and what we are seeing here is a huge amount of profits,” said Bai, who led an April 2021 study published in Health Affairs that found that nonprofit hospitals spend less on charity care than government or for-profit hospitals.

The article said officials at the nine health centers “defended their strong surpluses, saying the money allows them to expand services without being dependent on federal funds and helps them save for big projects, such as constructing new buildings. They pointed out that their operations are overseen by boards of directors, at least 51% of whom must be patients, ostensibly so operations meet the community’s needs.”

U.S. Health Resources and Services Administration Associate (HRSA) Administrator James Macrae told KHN, “It’s definitely something we will look at and what they are doing with those resources.” Macrae, a long time HRSA senior official, heads the agency’s Bureau of Primary Health Care, the unit that runs the federal health center program. “The expectation is they will take any profit and plow it back into the operations of the center,” he said.

The KHN story said some of the health centers with large surpluses make most of their money from sales of 340B-purchased drugs. It said the drug discount program lets health centers buy medicines at deep discounts, bill insurers at a higher rate, and keep the difference. “Clinics can reduce the out-of-pocket costs for patients but are not required to,” the article said.

NACHC’s Response

NACHC called the article “grossly inaccurate” in an Aug. 12 letter to The Washington Post. The association gave 340B Report a copy of its letter.

The nine health centers singled out by KHN are less than 1% of the nearly 1,400 health centers nationally, NACHC said. “Framing an argument on a cherry-picked handful of health centers … may generate a compelling headline, but also skews the facts.” 

“Most health centers are operating on thin margins,” NACHC said. “Health centers’ financial reserves are not secreted away, but rather are regularly reported, publicly available for scrutiny and subjected to annual fiscal audits. In some cases, if allowable, these extra dollars go toward new site expansions, increased staffing, or expanded services to address identified unmet needs in an underserved community.”

NACHC also said the article “amplifies misconceptions” about 340B. “By law, any and all health center savings resulting from that program must be re-invested in patient care,” it said.

Focus on Genesis Health Care

KHN’s article begins and ends with South Carolina-based Genesis Health Care and its CEO and general counsel, Tony Megna. Genesis successfully contested its dismissal from 340B in 2018 over audit findings that it dispensed 340B drugs to ineligible patients. A federal appeals court held last month that Genesis has the right to seek a lower court order that could expand the 340B patient definition dramatically.

The article said Genesis “benefits financially” from participation in 340B and that drug sales provide the bulk of its revenue.

“Those sales helped Genesis record a $19 million surplus on $52 million in revenue—a margin of 37%—in 2021, according to its audited financial statement,” the story said. “It was the fourth consecutive year the center’s surpluses had topped 35%, the records showed.”

“Most of Genesis’ revenue comes from the 340B program,” the article said.

“Genesis attributes its large margins to excellent management and says it needs the money to expand and modernize services while being less reliant on government funding,” the article said. “Still, Genesis’ hefty surplus stands out.”

“Megna was paid nearly $877,000 in salary and bonuses in 2021, according to Genesis’ latest IRS tax filing, an amount nearly four times the industry average,” the article said. The chair-elect of the Genesis board told KHN “that part of that compensation made up for several years when Megna was inadvertently underpaid,” the article said. KHN said Megna said his base salary is $503.000.

Three other health centers are profiled in the article. It does not say what their leaders are paid.

In response to a request for comment about the article, Megna said, “We ask, why is there an implication that surplus funds come at the expense of our mission? Many nonprofits have surpluses and/or substantial bank accounts. There is nothing wrong with good fiscal management. The wrong comes from spending the funds for something other than what supports our mission. Numerous required audits over the years have proven that Genesis does use funds appropriately.”

“Rather than lauding the health centers that are successful, this article implies there is something nefarious about their success, which is not in line with good journalism,” Megna said.

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