Philanthropists give billions to nonprofit hospitals each year – recently Facebook’s Mark Zuckerberg made headlines for a record $75 million gift to the San Francisco General Hospital, for example. In a tight race for philanthropy dollars for nonprofits across the nation, is it fair that hospitals, which operate more like businesses, are considered charities? (Source: CNN.)
Health economists estimate that tax breaks for nonprofit hospitals total $12 billion annually, in the name of benefiting their communities. The reality, however, made apparent by mandated studies associated with the Affordable Care Act (Obamacare), is that most do not give back even a portion of that worth in real services benefitting the community at large. (More at NY Times.)
Why do hospitals have nonprofit status, what is the difference between charity hospitals and for profit business hospitals in real numbers, and what is the future of their nonprofit status?
Why hospitals have nonprofit status
Legal restrictions on for-profit hospitals created in the 1970s and 1980s caused a national trend in hospital structuring: big corporations that could afford to buy large networks stayed for profit conglomerates, but nearly all other hospital systems, including large University hospitals, applied for nonprofit charity status under the loose definition of “serving the public interest”. Today, the American Hospital Association lists that only 1,060 of the nation’s nearly 5,000 hospitals are for-profit. Nearly 80% of those charitable hospitals are privately owned.
How much hospitals save with tax exemption and actually give back
Studies mandated by the Affordable Care Act and the IRS expose that most nonprofit hospitals are making a lot of profit. Money saved on tax exemptions should go back to the community, without exception, for an organization to be a charity. Most do not give back that much, however. A study in the New England Journal of Medicine (2013) found that the average hospital gives back only 7.5% of operating costs, with some only spending 1% and others 20%.
All charity hospitals are required to put a portion of their revenues in a fund to help with financial assistance for the poor, which is a truly valuable community benefit. Most hospitals, however, also include billed costs that Medicaid/Medicare does not reimburse as “community benefits”. What is more is that the majority overbill other patients to make up for those deficits from Medicare and Medicaid. Patients with private insurance providers, and uninsured patients, are billed more for the same service.
Political moves to revoke nonprofit status
Pittsburgh filed suit against the University of Pittsburgh Medical Center to pay taxes despite its nonprofit status, with an estimate that the Center makes more than a billion in profit and should be paying at least $20 million in taxes. The Center’s annual report publicized the organization as a “$10 billion global health enterprise”.
That verbiage alone is proof it considers itself a business, say officials. Because of cases like Pittsburgh, the Affordable Care Act provisions to monitor nonprofit status every three years and require more reporting, and many argue that, since they operate more like businesses and make tremendous revenues, they should be forced to pay taxes to give back to the community.
The case for nonprofit over for-profit
While very few differences can be noted across the board between nonprofit and for-profit (other than for-profits offer less direct community service, do not have to accept all patients, and pay taxes), many argue that for-profit hospitals are dangerous, to the point where states like Connecticut have outlawed them. The argument is that for-profits can opt to not provide services that people cannot pay for, undermining the quality of care available to the community. Shareholders and profits are in mind, not community needs.
Whether those concerns are true, however, is debatable. A Congressional study in 2006 showed that uncompensated care depended mostly on individual hospitals themselves – across the country uncompensated services account for 4.7% of nonprofit hospital budgets and 4.2% of for-profit budgets. Corporations tend to give back 5% to receive charitable deduction tax credits, and nonprofits are not extending beyond that percentage.
Also, a 1999 study in Health Affairs of for-profit takeovers of nonprofit hospitals found that there was virtually no change in care with the switch. A Harvard study (2014) showed that for-profits make much more money from better administration but their patients fare the same as non-profits. Competition in large cities and populated areas seems to make for-profits offer quality care over profit care anyway. Smaller rural hospitals can receive the same benefit by becoming part of a corporate network.
Trends to shift naturally to for-profit models
The real evidence is indicating a shift to for-profit naturally from economic drivers, without the intervention of government. A report from the Camden Group on hospital trends indicates that the conversion rate to for-profit is on the rise, as hospitals fight to compete in an ever saturated market with less and less public and philanthropic funding for services. More “hospital foundation” philanthropic arms to those for-profit hospitals are popping up to raise money for the uninsured, expensive equipment, and other “community benefits”.
So, if you don’t agree that your local public hospital should be a charity, even if your local government does not bother to sue it like in Pittsburgh, chances are in the near future it will be a normal business that gives back through mandated taxes and charitable contribution tax breaks anyway.