By Elisabeth Rosenthal for KFF Information
One owns a for-profit insurer, a enterprise capital firm, and for-profit hospitals in Italy and Kazakhstan; it has simply acquired its fourth for-profit hospital in Eire. One other owns one of many largest for-profit hospitals in London, is partnering to construct a large coaching facility for an expert basketball staff, and has launched and financed 80 for-profit start-ups. One other companions with a wellness spa the place rooms price $4,000 an evening and co-invests with “leading private equity firms.”
Do these sound like charities?
These diversified companies are, in truth, a few of the nation’s largest nonprofit hospital techniques. They usually have by some means managed to maintain myriad for-profit enterprises underneath their nonprofit umbrella—a standing which means they pay little or no taxes, float bonds at most well-liked charges, and achieve quite a few different monetary benefits.
Via authorized maneuvering, regulatory neglect, and a big dollop of lobbying, they’ve remained tax-exempt charities, categorized as 501(c)(3)s.
“Hospitals are some of the biggest businesses in the U.S.—nonprofit in name only,” stated Martin Gaynor, an economics and public coverage professor at Carnegie Mellon College. “They realized they could own for-profit businesses and keep their not-for-profit status. So the parking lot is for-profit; the laundry service is for-profit; they open up for-profit entities in other countries that are expressly for making money. Great work if you can get it.”
Many universities’ most sturdy revenue streams come from their technically nonprofit hospitals. At Stanford College, 62% of working income in fiscal 2023 was from well being providers; on the College of Chicago, affected person providers introduced in 49% of working income in fiscal 2022.
To make certain, many hospitals’ main supply of revenue remains to be more likely to be expensive affected person care. As a result of they’re nonprofit and subsequently, by definition, can’t present that factor referred to as “profit,” extra earnings are referred to as “operating surpluses.” In the meantime, some nonprofit hospitals, significantly in rural areas and inside cities, battle to remain afloat as a result of they rely closely on decrease funds from Medicaid and Medicare and don’t have any different revenue streams.
However investments are making “a bigger and bigger difference” within the backside line of many massive techniques, stated Ge Bai, a professor of well being care accounting on the Johns Hopkins College Bloomberg College of Public Well being. Funding revenue helped Cleveland Clinic overcome the deficit incurred through the pandemic.
When many U.S. hospitals had been based over the previous two centuries, largely by non secular teams, they had been accorded nonprofit standing for doling out free care throughout an period by which fewer folks had insurance coverage and payments had been modest. The establishments operated on razor-thin margins. However as extra Individuals gained insurance coverage and medical therapies grew to become simpler—and dearer— there was cash to be made.
Not-for-profit hospitals merged with each other, pursuing economies of scale, like joint buying of linens and surgical provides. Then, on this century, additionally they started buying elements of the well being care techniques that had lengthy been for-profit, similar to medical doctors’ teams, in addition to imaging and surgical procedure facilities. That raised some authorized eyebrows—how may a nonprofit merely purchase a for-profit?—however regulators and the IRS let it journey.
And in recent times, partnerships with, and possession of, profit-making ventures have strayed additional and additional afield from the purported charitable well being care mission of their group.
“When I first encountered it, I was dumbfounded—I said, ‘This not charitable,’” stated Michael West, an legal professional and senior vice chairman of the New York Council of Nonprofits. “I’ve long questioned why these institutions get away with it. I just don’t see how it’s compliant with the IRS tax code.” West additionally identified that they don’t act like charities: “I mean, everyone knows someone with an outstanding $15,000 bill they can’t pay.”
Hospitals get their tax breaks for offering “charity care and community benefit.” However how a lot charity care is sufficient and, extra essential, what kind of actions depend as “community benefit” and the right way to worth them? IRS steerage launched this yr stays fuzzy on the difficulty.
Lecturers who research the topic have constantly discovered the worth of many hospitals’ good work pales as compared with the worth of their tax breaks. Research have proven that usually nonprofit and for-profit hospitals spend about the identical portion of their bills on the charity care element.
Listed below are some issues listed as “community benefit” on hospital techniques’ 990 tax kinds: creating jobs; constructing energy-efficient amenities; hiring minority- or women-owned contractors; upgrading parks with lighting and comfy seating; creating therapeutic gardens and spas for sufferers.
All good works, to make sure, however well being care?
What’s extra, to justify partaking in for-profit enterprise whereas sustaining their not-for-profit standing, hospitals should join the enterprise income to that mission. In any other case, they pay an unrelated enterprise revenue tax.
“Their CEOs—many from the corporate world—spout drivel and turn somersaults to make the case,” stated Lawton Burns, a administration professor on the College of Pennsylvania’s Wharton College. “They do a lot of profitable stuff—they’re very clever and entrepreneurial.”
The reality is that quite a lot of not-for-profit hospitals have turn out to be rich diversified enterprise organizations. Probably the most seen manifestation of that’s outsize government compensation at most of the nation’s massive well being techniques. Seven of the ten most extremely paid nonprofit CEOs in america run hospitals and are paid hundreds of thousands, typically tens of hundreds of thousands, of {dollars} yearly. The CEOs of the Gates and Ford foundations make far much less, only a bit over $1 million.
When challenged concerning the beneficiant pay packages—as they usually are—hospitals reply that operating a hospital is an advanced enterprise, that pharmaceutical and insurance coverage execs make far more. Additionally, board compensation committees decide the payout, contemplating salaries at comparable establishments in addition to the hospital’s monetary efficiency.
One apparent purpose for the regulatory tolerance is that hospital techniques are main employers—the most important in lots of states (together with Massachusetts, Pennsylvania, Minnesota, Arizona, and Delaware). They’re big-time lobbying forces and main donors in Washington and in state capitals.
However some sufferers have had sufficient: In a swimsuit introduced by a neighborhood college board, a decide final yr declared that 4 Pennsylvania hospitals within the Tower Well being system needed to pay property taxes as a result of its government pay was “eye popping” and it demonstrated “profit motives through actions such as charging management fees from its hospitals.”
A 2020 Authorities Accountability Workplace report chided the IRS for its lack of vigilance in reviewing nonprofit hospitals’ group profit and really helpful methods to “improve IRS oversight.” A follow-up GAO report to Congress in 2023 stated, “IRS officials told us that the agency had not revoked a hospital’s tax-exempt status for failing to provide sufficient community benefits in the previous 10 years” and really helpful that Congress lay out extra particular requirements. The IRS declined to remark for this column.
Attorneys common, who regulate charity on the state stage, may additionally become involved. However, in follow, “there is zero accountability,” West stated. “Most nonprofits live in fear of the AG. Not hospitals.”
At the moment’s massive hospital techniques do miraculous, lifesaving stuff. However they don’t seem to be channeling Mom Teresa. Possibly it’s time to finish the group profit charade for those who exploit it, and have these massive companies pay not less than some tax. Communities may then use these {dollars} in ways in which immediately profit residents’ well being.
KFF Well being Information is a nationwide newsroom that produces in-depth journalism about well being points and is likely one of the core working packages at KFF—an impartial supply of well being coverage analysis, polling, and journalism. Be taught extra about KFF.
Subscribe to KFF Well being Information’ free Morning Briefing.
