Non-Profit Doesn’t Necessarily Mean “Do-Gooder”

I was intrigued to come across an essay by John Dilulio, Jr. in a publication I had previously not encountered: American Purpose. 

I have been familiar with Dilulio–a political scientist currently at the University of Pennsylvania–since his work on George W. Bush’s “Faith-Based Initiative.” (Thanks to a generous Ford Foundation grant, I helmed a three-year, three state study of that initiative.) In the 1990’s,  Dilulio was best known in criminal justice circles for his hostile analysis of young criminals and his condemnation of violent juveniles as ”superpredators,” a position from which he later–and properly–retreated.

The essay in American Purpose addressed a very different issue: the nonprofit status of American organizations, a status that entitles such organizations to various types of tax avoidance. The “nonprofit sector,” he tells us, consists of organizations

that enjoy one or more of four types of tax exemptions, subsidies, or supports: tax-free property owned by the organizations; tax-deductible donations to the organizations; taxpayer-funded grants, contracts, or fees to the organizations; and taxpayer-funded payments to individuals for purchasing goods or services from the organizations.

Intriguing indeed. But, you ask, why do we need any such “nonprofit sector?” What criteria should be used to determine which existing or new organizations receive some, all, or none of those four tax privileges? Who is supposed to benefit from their existence, and by what measures? And, last but not least, how might we mitigate the moral hazard when some of these organizations inevitably use their tax privileges for private gains or to evade public accountability, or behave in ways that are both deceptive and self-dealing?

The essay began with the good news: something like 92 percent of all nonprofits are small, community-based, and serve local needs. Fewer than 3 percent lobby for government grants or contracts.

At the top of the nonprofit pyramid, however, are less publicly beneficial organizations–and those are especially prevalent in health care.

At its very top, the tax-privileged sector is dominated by the ten nonprofit health systems that in 2021 each collected $14.5 billion or more in annual revenues, and by a dozen nonprofit universities that are among the most well-endowed universities in America. Is enough being done to ensure that these tax-privileged titans’ board members, CEOs, presidents, and other leaders are using their respective tax privileges in the public interest while refraining from individual or institutional self-dealing?

Dilulio cites a 2023 article in which Rice University economists Derek Jenkins and Vivian Ho wrote that, “Nonprofit hospitals, which currently comprise approximately 58 percent of U.S. hospitals, have been repeatedly criticized by scholars and policymakers for failing to live up to a poorly articulated standard of ‘charity care’ and benevolence,” and for failing to justify their tens of billions of dollars a year in federal, state, and local tax breaks.  He also cited a 2022 report by the Economic Research Institute, which found that, while nonprofit hospital CEOs are paid, on average, $600,000 a year, the ten highest-paid nonprofit health systems executives made $7 million a year or more;  the CEO of Kaiser Permanente was paid nearly $18 million in 2018.

Back when I was a practicing lawyer, I saw how this worked. If a corporation being formed could credibly point to some charitable purpose, and could successfully argue for nonprofit status, monetary gains that would otherwise constitute–and be taxed as– profit could be diverted/mischaracterized as “overhead costs.” These “nonprofits” could divert what would otherwise be profit into generous salaries and lots of perks for management. (Does a health organization executive really need a luxury car supplied by the nonprofit entity? What about that corporate jet?)

The essay has much more information, and offers suggestions for legislative interventions. If you are interested in the various ways in which nonprofit status can be–and has been– gamed, it’s well worth the time to click through and read in its entirety.

My own first reaction was that this situation–the culture of “game-playing” that has allowed greed to infect and distort significant elements of a system originally intended to serve the public good–has become widespread. It isn’t limited to health care and a handful of elite universities.

Assuming we emerge from the November election with American democracy still largely intact, we need to address a multitude of structural distortions, and not just those affecting the electoral system. The misuse of nonprofit status is one of them.

