US hospitals systems (the majority of them “nonprofits”) are battlefronts in the COVID-19 fight. We’ve already examined hospitals’ abysmal record: hospital administrators failed to prepare for a pandemic predicted by state, federal, and international government agencies and infectious disease experts since the 2003 SARS outbreak. These agencies and experts not only warned about likely pandemics, they wrote preparedness plans and delineated the critical failure points should healthcare systems and governmental bodies fail to prepare. In our profits-first healthcare system, hospitals didn’t stockpile equipment. It turns out states didn’t either. And states never mandated that hospitals stockpile, nor did they check to see what the hospitals were doing, if anything. The federal government didn’t check on states and hospital systems and let its own stockpile diminish and degrade. Failure all around.
Studies say that hospitals are the largest individual contributors to US healthcare costs and that Americans spend over $1 trillion a year at hospitals, about a third of the US annual healthcare spending. We saw in our previous We Do the Work report that hospitals were reported to be the 2nd most profitable industry in the US, just behind #1, commercial banking. Hospital systems have been consolidating for years, giving patients fewer choices (in rural areas, pretty much no choice) and hospitals the ability to raise prices at will. Ironically, most of these profitable hospitals are “nonprofits,” a status that comes with huge benefits for hospital executives’ compensation packages and hospitals’ bottom lines, but not for patients and not for hospitals’ frontline workers treating COVID patients.
US hospitals: profit, nonprofit and government-owned/run
The vast majority of US community hospitals (56%) are nonprofits. Only 25% are for-profit (that is, they’re owned by investors just like GM and Walmart and structured to benefit these investors via dividends, appreciating stock prices, and the like). And 19% are owned by state and local governments. The federal government also owns and runs hospitals—for example, the VA system.
In more urban areas like Minneapolis/St. Paul, the major hospitals systems are typically structured as nonprofits as is true of Allina, HealthPartners, M Health Fairview, and the Mayo Clinic.
Nonprofit hospitals as “charities”
Many nonprofit hospitals started life as religious institutions, part of a church or religious order. You’ll see these histories hyped in hospitals’ marketing pieces—how nuns started the first hospital in the 1800s, typically treating working class and indigent patients. The nuns are long gone as are the days of providing free care to the poor and suffering. These hospitals are now profit-generating machines staffed by well-compensated professional administrators with business backgrounds and free-market ideology. They’re often the biggest employer in their cities and generate revenue exceeding that of the local municipal government. (Even so, one big, successful nonprofit hospital system in the Midwest and West continually refers to its system as “our ministry.”)
Nonprofit hospitals are structured as public charities. Their charitable mission is to provide the latest medical technology and affordable healthcare to the communities they serve. Any profits they make (what’s left over after subtracting their expenses from their revenues) are supposed to be invested in their charitable mission. Unlike for-profit hospitals, nonprofits have no investors looking for dividends or an appreciating stock price. That said, both nonprofit and for-profit hospitals are private corporations. They are not publicly owned like government-run hospitals, and the public has no say in how they operate, what they charge, what care they provide, and what they do with their profits.
The benefit of nonprofit status? simple: Nonprofit hospitals don’t pay taxes
Nonprofit hospitals are 501(c)3 corporations under the IRS code, which gives them a huge, money-saving special privilege. They don’t pay:
Local property tax (the money that funds public schools)
Federal and state corporate income tax
State and local sales and use taxes (the majority of states, including Minnesota, exempt hospitals from sales tax; local sales tax is a major revenue stream for city governments)
By avoiding property tax payments to the county or city where their hospitals are located, nonprofit hospitals shift the financial burden for public schools and other essential services and infrastructure onto individual citizens (both homeowners and renters) and small business owners, who end up paying more to cover the share that the nonprofit hospitals duck.
And more. Nonprofit hospitals can:
Accept charitable donations, which are tax-exempt to the donor (donors are more likely to give if they can deduct their contributions)
Borrow money by issuing tax-exempt bonds (tax-exempt bonds carry a lower interest rate so the hospital/borrower pays less in interest)
Buy their pharmaceuticals at a discount through a federal program if they treat large numbers of indigent patients
Originally, hospitals got tax-exempt status because they were affiliated with religious institutions and served some charitable purpose not necessarily related to medical care. In 1956, the IRS implemented the “charity care” standard; it required hospitals to offer free care to patients unable to pay in order to qualify as a tax-exempt entity.
