If you live in the United States, the closest hospital to you is most likely a privately operated nonprofit institution. Such hospitals are eligible to receive valuable tax exemptions in exchange for the promise that they will provide benefits to their communities, such as free or reduced-price care for patients who cannot pay. But some of these ostensibly charitable organizations look and act more like aggressive for-profit companies.
Media accounts and studies from across the U.S., compiled in a new report by Human Rights Watch, show that many nonprofit hospitals charge low-income patients high fees and aggressively pursue medical bills from people who cannot pay, including through ruinous lawsuits and selling debt to third-party debt collectors.
This isn’t a problem limited to a couple of bad apples. The U.S. government’s regulatory failures have allowed some unscrupulous nonprofit hospitals to benefit from their public perception and tax-exempt status while engaging in exploitative practices. To stop this, we need clearer federal standards defining what nonprofit hospitals must give back to their communities.
Under U.S. tax law, a nonprofit organization must be organized for a so-called “exempt purpose,” such as charity, religion, science or education. Many nonprofits engage in and promote these exempt activities by relying entirely on donations. But they are not technically required to do so. In fact, many fund their operations by selling goods and services.
While nonprofit hospitals may receive donations to help support their operations, they also sell hospital services, such as emergency treatment, diagnostic work and inpatient surgery. For some nonprofit hospitals — particularly small, rural hospitals and those in low-income communities — the revenue they generate from selling services may be just enough to break even, or even less. But for others, it’s big business.
Before the COVID-19 pandemic, more than two dozen private, nonprofit hospital systems made enough in operating revenue to have made the Fortune 500 list of the nation’s largest companies, were they for-profit. While the pandemic shook hospital finances, by the end of 2021, 10 of the largest nonprofit hospital systems’ year-over-year total operating revenues had increased by between 5% and 18%.
Many such nonprofits make significantly more than they spend. A 2016 study by researchers from Johns Hopkins University found that seven of the 10 most-profitable hospitals in the U.S., when measured by revenue per patient discharge, were nonprofits.
In 2019, Axios studied financial statements for 31 prominent nonprofit hospital systems and found that they earned more than $105 for each $100 spent, on average, during the first quarter of that year. Between 2019 and the end of 2021, even when massive public subsidies granted to hospitals in response to the pandemic are excluded, the median nonprofit hospital’s operating margins increased by about 12%.
Under U.S. tax law, none of this excess revenue can directly benefit private interests, such as shareholders or owners of a for-profit company. But this does not mean that the excess revenue generated by a nonprofit’s commercial activities must neatly support its mission.
Consider nonprofit hospitals’ executive compensation practices. In 2017, the average annual compensation for a CEO at one of the 82 largest nonprofit hospitals in the U.S. was about $3.5 million. While the validity of executive compensation may be difficult to dispute, it’s clear that, for many of these organizations, little of the public money they receive is transferred to those who need it most.
Nonprofit hospitals’ combined tax exemptions were approximately $28 billion in 2020. But that same year, these hospitals spent about $16 billion on free or reduced-price charity care for low-income patients — or about 57% of the tax benefits they received.
The Internal Revenue Service considers this so-called “charity care” to be a major justification for these hospitals’ tax exemptions. But a 2018 study by the National Bureau of Economic Research found that charity care accounted for only 1.5% of the median nonprofit hospital’s expenses, while the median for-profit, taxpaying hospital spent 1.4% of its expenses on charity care.
These public subsidies are given to nonprofits in exchange for a promise that they make to serve the public interest. For most, particularly those that depend on charitable donations to function, this promise is simple enough to honor. But for nonprofits that engage in commercial activities, like hospitals, the dollar has a way of making this promise much more complicated to keep.
In the long term, the U.S. needs to rethink its reliance on these commercial entities to deliver the human right to health. But in the short term, alongside these needed reforms, the U.S. can help these nonprofit hospitals live up to their promise by ensuring they provide benefits to their communities that are at least commensurate with the value of the tax exemptions they receive.