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Unhealthy, Unwealthy, Unwise

When I was doing research for a former book–my first sabbatical project, back in 2007– I came across data confirming the relationship between individual and social health.  It turns out that countries with strong social safety nets have substantially fewer social ills–not simply less crime, but also less divorce, fewer unwed teenager mothers, etc.

I thought about that research when I read a fascinating article shared by a reader of this blog.The article from Harpers Magazine was written by the son of a doctor who’d practiced for most of his career in Great Britain’s National Health Service–the NHS–and it compared his observations of that system to the reality he encountered after moving to the United States.

When I moved to New York, many things seemed strange. Among them were the crutches I saw discarded on the street, leaning against the hunter-green fences of construction sites or on the steps of the public library where I had an office. It felt like finding evidence of miracles: the lame had risen up and walked. Later I learned that people were often expected to buy such items, rather than being given or lent them by a health provider. Once finished with them, they naturally enough threw them out. I connected this in my mind to the chronically ill people I saw living on the street, many with mobility issues—people who seemed to need care and weren’t getting it, like the woman nodding out on the corner in a wheelchair, or the man wearing nothing but a hospital gown, looking as if he’d been discharged from a psych ward straight into Tompkins Square Park.

As a freelancer, I bought my own insurance—my second-largest expense after rent. Despite spending hundreds of dollars a month, I still had to hand over something called a copay to be seen by a doctor. When I expressed shock at this fact, my American friends laughed bitterly. Step by step, I was initiated into this strange new health culture, so different from the one I was used to. Why did I need permission from the insurance company if my doctor thought a treatment was necessary? This was a medical decision, wasn’t it? In that first year, I went to see a physiotherapist and realized that he was shamelessly upselling me, trying to persuade me to embark on a complicated and expensive course of treatment that I didn’t need. Oddly, this disturbed me most of all. I was used to a system where there was no incentive to do such a thing, and it felt like a breach of trust. Deep inside, I was still the doctor’s kid, conditioned to see medical professionals as benevolent authorities.

I began to hear horror stories: the uninsured woman who slipped in a gym changing room, knocking herself unconscious, then woke up and tried her best to stop the ambulance from coming, as she couldn’t afford the cost; the young musician who’d tried to set his own broken arm using instructions from the internet. Everything seemed absurdly marked up ($1,830 for a pair of orthotic insoles?), and hovering over us all was the threat of medical bankruptcy. It was mind-bending to think that I was one serious illness away from losing my life savings. I contributed to GoFundMe campaigns and began to experience something new, a low-level background anxiety.

That reference to “low-level anxiety” triggered my recollection of that long-ago research, because it found that individuals’ feelings of personal safety have a marked and important effect on the health of the overall society. People who feel secure in their persons and prospects are less suspicious, more neighborly, and less likely to engage in risky or anti-social behaviors.

Recent unwarranted shootings–the elderly man who shot a teenager who rang his doorbell, the homeowner who responded with a hail of bullets to an unknown car in his driveway–point to the negative aspects of a society in which “low level anxieties” are widespread.

The Harpers article traces the history of America’s health care failure–how we got here. The paragraph that best explains just where “here” is, is the following:

The U.S. health care sector is massive. In 2020, it amounted to 19.7 percent of GDP. In the previous (pre-pandemic) year, that number was 17.6 percent. The United States spends more on health care than any other developed country, and not by a small amount: $12,318 per capita in 2021. In the rest of the developed world the average is under $6,000. What do we get for all this money? Lower life expectancy and higher infant mortality than almost all other developed nations. Despite the huge deployment of resources, the system is, by almost every metric, a dismal failure.

It isn’t just a failure that harms individuals. We Americans pay extra for the social dysfunction.

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Health And Wealth

Speaking of health…

When I was still practicing law, I did a fair amount of work for nonprofit organizations.

Most of the nonprofits for which I drafted articles of incorporation or amended bylaws, or those I simply represented in various transactions, were “true” nonprofits–everything from Little League teams to small “do-gooder” groups focused on addressing a social ill. I want to be clear that I am not talking about those organizations, or criticizing their tax-exempt status–a status that was intended to facilitate the provision of socially-beneficial goods and services.

