One owns a for-profit insurer, a venture capital firm, and for-profit hospitals in Italy and Kazakhstan; it has simply acquired its fourth for-profit hospital in Ireland. Another owns one of the largest for-profit hospitals in London, is partnering to construct a massive training facility for an expert basketball staff, and has launched and financed 80 for-profit start-ups. Another companions with a wellness spa where rooms cost $4,000 an evening and co-invests with “leading private equity firms.”
Do these sound like charities?
These diversified companies are, in reality, a number of the nation’s largest nonprofit hospital methods. And they’ve in some way managed to maintain myriad for-profit enterprises below their nonprofit umbrella — a standing which means they pay little or no taxes, float bonds at most popular charges, and achieve quite a few different monetary benefits.
Through authorized maneuvering, regulatory neglect, and a big dollop of lobbying, they’ve remained tax-exempt charities, labeled 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 University. “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 University, 62% of operating revenue in fiscal 2023 was from well being companies; on the University of Chicago, affected person companies brought 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. Because they’re nonprofit and due to this fact, by definition, can’t present that factor referred to as “profit,” extra earnings are referred to as “operating surpluses.” Meanwhile, 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 various revenue streams.
But investments are making “a bigger and bigger difference” within the backside line of many large methods, stated Ge Bai, a professor of well being care accounting on the Johns Hopkins University Bloomberg School of Public Health. Investment 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. But as extra Americans gained insurance coverage and medical remedies turned more practical — and costlier — 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, in addition they started buying elements of the well being care methods that had lengthy been for-profit, comparable to medical doctors’ teams, in addition to imaging and surgical procedure facilities. That raised some authorized eyebrows — how might a nonprofit merely purchase a for-profit? — however regulators and the IRS let it trip.
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 lawyer 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.” But how a lot charity care is sufficient and, extra vital, what kind of actions rely as “community benefit” and how you can worth them? IRS guidance released this year stays fuzzy on the problem.
Academics who examine the topic have persistently discovered the value of many hospitals’ good work pales as compared with the value of their tax breaks. Studies have proven that typically nonprofit and for-profit hospitals spend about the same portion of their bills on the charity care element.
Here are some issues listed as “community benefit” on hospital methods’ 990 tax varieties: 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 certain, 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. Otherwise, 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 University of Pennsylvania’s Wharton School. “They do a lot of profitable stuff — they’re very clever and entrepreneurial.”
The fact is that plenty of not-for-profit hospitals have change into rich diversified enterprise organizations. The most seen manifestation of that’s outsize govt compensation at most of the nation’s large well being methods. Seven of the 10 most extremely paid nonprofit CEOs within the United States run hospitals and are paid thousands and thousands, sometimes tens of millions, of {dollars} yearly. The CEOs of the Gates and Ford foundations make far much less, only a bit over $1 million.
When challenged about the generous pay packages — as they usually are — hospitals reply that working a hospital is an advanced enterprise, that pharmaceutical and insurance coverage execs make far more. Also, 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 methods are main employers — the most important in lots of states (together with Massachusetts, Pennsylvania, Minnesota, Arizona, and Delaware). They are big-time lobbying forces and main donors in Washington and in state capitals.
But some sufferers have had sufficient: In a suit brought by a local school board, a decide final 12 months declared that 4 Pennsylvania hospitals within the Tower Health system had to pay property taxes as a result of its govt pay was “eye popping” and it demonstrated “profit motives through actions such as charging management fees from its hospitals.”
A 2020 Government Accountability Office report chided the IRS for its lack of vigilance in reviewing nonprofit hospitals’ group profit and beneficial 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 beneficial that Congress lay out extra particular requirements. The IRS declined to remark for this column.
Attorneys normal, who regulate charity on the state stage, might additionally get entangled. But, in observe, “there is zero accountability,” West stated. “Most nonprofits live in fear of the AG. Not hospitals.”
Today’s large hospital methods do miraculous, lifesaving stuff. But they don’t seem to be channeling Mother Teresa. Maybe it’s time to finish the group profit charade for those who exploit it, and have these large companies pay at the least some tax. Communities might then use these {dollars} in ways in which straight profit residents’ well being.
Elisabeth Rosenthal:
[email protected],
@RosenthalHealth
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