On February 20, 2020, The New York Times ran an editorial “Why are Nonprofit Hospitals so Highly Profitable?” Shockingly, this article explained that seven of the ten most profitable hospitals in American are “non-profit” hospitals.
How can this be? In short, before 1969, for a hospital to be nonprofit, it had to provide charity care for the poor. In exchange, the hospital was exempt from state and local taxes.
The law changed in 1969 to allow hospitals to be nonprofit (and tax exempt) if they provided other community benefits, but charity care was no longer required. Nowadays, “community benefit” includes providing care to Medicaid (AHCCCS) patients.
As you can imagine, if a business doesn't have to pay taxes, it is much more profitable than tax paying enterprises. Further, the average CEO salary at nonprofit hospitals is $3.5 million, and from 2005-15, average CEO compensation skyrocketed by 93%.
Some communities are fighting the nonprofit designation. Morristown Hospital lost its tax exemption. The judge in that case wrote that given how that hospital operated, the nonprofit designation was a “legal fiction”.
Of course, not every nonprofit hospital is a “fiction” but everyone should understand that “nonprofit” really means “tax exempt”. All of us should closely examine the underlying community benefit to determine if the tax exemption is deserved.