But. (You knew there was a “but,” didn’t you.)

There are also far too many “nonprofit” organizations that are really cleverly-veiled for-profit business enterprises. So long as talented lawyers can describe the business with language indicating  a charitable mission of some sort, these enterprises escape both income and property taxation, padding what would otherwise be the bottom line.

And about that bottom line–rather than sending  what are actually profits to shareholders or other investors to be taxed, as for-profit enterprises do, sizable chunks of those dollars are used to inflate the salaries paid to  management personnel (who–surprise!– often were the founders of the organization), transforming them into expenses of the enterprise.

Legal magic!!

Back in my lawyering days, this was one of the many things that royally pissed me off. I  revisited that annoyance when I read a recent article by Michael Hicks in the Capital Chronicle. Hicks has periodically focused on the economic shenanigans of Indiana’s hospitals–all of which are theoretically nonprofit, and many of which actually are.

Hicks reminds us that the benefits bestowed by nonprofit status are in exchange for the  “well established notion that nonprofits advance the public good.”

Today, nearly every hospital corporation in Indiana is a not-for-profit. I’m pleased to report, that insofar as I can judge from the data, most are focused on that well established notion of ‘advancing the public good.’

In fact, it would seem that only five or six of Indiana’s not-for-profit hospital firms have dispensed with any pretense of “advancing the public good.” Now, this doesn’t mean they aren’t doing good things that folks are willing to pay for. But, so do Walmart, J.P. Morgan Bank, Amazon, and McDonalds. One key difference is that we tax these for-profit firms.

Hicks then tells us that, in 2020, the nation’s largest for-profit hospital, HCA, reported a 7.3% profit. That same year, Ascension Health in Indiana reported a 41% profit, Community Health Network reported 23.3%, IU health reported 22% and Deaconess reported 13.8%. As he writes, this is flagrant misuse of the not-for-profit status.

If these were for-profit firms, their investors would’ve had a windfall. Instead, they put that money in money market accounts, or offshore investments. That money should flow back into Hoosier communities instead of leaving the state. The losses are startling. Roughly 60% of all the economic growth in Muncie over the last decade was swallowed just by the profits of IU Health and Ball Memorial Hospital.

The article then focused on Ascension St. Vincent, which recently announced plans to close 11 clinics in Indiana.

Now, I’m sure this was a random coincidence that had nothing to do with pending legislation aimed at their monopoly power. If reporting is true, most of these clinics were profitable. Of course, system-wide, Ascension is fabulously profitable. In the last year for which we have data, they reported making a profit of more than $308, 000 per employee, less than half of which was from healthcare services.  Ascension Health is today a financial services firm that claims heritage from Catholic charities, but now only dabbles in healthcare.

The decision to close less profitable clinics would be a typical business decision of a venture capital firm. But, it is wholly incompatible with the “notion that nonprofits advance the public good.” Ascension is a ‘not-for-profit’ entity in name only. Its behavior is that of a large conglomerate. They are not alone. In 2020, IU Health reported a tad more than $4 billion in physical assets in Indiana. Their investment holdings were $7.8 billion. They also made $49,600 per worker in profits in 2020.

There is much more data in the article, all of which supports Hick’s thesis that “these big ‘hospitals’ are really just large financial services firms, who own construction firms, physician offices, restaurants and yes, hospitals.” If Indiana had a legislature that focused on the welfare of Hoosiers, that body might remove the nonprofit status of systems behaving like venture capitalists.

 Removing the not-for-profit status would generate huge tax dollars for cities across Indiana, expose these hospitals to federal laws on non-compete and increase the probability of enforcement of anti-trust regulations.

Welcome to yet another aspect of privatized health care…It costs Americans a lot to reject the “socialism” of a national health system.

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Health And Debt

I was fascinated by a recent column in which Paul Krugman examined the geographical clustering of low credit scores.

