Nonprofit Hospitals -
Big Business in Nonprofit Clothing?

June 17, 2019  | by George Suttles

Industry Knowledge

In the last few months, high profile nonprofit institutions have come under intense scrutiny for ethical dilemmas pertaining to the stewardship of resources meant to support mission. This is Part Two in our three-part series of thought pieces, in which the Commonfund Institute will contemplate ever evolving ethical considerations among nonprofit institutions pulled right from current events. See Part One here.

A majority of hospitals in the United States operate as nonprofit organizations and are exempt from most federal, state, and local taxes. In addition to tax exemptions, nonprofit status allows hospitals to benefit from tax-exempt bond financing and to receive charitable contributions that are tax-deductible to donors. This favorable tax status is intended to promote and acknowledge the community benefit provided by these institutions.1

Historically, the vast majority of hospital community benefits is charity care, providing patients care services for free or a reduced charge. Charity care is only one type of community benefit that nonprofit hospitals provide, and not all health systems calculate charity care the same way. The federal definition of community benefit provides hospitals with tremendous latitude, and state and local governments have their own laws that vary substantially from state to state, making the definition and requirements regarding the provision of community benefits variable.2

Over time, some nonprofit hospitals, originally set up to serve the poor, a clear community benefit, have been transformed by shifting market forces to resemble for profit businesses. Many larger nonprofit hospital systems have seen earnings soar in recent years, riding gains from investment portfolios and enjoying the pricing power that came from a decade of mergers. In 2018, NBC News reported that the largest nonprofit hospitals earned a collective $21 billion in investment income.3 Although that number is astonishing, many smaller/rural nonprofit hospitals operate in the red, and without income from investable pools to help mitigate the loss of patient revenue, they struggle to keep their doors open.

With the passage of the Affordable Care Act (ACA), healthcare continues to change rapidly, as the landscape shifts from fee for service to a value-based system. A focus on population health, a shift of care into ambulatory, virtual, and community-based settings, and increased competition from non-traditional competitors are just some of the economic and regulatory forces creating critical strategic, operating, and financial challenges for health and hospital systems.

These changes mean that larger nonprofit hospital systems need diverse revenue streams to remain viable, but there has been public controversy over whether they provide community benefits sufficient to justify the tax exemptions. Over the years, several states, including, Illinois, Michigan, New Jersey, and Wisconsin have waged battles with large nonprofit hospitals over tax exemption. Recently Pittsburgh Attorney General Josh Shapiro accused University of Pittsburgh Medical Center (UPMC), a major nonprofit hospital system and health insurer, of failing to fulfill its charitable mission.4

The legal challenge rests on the accusation that UPMC, which offers health insurance and health care, has not been acting like a true charity, in violation of state law that makes it tax-exempt and helped it avoid $40 million in property taxes last year alone. The Attorney General stated that “practices such as requiring out-of-network patients to pay for care before receiving treatment run counter to its charitable mission.” The UPMC legal battle also highlights the ethical question of whether powerful nonprofit hospital systems that receive benefits as charities, such as millions of dollars in tax breaks and public and private donations, should be more explicitly held accountable for providing more community benefits.

Studies have shown that some nonprofit hospitals do not act like nonprofits, especially when the economy is doing poorly. As nonprofit hospital’s finances get more challenging, they may not be willing to offer services that are less profitable but greatly needed, like emergency psychiatric care or obstetrics.5  Additional research indicates that although calculated percentages of community benefit vary by hospitals, the mixed results are proof that the notion of community benefit needs to be reexamined and made clearer to ensure it is commensurate with the tax benefits provided.6

The changing landscape of healthcare and the incentives (or disincentives) provided to large nonprofit hospital systems arguably make it more and more difficult to focus on the mission of providing high quality patient care to those in need. As the lines between behaving like a big business and being a nonprofit become more blurred, hospital boards of trustees will need to use ethical frameworks in addition to financial, operational, and strategic tools to more effectively find balance between profitability and providing continued, high impact community benefit. Fundamentally, a more profound ethical consideration is how do we, as a society, ensure that resources are being deployed equitably across our healthcare system so that everyone has access to timely, high quality care?

1 Health Affairs, 2/25/2016, Julia James, Nonprofit Hospitals’ Community Benefit Requirements

2 Hilltop Institute, Community Benefit State Law Profiles

3 NBC News, 2/7/2018, Hospitals made $21B on Wall Street last year, but are patients seeing those profits?

4 The Washington Post, Feb 2019, Giant Hospital system’s charity status challenged

5 US National Library of Medicine, National Institutes of Health, Published Feb. 2018, Herring, Gaskin, Hossein, and Anderson: Comparing the Value of Nonprofit Hospitals’ Tax Exemption to Their Community Benefits

6 KelloggInsight, Healthcare research, What Happens to Healthcare Costs When Nonprofit Hospitals Take a Financial Hit?

Authors

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George Suttles supports Commonfund’s educational, market research, and professional development activities as Director of Research of Commonfund Institute. He also serves as a member of the Commonfund Diversity and Inclusion Office. Prior to joining Commonfund, George was a Program Officer at the John A. Hartford Foundation, an independent, national private foundation focused on improving care for older adults. Before joining the foundation, he was a Vice President, Senior Philanthropic Relationship Manager at U.S. Trust/Bank of America. In this role he worked with private and institutional clients on issues related to best practices in strategic grantmaking. Throughout his career, George has supported the philanthropic activities of leading nonprofits with a focus on healthcare and related missions. He is also a member of numerous nonprofit boards, including Odyssey House, Drive Change, and the Support Center for Nonprofit Management. Currently, he is on the Adjunct Faculty at the New York University (NYU) School of Professional Studies. George received a B.A. from Wesleyan University, an M.A. in Philanthropic Studies from Indiana University Lilly Family School of Philanthropy (IUPUI) and an M.P.A.  from Baruch CUNY School of Public Affairs.
George Suttles
Director of Research
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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.