One owns a for-profit insurer<\/a>, a venture capital<\/a> company, and for-profit hospitals<\/a> in Italy and Kazakhstan; it has just acquired its fourth for-profit hospital in Ireland<\/a>. Another owns one of the largest for-profit<\/a> hospitals in London, is partnering to build a massive training facility<\/a> for a professional basketball team, and has launched and financed<\/a> 80 for-profit start-ups. Another partners with a wellness spa where rooms cost $4,000<\/a> a night and co-invests with \u201cleading private equity firms.\u201d<\/p>\n

These diversified businesses are, in fact, some of the country\u2019s largest nonprofit hospital systems. And they have somehow managed to keep myriad for-profit enterprises under their nonprofit umbrella \u2014 a status that means they pay little or no taxes, float bonds at preferred rates, and gain numerous other financial advantages.<\/p>\n

Through legal maneuvering, regulatory neglect, and a large dollop of lobbying, they have remained tax-exempt charities, classified as 501(c)(3)s.<\/p>\n

\u201cHospitals are some of the biggest businesses in the U.S. \u2014 nonprofit in name only,\u201d said Martin Gaynor, an economics and public policy professor at Carnegie Mellon University. \u201cThey realized they could own for-profit businesses and keep their not-for-profit status. So the parking lot is for-profit; the laundry service is for-profit; they open up for-profit entities in other countries that are expressly for making money. Great work if you can get it.\u201d<\/p>\n

Many universities\u2019 most robust income streams come from their technically nonprofit hospitals. At Stanford University, 62% of operating revenue<\/a> in fiscal 2023 was from health services; at the University of Chicago, patient services brought in 49%<\/a> of operating revenue in fiscal 2022.<\/p>\n

To be sure, many hospitals\u2019 major source of income is still likely to be pricey patient care. Because they are nonprofit and therefore, by definition, can\u2019t show that thing called \u201cprofit,\u201d excess earnings are called \u201coperating surpluses.\u201d Meanwhile, some nonprofit hospitals, particularly in rural areas and inner cities, struggle to stay afloat because they depend heavily on lower payments from Medicaid and Medicare and have no alternative income streams.<\/p>\n

But investments are making \u201ca bigger and bigger difference\u201d in the bottom line of many big systems, said Ge Bai, a professor of health care accounting at the Johns Hopkins University Bloomberg School of Public Health. Investment income helped Cleveland Clinic overcome<\/a> the deficit incurred during the pandemic.<\/p>\n

When many U.S. hospitals were founded over the past two centuries, mostly by religious groups, they were accorded nonprofit status for doling out free care during an era in which fewer people had insurance and bills were modest. The institutions operated on razor-thin margins. But as more Americans gained insurance and medical treatments became more effective \u2014 and more expensive \u2014 there was money to be made.<\/p>\n

Not-for-profit hospitals merged with one another, pursuing economies of scale, like joint purchasing of linens and surgical supplies. Then, in this century, they also began acquiring parts of the health care systems that had long been for-profit, such as doctors\u2019 groups, as well as imaging and surgery centers. That raised some legal eyebrows \u2014 how could a nonprofit simply acquire a for-profit? \u2014 but regulators and the IRS let it ride.<\/p>\n

And in recent years, partnerships with, and ownership of, profit-making ventures have strayed further and further afield from the purported charitable health care mission in their community.<\/p>\n

\u201cWhen I first encountered it, I was dumbfounded \u2014 I said, \u2018This not charitable,\u2019\u201d said Michael West, an attorney and senior vice president of the New York Council of Nonprofits. \u201cI\u2019ve long questioned why these institutions get away with it. I just don\u2019t see how it\u2019s compliant with the IRS tax code.\u201d West also pointed out that they don\u2019t act<\/em> like charities: \u201cI mean, everyone knows someone with an outstanding $15,000 bill they can\u2019t pay.\u201d<\/p>\n

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Hospitals get their tax breaks for providing \u201ccharity care and community benefit.\u201d But how much charity care is enough and, more important, what sort of activities count as \u201ccommunity benefit\u201d and how to value them? IRS guidance released this year<\/a> remains fuzzy on the issue.<\/p>\n
Academics who study the subject have consistently found the value of many hospitals\u2019 good work<\/a> pales in comparison with the value of their tax breaks.<\/a> Studies have shown that generally nonprofit and for-profit hospitals spend about the same portion<\/a> of their expenses on the charity care component.<\/p>\n
Here are some things listed as \u201ccommunity benefit\u201d on hospital systems\u2019 990 tax forms: creating jobs; building energy-efficient facilities; hiring minority- or women-owned contractors; upgrading parks with lighting and comfortable seating; creating healing gardens and spas for patients.<\/p>\n
All good works, to be sure, but health care?<\/p>\n
What\u2019s more, to justify engaging in for-profit business while maintaining their not-for-profit status, hospitals must connect the business revenue to that mission. Otherwise, they pay an unrelated business income tax.<\/p>\n
\u201cTheir CEOs \u2014 many from the corporate world \u2014 spout drivel and turn somersaults to make the case,\u201d said Lawton Burns, a management professor at the University of Pennsylvania\u2019s Wharton School. \u201cThey do a lot of profitable stuff \u2014 they\u2019re very clever and entrepreneurial.\u201d<\/p>\n
The truth is that a number of not-for-profit hospitals have become wealthy diversified business organizations. The most visible manifestation of that is outsize executive compensation at many of the country\u2019s big health systems. Seven of the 10<\/a> most highly paid nonprofit CEOs in the United States run hospitals and are paid millions, sometimes tens of millions<\/a>, of dollars annually. The CEOs of the Gates and Ford foundations make far less, just a bit over $1 million<\/a>.<\/p>\n
When challenged about the generous pay<\/a> packages \u2014 as they often are \u2014 hospitals respond that running a hospital is a complicated business, that pharmaceutical and insurance execs make much more. Also, board compensation committees determine the payout, considering salaries at comparable institutions as well as the hospital\u2019s financial performance.<\/p>\n
One obvious reason for the regulatory tolerance is that hospital systems are major employers \u2014 the largest in many states (including Massachusetts<\/a>, Pennsylvania, Minnesota, Arizona, and Delaware<\/a>). They are big-time lobbying forces and major donors in Washington and in state capitals.<\/p>\n
But some patients have had enough: In a suit brought by a local school board<\/a>, a judge last year declared that four Pennsylvania hospitals in the Tower Health system had to pay property taxes<\/a> because its executive pay was \u201ceye popping\u201d and it demonstrated \u201cprofit motives through actions such as charging management fees from its hospitals.\u201d<\/p>\n
A 2020 Government Accountability Office report chided the IRS<\/a> for its lack of vigilance in reviewing nonprofit hospitals\u2019 community benefit and recommended ways to \u201cimprove IRS oversight.\u201d A follow-up GAO report<\/a> to Congress in 2023 said, \u201cIRS officials told us that the agency had not revoked a hospital\u2019s tax-exempt status for failing to provide sufficient community benefits in the previous 10 years\u201d and recommended that Congress lay out more specific standards. The IRS declined to comment for this column.<\/p>\n
Attorneys general, who regulate charity at the state level, could also get involved. But, in practice, \u201cthere is zero accountability,\u201d West said. \u201cMost nonprofits live in fear of the AG. Not hospitals.\u201d<\/p>\n
Today\u2019s big hospital systems do miraculous, lifesaving stuff. But they are not channeling Mother Teresa. Maybe it\u2019s time to end the community benefit charade for those that exploit it, and have these big businesses pay at least some tax. Communities could then use those dollars in ways that directly benefit residents\u2019 health.<\/p>\n
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