Krugman was deconstructing some recent research showing what he described as a “big band of credit-score calamity that stretches across the American South.” The research confirmed that, in virtually every part of the South and across all demographic groups– every race, every income bracket —  credit score are low.

Low credit scores penalize people in a number of ways. As Krugman notes,

The region’s poor credit means Southerners are paying more to borrow money, assuming they can qualify for loans at all. That sets them back in everything from car and home purchases to credit card rewards.

But why the South?

Many of us would suggest the influence of racism. But that turns out not to explain the phenomenon.

Our first guess about what might be happening here involves race. Almost 3 out of every 5 Black Americans live in the South, and they make up almost 20 percent of the region’s population. Centuries of slavery, sharecropping, apartheid and exclusion from many elite educational institutions left some Southern Black folks with little credit and even less collateral.

When researchers ran the numbers, the Blackest parts of the South had roughly the same credit scores as the least-Black areas. And their scores were far lower than places with similar Black populations outside the South. So while race may play a role, it’s clearly not a defining factor.

Well, what about poverty? The South has the highest poverty, lowest income and lowest education rates of any region in the U.S., and counties with lower income and lower college graduation rates are likely to have lower credit scores.

Nope.

Even some of the South’s biggest, most dynamic cities — think Atlanta or Dallas — have the same below-average credit scores as their more rural Southern neighbors. Within every income bracket, the typical Southerner has a lower credit score than someone who lives in the Northeast, Midwest or West.

So–if it isn’t racism and it isn’t poverty, what explains this phenomenon?

The answer, it turns out, is America’s refusal to follow virtually every other modern nation and offer national health care. Medical debt is the reason credit scores are so low in the South.

It turns out the South has the highest levels of medical debt in the country.

Of the 100 counties with the highest share of adults struggling to pay their medical debt, 92 are in the South, and the other eight are in neighboring Oklahoma and Missouri, according to credit data from the Urban Institute. (On the other side, 82 of the 100 counties with the least pervasive medical-debt problems are in the Midwest, with 45 in Minnesota alone.)

And sure enough, when you look at areas across the nation where adults are struggling to pay down medical debt, they have similar credit scores.

This raises an obvious question: why is this problem concentrated in the South?

One answer is that the South is simply less healthy than any other region. Data from the Centers for Medicare and Medicaid Services shows that among Medicare recipients, the population for which we have the best data, those in the South are substantially more likely to suffer from four or more chronic conditions. And poor health tends to go hand in hand with people having overdue medical debt and poor credit scores.

Poor health isn’t the only factor–Red State policy choices are a huge contributor.A recent analysis in the Journal of the American Medical Association found that medical debt “became more concentrated in lower-income communities in states that did not expand Medicaid. The share of residents with overdue medical debt is more strongly linked to a county’s credit score than any other factor– including debt related to car loans, credit cards and student loans.

Last year, the federal Consumer Financial Protection Bureau (CFPB) issued a scathing report finding that medical debt is “an unexpected, unwanted, and financially devastating expense” that is “far less reliable and predictive of people’s ability to pay their bills” than other kinds of borrowing.

The lack of national health insurance–or even Medicaid availability–means that folks in the South pay higher rates on mortgages and car loans, and have more trouble getting credit.

But there are social as well as individual costs involved.

Insecurity fosters anti-social behaviors. When a serious illness means you might lose your house or go bankrupt—you tend to take those worries out on others. Research shows that countries with better social safety nets are more tolerant of differences in race, religion and sexual orientation, and some studies have suggested that Canada’s lower rate of gun violence can be attributed to their stronger social safety net.

But national health insurance would be “socialist” and Southerners wouldn’t want that…

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Health Care One More Time

Republicans love to accuse government of waste and fraud while pointedly ignoring waste and fraud in the private sector. (I always think of that biblical phrase about ignoring the beam in one’s own eye...if you want to talk about fraud, Senator Scott….).

