(Illustration by Adam McCauley)
For many scholars, policy makers, and members of Congress, nonprofit hospitals aren’t earning their tax breaks. They say that health-care nonprofits, including insurers, nursing homes, and other medical providers, have become commercialized in recent years, making it difficult to distinguish them from their for-profit equivalents. John Colombo, a professor of law emeritus at the University of Illinois at Chicago and an expert on tax-exempt organizations, points to the complex corporate structures of many nonprofit hospitals, ranging from formal ties to businesses to an array of commercial offshoots, to argue that charitable hospitals are no different from profit-seeking entities. Today, charitable hospitals are second only to housing nonprofits in their use of taxable subsidiaries, and their commercial behavior has been shown to boost competition with for-profit hospitals. Given these contradictions, do nonprofit health providers still deserve their tax-exempt status?
According to Jill Horwitz, vice dean for faculty and intellectual life and a professor of law at the UCLA School of Law, the answer is a resounding yes. In a chapter on health care in the new third edition of The Nonprofit Sector: A Research Handbook, edited by Walter Powell and Patricia Bromley, both professors of education at Stanford University, Horwitz challenges the narrative that nonprofit hospitals “have lost their way,” operating as “for-profits in disguise” that have become excessively or inappropriately commercialized.
When Horwitz was in law school in the 1990s, she noted how commentators responded to a wave of hospital conversions from nonprofit to for-profit. “They said it didn’t matter because nonprofits and for-profits were exactly the same,” she says. “Intrigued, I started doing some reading and realized that people who thought ownership didn’t matter were looking only at limited financial measures and not the services hospitals provide or the quality of care—the things we actually care about when we go to the hospital.”
Examining the history of charitable health care in the United States, Horwitz debunks the notion that organizations established long ago to help the sick and the poor have only recently become despoiled by commercialization. “Even if nonprofit status and commercialization is an American paradox,” Horwitz says, “it began with colonial health-care endeavors.”
Her research shows that since the early American republic, neither government nor private donors have been willing to foot the bill for delivering the care that patients need. The 1811 charter of Massachusetts General Hospital, for example, required it to “support thirty sick and lunatic persons who were charges of the state.” To cover the cost of caring for other patients, the hospital charged for services. At almshouses—precursors to today’s nursing homes—patients were put to work, scrubbing, knitting, sewing, farming, groundskeeping, and whitewashing buildings to offset expenses. Philadelphia Hospital, founded by Benjamin Franklin, admitted poor patients, promising free treatment, but only with “a security deposit from the local overseer of the poor as indemnification,” Horwitz writes, “so that the hospital would not be stuck paying for the transport or burial of the patient’s dead body.”
Drawing on the historical record, Horwitz makes it clear that the supposed “golden age” when “health providers acted entirely outside commercial markets, serving those in need without compensation,” never existed. The more effective and expensive health care became, the greater the need for nonprofit hospitals to find revenues. At least some commercial activities, Horwitz says, “have allowed charities to cross-subsidize in terms of both underwriting care for poor patients and, as importantly, refraining from oversupply of profitable services.”
“Horwitz considers the outcomes we would like these nonprofits to provide—the provision of unprofitable services, or services to the poor—instead of trying to rationalize how health care fits into the nonprofit sector,” says David Cutler, a professor of applied economics at Harvard University. “The idea is to evaluate these nonprofits in terms of what they do for society, rather than in terms of how close they are to traditional charities such as food banks.”
Despite the inordinate critical attention paid to a handful of very profitable organizations, the ordinary charitable hospital operates in the red in a given year. “You can’t really hold a gun to the head of the nonprofit hospital and say, ‘Give free care to everyone who needs it. Solve our health-care problem and pay for everyone.’ The money has to come from somewhere,” Horwitz says. “What worries me most in forcing nonprofit hospitals to provide free services that they can’t afford is that they will need to look for ways to find the money. Competing with for-profit hospitals and under pressure from policy makers, they’re likely to resort to the overprovision of profitable services that people don’t need.”
Jill R. Horwitz, “Charitable Nonprofits and the Business of Health Care,” from The Nonprofit Sector: A Research Handbook, Third Edition, Walter W. Powell and Patricia Bromley, eds., Stanford, CA: Stanford University Press, 2020.
Read more stories by Daniela Blei.