““Not-for-profit hospitals don’t price any less aggressively than for-profits. We subsidize not-for-profits to the tune of $30 billion annually, in the form of tax exemptions, and we have to ask what that money is getting us.”
https://thehealthcareblog.com/blog/2017/04/25/the-fairy-tale-of-a-non-profit-hospital/”
What are nonprofit hospitals supposed to provide in exchange?
The IRS says they’re supposed to provide “community benefit” and charity care for the underserved, uninsured, and underinsured who would otherwise need government help. (Note that for-profit hospitals also provide charity care.)
Do they provide it?
Since 2010, as part of affordable care act, nonprofit hospitals have to list on their annual 990 tax forms how much “money-losing” care they’re dispensing to these populations and how they calculate that number. They also have to list what they’ve done, for free, to better their communities Now investigative reporters, researchers, and consumer advocates have a way to assess whether these nonprofit hospitals deserve their huge tax breaks. Recent research shows that many are providing nowhere near the amount of charity care and community benefit that would justify the value of their tax exemption. One study estimated that “only 25% of nonprofits provide enough total charity to warrant their tax exemption, and only 20% of nonprofits provide enough incremental charity care beyond what for-profits provide to justify their tax exemption.”
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5813653/
And more
Even worse, on their IRS 990 forms, when nonprofit hospitals calculate the amount of charitable healthcare they gave away in a tax year, they use chargemaster prices, made up prices that nobody actually pays that are many times higher than what commercial insurance or Medicare would pay for the same service or procedure. You can see this chargemaster price on your medical bills, less some “adjustment,” less what your insurance company actually paid, and less your co-pay if any. It’s not only shocking, but makes your bill pretty much incomprehensible. Because nonprofits can make the baseline price up, they can inflate how much they “give back” to the community as much as they want. For example, suppose they evaluate a patient with chest pain, and the allowable Medicare amount for that service is $3600. Rather than use the same $3600 for an uninsured patient and list $3600 in charitable care, the hospital can use the chargemaster rate, say $25,000, and then list an inflated $25,000 in uncompensated care, almost 7 times higher than actual cost of the care the hospital provided. Nonprofits are allowed to do the same for Medicaid patients (but not Medicare patients) and other patients using means-tested healthcare programs. If Medicaid reimburses just $2500 for the same service, rather than listing $1000 in uncompensated (unreimbursed) charitable care ($3500 cost of care - $2500 Medicaid reimbursement), the hospital uses the chargemaster rate and lists an inflated $22,500 ($25,000-$2500).
The IRS reporting requirement is so lax that nonprofit hospitals can get away with inflating the amount of their “charitable” care on IRS reporting to retain their enormous tax advantage.
Because they don’t pay property taxes or corporate income taxes on money left over after paying expenses, nonprofit hospitals end up with a tax-free surplus that they don’t call a profit even thought it is. And this all works because…
nonprofit and for-profit hospital corporations don’t disclose the real prices actually paid by their patients.
So what do nonprofit hospitals do with their surplus?
They pay their executives and administrators a lot of money, more than for-profit hospitals. They buy up other local hospitals and clinics to eliminate competitors and increase their market share, allowing them to raise prices. They also use the money to buy up independent medical practices to turn independent doctors into employed physicians (after the physicians sign a non-complete clause). They construct new facilities. Added to the monetary benefit, their executives get to mingle with other local executives and influential politicians. And they use lobbyists or membership in lobbying trade organizations like the American Hospital Association to keep the game going with help from Washington.
Nearly half of the CEOs of America’s leading nonprofit health systems last year had salaries that exceeded $2.5 million. The highest paid, the top executive, at Banner Health in Phoenix, got $21.6 million.
Here’s data for the top nonnprofit organizations in Minnesota. Ranked by revenue, hospitals top the list (#3 on the list, not included, is health insurer Blue Cross and Blue Shield of Minnesota). Note the CEO salaries and for organizations treated as “charities,”
The takeaway
Do nonprofit hospitals provide healthcare services at lower cost that for-profit systems? How would anyone know? Pricing is so opaque that the only way to know for sure is if hospitals actually published the prices they charge and stopped the chargemaster boondoggle. Moreover, insured patients have little choice anyway—most end end up having to use the providers and hospitals linked to their healthcare insurer.
Do nonprofits warrant the hefty tax advantages they get and that cost citizens extra tax outlays to cover the shortfall for critical public services? No.
It’s time for Americans to demand that so-called nonprofit hospitals stop paying executives outsize pay packages and instead actually pay back communities what they’re owed and have been scammed out of by nonprofits’ tax avoidance.
Next up in We Do the Work Series
Hospital administrators: despite all evidence of failure, still steering a profits-first, corporate healthcare system in a public health crisis.