Monday, January 19, 2009

Rip-off Non-profit Hospitals

I mentioned a while ago about a professor I had in graduate school who argued that the difference between non-profits and for-profits is becoming more of a business decision rather than a meaningful distinction. He saw it as a way for an organization to better manage their profitability by getting a tax exemption. It turns out that the example he gave for this was a health care organization that made the transition from for-profit to non-profit charity. Twenty something years later, the relevance of his remarks are all the more startling.

Health care is the 800 pound gorilla in the charity sector. In the book, The Nonprofit Almanac 2008, we are informed that out of the roughly $1.14 trillion of revenues that all 9 categories of reporting public charities received in the most recent year of available data (2005), health care organizations received 59% ($672 billion) of the money. Number 2 out of the 9 categories of charities, is education at a paltry 16% of the revenues. Not surprisingly, the vast majority of the money that flows into the health care charities goes to nonprofit hospitals and primary treatment facilities - 73% or $492 billion out of the $672 billion. According to the IRS, of the over 5,700 hospitals in this country, over half (2,900) are nonprofit hospitals.

As I have stated before, when big money is involved, bad things invariably happen. However, the level of stench coming out of some of the nonprofit hospitals is really raising eyebrows. In a series of reports in the Wall Street Journal in 2008 (click here for one of the more recent entries, midway through the article it has a list of many other articles), it has been noted how a number of nonprofit hospitals have grown into profit machines in recent years. Basically, some of these places are barely providing any charity care at all. In some areas, if you provide as little as 2.5% on charity care you are considered the best in your class! What a low class group that is! At the same time they are garnering billions in tax exemptions and have massive surpluses.

Thankfully, there are also some very high class nonprofit hospitals out there that really do have their heart and soul in service to those in need. In fact, IRS Commissioner Miller noted in a speech on 1-12-09 that the average "profit" margin for the nonprofit hospitals, based on an IRS survey, was 5% and 20% of the hospitals were running a deficit. So we should not throw out the baby with the bathwater here and need to laser in on those piggish outliers that are abusing their tax exempt status.

One of our blog readers, who suggested I write this piece, made this observation:

...why this whole issue is so important: we all need health care and literally can't live without health care providers. So even if a nonprofit hospital isn't a charity to which the average person would make a donation/contribution, the average person will, at some point, use such a hospital's services. (After all, everyone had to be born in a hospital! At least, most everyone.) And such hospitals are supported to a large extent by payments from Medicaid and Medicare -- in which respect they are supported by public donations/contributions. So it's my money and your money that's driving their profits, and that just ain't right.

Commissioner Miller also noted that, under federal law, the requirement for a nonprofit hospital to be tax exempt is unlike that of other charitable organizations. He stated that, "We ordinarily expect a charity to provide for a charitable class of people - a prime example is providing food, clothing and shelter to the poor or distressed." For nonprofit hospitals, the expectations is that they provide a "benefit to the community" which can include, according to Miller, "services provided to persons commonly thought of as being outside the traditional definition of a charitable class - the poor or distressed". Commissioner Miller wonders if the community benefit standard may be "outdated" and in need of a "tune-up". My opinion is, yes it is, big time!

It appears that Senator Grassley, who is on the U.S. Senate Finance Committee, is considering legislation that would require more accountability by the nonprofit hospitals for the billions they get each year in annual tax exemptions. The legislation would require these hospitals to spend a certain minimum amount on charity care. It would also set caps on executive compensation, among other things. Hurray for the Senator!

For about ten years of my career, I had the honor and privilege of working for a community health center. These organizations dedicate themselves entirely to the cause of the providing quality health care services to the poor. Their outstanding work often goes unnoticed as they are largely out-financed and out-marketed by nonprofit hospitals. I hope that Senator Grassley and his colleagues also consider dedicating more resources to these worthy organizations, if and when (I hope) some of the shady nonprofit hospitals lose their tax exempt status.


hugnkiss said...

This is a true & great post! The tax-exempt hospital industry is probably the most visibly active currently in D.C.
Right now there are big-box, non-profit hospitals declaring bankruptcy all over the country because of the way they are managed. (see for more information). Does it make any sense for the United States Congress to shut down over 200 of America's best and safest hospitals just because physicians own and operate them instead of the bureaucrats? Of course not.
America's economic crisis & healthcare crisis have not stopped Congressman Stark (CA-D) from pushing ahead with the big-box hospitals, the bureaucrats, & their high-paid lobbyists' determination to destroy hospitals owned by physicians, even if it means destroying healthcare that millions of America's children depend on.
As you might expect, Congressman Stark has done very well for himself as the champion of the American Hospital Association which represents the bureaucrats. That's how it's worked in Washington for a very long time.
The AHA bureaucrats sure aren't telling.
The physicians are, well, physicians, not politicians. They're hoping that the Congress will wind up doing the right thing ... somehow.
But we know better, don't we? There are times when, as voters and citizens, we've just got to pick up the phone and tell our Congressman and Senator, "no way."
This is one of them.
During the campaign Barack Obama said he could bring change and reform to Washington, but he needed our help to do it.
After he won the campaign President-elect Obama told us that we must all work together for change and reform.
Starting right now.
The Congress is going into session weeks before President-elect Obama will be sworn in. That's why Congressman Stark has been told to shut down hospitals operated by physicians right away, before our new President moves into the White House.
That's why we need to tell the Congressmen and Senators who work for us that we support physicians, not bureaucrats and so should they.

Angela said...

According to my blogger reader, you have a post up titled, "Is There a Hierarchy of Giving?" but I can't see it on your site. Is it mistaken?

Ken Berger said...


That was a mistake on my part. I was drafting a blog entry and pushed the publish button rather than the save button. I hope to have it ready for publishing soon!

Anonymous said...

Very interesting article. Thank you.

Sandra Miniutti said...

Check out this article, from the Pittsburgh Post-Gazette, that discusses the additional reporting that the IRS is requiring of nonprofit hospitals:

True North said...

Excellent point: being non-profit is a business decision. One factor that would ease a transition to for-profit status would be for our national corporate income taxes to be reduced from their current stratospheric levels. Absent this companion change, the for-profit hospital industry will have to start offshoring just like very other industry in America, or start going bankrupt. As in all things, the customer loses; the question is, who wins? The hospital industry and their buddies, or the government and thei buddies?

Ken Berger said...

True North,

I hope that the patient wins. In my opinion, the best way for that to happen is with government providing a meaningful framework within which hospitals can be financially secure and provide outstanding quality. There should be tax incentives for hospitals to accomplish this rather than government takeover. Meanwhile, nonprofit hospitals need to look more like the rest of the charitable sector or transition to a for profit model.


True North said...

I apologize for my excessive cynicism. You are absolutely correct when you speak of a meaningful framework. However, I am not in favor of targeted tax incentives; regardless of their business model (non-profit, or for-profit), hospitals are a very complex business; they will flourish in a low-tax, low-regulation environment, and so will their patients. In our high-tax, high-complexity-regulation regime, only giant corporations can withstand the pressure and play the game. Too much energy has to go into "being a corporation" and not enough into "being a hospital". I appreciate your optimism, and your advocacy.

Ken Berger said...

True North,

Got it.


Anonymous said...

Great Article.

We need more talk about this in the press.

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