Opinion | Many hospitals are non-profit in name only and get away with it

Does this sound like charity?

These diversified companies are, in fact, some of the largest nonprofit hospital systems in the country. And they’ve somehow managed to keep countless profitable enterprises under their nonprofit umbrella — a status that means they pay little or no taxes, issue bonds at preferential rates, and receive a host of other financial benefits.

Through legal maneuvering, regulatory neglect, and a heavy dose of lobbying, they have remained tax-exempt charities, classified as 501(c)(3).

“Hospitals are some of the largest businesses in the United States — nonprofits in name only,” said Martin Gaynor, a professor of economics and public policy at Carnegie Mellon University. “They realized they could own profitable businesses and maintain their nonprofit status. So the parking lot is profitable; the laundry is profitable; they open profitable entities in other countries that are explicitly designed to make money. Great job if you can get it.”

Many universities’ most robust revenue streams come from their nonprofit, technical hospitals. At Stanford University, 62 percent of operating revenue in fiscal 2023 came from health services; at the University of Chicago, patient services provided 49 percent of operating revenue in fiscal 2022.

Certainly, the primary source of revenue for many hospitals is probably still expensive patient care. Because they are nonprofit and therefore by definition unable to show that thing called “profit,” excess revenue is called “operating surplus.” Meanwhile, some nonprofit hospitals, particularly those in rural areas and inner cities, struggle to stay afloat because they rely heavily on reduced payments from Medicaid and Medicare and have no alternative revenue streams.

But investments are “making an increasing difference” in the bottom line for many large systems, said Ge Bai, a professor of health care accounting at the Johns Hopkins Bloomberg School of Public Health. Investment income helped Cleveland Clinic overcome the deficit it faced during the pandemic.

When many American hospitals were founded over the past two centuries, mostly by religious groups, they were given nonprofit status because they provided free care in an era when fewer people had insurance and bills were modest. The institutions operated on razor-thin margins. But as more Americans got insurance and medical treatments became more effective—and more expensive—there was money to be made.

Nonprofit hospitals merged with each other, seeking economies of scale, such as pooled purchasing of linens and surgical supplies. Then, in the 2000s, they began acquiring parts of health care systems that had long been profitable, such as physician groups and imaging and surgery centers. That raised some legal eyebrows—how can a nonprofit just take over a profitable organization?—but regulators and the IRS let it happen.

And in recent years, partnerships with and ownership of for-profit corporations have increasingly strayed from their perceived charitable mission of providing health care in their communities.

“When I first came across it, I was flabbergasted — I said, ‘This is not charitable,'” said Michael West, an attorney and senior vice president of the New York Council of Nonprofits. “I’ve long wondered why these organizations get away with it. I just don’t see how it’s consistent with the IRS tax code.” West also pointed out that they don’t action Like charities: “I mean, everyone knows someone who has a $15,000 outstanding bill that they can’t pay.”

Hospitals get their tax benefits for providing “charitable care and community benefit.” But how much charitable care is enough and, more importantly, what activities count as “community benefit” and how should they be valued? IRS guidance released this year remains vague on the issue.

Academics who study the subject have consistently found that the value of the good work of many hospitals pales in comparison to the value of their tax benefits. Studies have shown that nonprofit and for-profit hospitals generally devote about the same share of their expenditures to the charity care component.

Here are some of the things that hospital systems report as “community benefits” on their 990 tax forms: creating jobs; building energy-efficient facilities; hiring minority- and women-owned contractors; renovating parks with lighting and comfortable seating; creating healing gardens and spas for patients.

All good work, that’s for sure, but health care?

In addition, to justify engaging in for-profit activities while maintaining their nonprofit status, hospitals must tie their operating income to that mission. Otherwise, they pay an unrelated business income tax.

“Their CEOs — many of them from the corporate world — are spouting nonsense and doing somersaults to make their case,” said Lawton Burns, a management professor at the Wharton School of the University of Pennsylvania. “They’re doing a lot of profitable things — they’re very smart and entrepreneurial.”

The truth is that a number of nonprofit hospitals have become wealthy, diversified corporate entities. The most visible manifestation of this is the excessive compensation of executives at many of the nation’s large health systems. Seven of the 10 highest-paid nonprofit CEOs in the United States run hospitals, and are paid millions, sometimes tens of millions, of dollars annually. The CEOs of the Gates and Ford foundations make far less, just over $1 million.

When hospitals are challenged about generous pay packages — as they often are — they respond that running a hospital is a complicated business, that pharmaceutical and insurance executives earn much more. Also, compensation committees set the payout, taking into account salaries at peer institutions and the hospital’s financial performance.

One obvious reason for the regulatory tolerance is that hospital systems are large employers — the largest in many states (including Massachusetts, Pennsylvania, Minnesota, Arizona and Delaware). They are major lobbying forces and big donors in Washington and in state capitals.

But some patients have had enough: In a lawsuit filed last year by a local school board, a judge ruled that four Pennsylvania hospitals that are part of the Tower Health system were required to pay property taxes because executive salaries were “excessively high” and the hospitals had “profit motives by, for example, charging management fees to the hospitals.”

A 2020 Government Accountability Office report criticized the IRS for its lack of vigilance in reviewing nonprofits’ community benefits and recommended ways to “improve the IRS’s oversight.” A follow-up GAO report to Congress in 2023 said, “IRS officials told us the agency did not revoke a hospital’s tax-exempt status because it had not provided sufficient community benefits over the past 10 years” and recommended that Congress establish more specific standards. The IRS declined to comment for this column.

Attorneys general, who regulate charities at the state level, could also get involved. But in practice, there is “zero accountability,” West said. “Most nonprofits live in fear of the attorney general. Hospitals don’t.”

Today’s large hospital systems do miraculous, life-saving things. But they’re not channeling Mother Teresa. Maybe it’s time to end the charade of community benefits for those who abuse them, and at least make these big corporations pay some taxes? Communities could then use those dollars in ways that directly benefit the health of residents.