Non-profit Does Not Mean Charitable

Commonly, we equate non-profit organizations with charitable organizations. In fact, that assessment often is inappropriate.  Non-profit is a designation granted by the IRS that exempts an organization from paying any taxes – local, state, federal, and property.  IRS eligible tax exempt missions include charitable, religious, scientific, and educational.  Even considering just those organizations with IRS acknowledged charitable missions would still include many entities most would not consider charitable.

If general, we might think a charitable organization would have the following characteristics.  Donations and grants make up the majority of their revenues. Their expenditures and efforts are primarily directed to helping those in need, e.g. food, clothing, housing, education, vocational, etc. Further that they do so without charging those who they are assisting.  Usually, employees and executives of these organizations are there for the mission, not money – often earning below market compensation for their efforts.

And then there are non-profits whose business models bear no resemblance to the above described philanthropic organizations.  While by designation these non-profits must have some charitable component, actual charity is a small fraction of the significant revenues generated from charged services, and a small fraction of their expenditures.  They are not charitable operations. They are tax exempt operations.

Recently the Sunday News published a “Snapshot” of area non-profit executive compensation.  The numbers presented were taken from the IRS 990 filings of 18 local non-profits.  Of the 18, only 3 of the CEOs had compensation less than $150,000, while the average compensation was an astounding $531,372. Most striking was the compensation reported for WellSpan executives:  CEO – $1,634,882, York Hospital President – $904,054, WellSpan Medical Group President -$1,016,339, Ephrata Hospital President- $1,107,634.  This is not a WellSpan phenomenon.  Rather such remarkable compensation has become the norm among non-profit health systems across the country.

What were local community hospitals when many of us were growing up have morphed into mammoth healthcare systems – vast cash generating operations with huge administrations that long ago abandoned their charitable missions. More than 60% of hospitals in the US are tax exempt non-profits.  Interestingly, financial comparison of non-profit hospitals vs. for-profit hospitals reveals that after accounting for tax payments in that latter group, the non-profits are more profitable than their for-profit counterparts.

Further, according to a study published in Health Affairs, charitable care provided as a percentage of operating expenses by non-profit and for-profit hospitals was 1.9 percent and 1.4 percent respectively. And even those numbers are exaggerated because they are based on list charges – inflated charges that are significantly higher than what a private insurer would pay, and many times higher than the Medicare allowance for a particular service.  As an example, an uninsured patient evaluated for chest pain in the ER could be charged $25,000 for that service, even though the Medicare allowable is only $3600.   Anything short of $25,000 that the hospital is able to collect – and as most know, the non-profit hospitals efficiently and aggressively pursue collections – is claimed as charity.

In additional to paying for expansive and well compensated administrative staffs, the non-profit hospitals use retained earnings to continuously upgrade infrastructure and technology, which include many improvements that for the most part do not demonstrably improve the health of the community.

According to, in 2014 York Hospital, WellSpan Medical Group and WellSpan Specialty Services had combined gross receipts of approximately $1.73 billion.  In as much as the non-profit health systems charge and spend beyond that which would be required to more efficiently deliver healthcare, all other community employers and their employees are financially worse off.  The excessive spending is funded by excessive healthcare premium increases which in turn results in lower wages as a greater portion of compensation goes to pay for the healthcare benefit, and community employers have less capital to grow their businesses and the local economy.

Workers, homeowners, and businesses suffer further from higher property taxes as a result of these health systems’ paying no taxes on the $billions of real estate that they own.  Each new acquisition exacerbates the situation as another property is taken off the tax rolls. It is hard to understand why these entities with massive revenues, huge bureaucracies, and exceptional executive compensation should not have to pay the same taxes paid by other businesses and property owners.

You might think that the government would remedy this situation by withdrawing tax exempt status from such wealthy businesses, but you would be operating under the misconception that government works to do the right thing rather than the reality – it primarily serves self and special interests.  The non-profit health system industry spends $10s of million lobbying the government, and would spend much more to prevent loss of their tax exempt status.

Let me conclude with 2 observations and a plea.  First, although there is much to criticize in non-profit hospital systems’ charging, spending, and bureaucracies, the reality is they, like the rest of us, are rational economic actors.  They operate in their best interests in their market and its incentives – in the case of healthcare, an unfree market rife with perverse incentives spawned by injurious government regulation, price fixing, and subsidies.

The free market (economic freedom) has steadily given us so much more for so much less in so much of our lives including household conveniences, communication, technology, entertainment, etc.  The only segments of the economy that have resisted this productivity miracle are healthcare and education.  Is it mere coincidence that these are the areas of the economy most regulated and subsidized, i.e. least free, by the government?

To the community and business leaders who give of their time and counsel serving on the boards of these health systems:  What is your charge and who is your constituency?  Is it to maximize the profitability of the health system and the well-being of its bureaucracy, or is it to overseeing the administration of the health system to provide high quality and cost effective medical care for your community?

Please join the campaign for liberty.  Our freedom and prosperity depend on it.

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