That disconnect is particularly obvious when it comes to America’s incredibly wasteful insistence on private sector health care. Several years ago, I was on a university research team looking at certain aspects of Indiana’s health care environment. I no longer recall the outlines of our investigation, but I do still remember my shock at learning that–at that time–seventy percent of all American health care costs were being paid by some level of government.

It wasn’t just Medicare and Medicaid, or the CDC, or the numerous federal programs aimed at specific diseases. State and city governments support local hospitals for the indigent, and other local programs; more significantly, the millions of people in the U.S. who work for a government entity–universities, police and firefighters, schoolteachers, etc. etc.–have health insurance paid for by tax dollars.

What really blew my mind was the realization that the money government was already spending would be enough to cover almost all of the costs of a national health care system if we simply reduced the enormous amounts spent–wasted– on duplicative paperwork and insurance company marketing and overhead.

What made me think about that long-ago epiphany was an article from The Fulcrum sharing “shocking statistics” about American healthcare.

The first was the number of people on Medicaid. (Not Medicare–Medicaid.) Most of us think of publicly funded healthcare as something offered by Canada and countries in Europe, not the adamantly “private” U.S.

The shocking truth is that most of the U.S. population will soon be on some form of government-sponsored health insurance. Right now, 158 million Americans (nearly half of the nation’s 330 million population) are covered by a combination of Medicare, Medicaid and subsidized enrollment in the state and federal exchanges. Experts predict that percentage will climb.

Within that population is an even-more shocking statistic: According to the Centers for Medicare & Medicaid Services (CMS), enrollment in Medicaid surpassed 90 million in 2022.

This program, traditionally linked to a small population of Americans in poverty, will serve more than 100 million people in fiscal year 2023 (or 1 in 3 insured Americans). Since 2020, Medicaid enrollment has jumped 30% thanks to expansion programs in several more states under the Affordable Care Act and Covid-19 public health emergency funding.

The article highlighted several problematic consequences of that staggering figure, especially the difficulty experienced by enrollees in finding primary care doctors.

The second statistic concerned individuals who aren’t on either Medicare or Medicaid.

Since 2000, medical costs have risen each year by 4.85%, significantly outpacing the 2.85% annual increase in GDP.

With healthcare premiums rising at a faster rate than revenue, businesses have made up the difference by transferring the financial burden to employees in the form of high-deductible health plans.

In 2022, despite below average healthcare inflation, U.S. employees paid a shocking 10.4% more in out-of-pocket healthcare expenses than the year before.

Already, medical costs are the No. 1 cause of bankruptcies in the United States. If a recession ensues as many economists predict, millions more workers and families will suffer economic hardships.

Number three? Forty-eight percent of those eligible for Medicare choose Medicare Advantage.

“Traditional” Medicare, enacted by Congress in 1965, continues to use a fee-for-service reimbursement model—one that pays doctors and hospitals based on the quantity (rather than quality) of medical services they provide.

In 1997, Congress created an alternative program called Medicare Advantage (MA). Unlike traditional Medicare, this option is “capitated.” That means the federal government pays healthcare providers an annual, up-front fee based on the age and health status of the enrollees.

Supporters of MA say that capitation incentivizes doctors to keep patients healthy without over-treating and over-testing them.

However, there are some downsides. Although seniors enrolled in MA enjoy more predictable annual costs and added benefits such as eyeglass coverage, they have fewer choices when selecting doctors and hospitals.

I found that last observation interesting, since most people who oppose national healthcare insist that Americans value choice more highly than cost. Apparently, we don’t.

The article concludes by reminding readers that healthcare inflation has exceeded GDP growth for half a century. The U.S. spends more than twice as much as the next most expensive nation for health care, and the last time I looked, American healthcare was ranked 37th. Meanwhile, employers and families are increasingly finding the costs out of reach.

These statistics just confirm that ideology can kill. (If you doubt that, look at the disproportionate number of Republicans who died of COVID because they refused to be vaccinated.)

Clinging to the belief that we aren’t already “socialized”–and very inefficiently– costs all of us a lot of money.

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