Do No Harm–and More Good

Imagine, if you will, an America that was home to just three types of organizations: government bodies that make or administer laws; business firms that make and take profits; and families and other civil society associations that shape human characters. 

Then somebody comes along with an intriguing proposal. In addition to these, let’s create a “nonprofit sector” consisting 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?

First, the good news. America has a real and robust nonprofit sector, or, as I shall interchangeably call it, tax-privileged sector. The nation’s more than 1.2 million tax-privileged organizations mobilize more than sixty million volunteers each year. The National Council of Nonprofits is the tax-privileged sector’s leading research, training, and advocacy arm. It has documented that about 92 percent of all nonprofits are small, community-based, and serve local needs, while fewer than 3 percent lobby for government grants or contracts.

For example, America is home to hundreds of thousands of churches, synagogues, mosques, and other sacred places that serve civic purposes ranging from preschool programs to eldercare services. They benefit needy and neglected children, youth, and families of every faith and of no faith. Their tax-exempt properties are typically neither large nor lavish. Few receive any direct government funding. Their donors are mostly low- to middle-income people who do not itemize on their tax returns. So, when they donate a dollar they donate a whole dollar. 

But even most large, national nonprofits that work from suites rather than the streets presumptively merit their tax privileges. That includes the nearly 300,000 IRS-registered nonprofits that do their health care, human services, and other do-gooding on budgets of $500,000 a year or more, roughly 20,000 of which boast annual budgets of $10 million or more. 

Now, however, the more challenging news. 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? 

Today in Congress, a diverse and growing chorus says “no.” For example, one year ago, Representatives Pramila Jayapal and Victoria Spartz proposed the Stop Anticompetitive Healthcare Act. The bill would give the Federal Trade Commission the authority to investigate and ban future mergers in the nonprofit health systems industry that now encompasses almost 60 percent of all the hospitals in America. That industry is led by giants like Kaiser Permanente, which in 2021 encompassed 39 hospitals plus 734 medical offices and had $93.4 billion in revenues.

Likewise, in December, Senator J.D. Vance, joined by five other Republican members, proposed the College Admissions Accountability Act. The bill would establish a new inspector general’s office and subject nonprofit universities with endowments that total $10 billion or more to a 35 percent federal excise tax (up from 14 percent) on endowment net investment income. Harvard sits atop that heap with a more than $50 billion endowment and more than $500 million a year in gifts from alumni and others. 

Neither bill has passed or is likely to pass, but many more such bills are in play or on the way. These days any issue can become fodder for hyperpartisanship and ideological combat. That seems to be happening of late in relation to some congressional inquiries regarding elite private universities’ responses to antisemitism, including (full disclosure) my own, the University of Pennsylvania. But there is a better, bipartisan way for Congress to assess how rich nonprofit hospitals and universities use their respective tax privileges, and to decide what, if any, reforms are needed.  

Do No Harm

Nonprofit hospitals are exempt from most federal and state taxes. They also can receive both tax-deductible contributions from individuals and grants or contracts from government funders. Under some conditions, they can also issue tax-exempt bonds. Those tax privileges are predicated on the expectation that they will distribute any profits to charitable care and financial relief for their patients and communities. Do they? 

There is evidence to suggest that more than a few do not. In a 2023 article in Health Affairs, Rice University economists Derek Jenkins and Vivian Ho noted, “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. 

Jenkins and Ho compared changes in nonprofit hospitals’ profits with changes in their charity care—conventionally defined as the value of free and discounted care given to economically disadvantaged patients—and cash reserves. They conducted an in-depth analysis of National Academy for State Health Policy data for the period 2012 through 2019 and found “substantial growth in nonprofit hospital operating profits and cash reserves in this period but no corresponding increase in charity care.” And they noted that 86 percent of nonprofit hospitals do “not provide more charity care than the value of their tax exemption.”

Likewise, a 2022 report by the Economic Research Institute found that nonprofit hospital CEOs were paid, on average, $600,000 a year, while the ten highest-paid nonprofit health systems executives each made $7 million a year or more. The CEO of Kaiser Permanente was paid nearly $18 million in 2018.

In a New York Times op-ed from last October, Amol Navathe, a practicing physician and co-director of Penn’s Healthcare Transformation Institute, suggested that nonprofit hospitals care more about dollars than patients. Why? Because the government has yet to define and enforce clear metrics for measuring “community benefits,” and because “regulators like the IRS” do not strip “the tax-advantaged status of egregious actors.” This could, he concluded, “be fixed through legislation by Congress.”

Amen; but, I would amend that conclusion to say that it can be fixed only through federal legislation. At least in my view, the aforementioned Jayapal-Spartz bill had numerous worthwhile provisions, but the place to start with the largest and richest nonprofit hospitals and healthcare systems or “mega meds” might be a federal mandate regarding so-called charity care. 

In a 2021 Health Affairs article, Johns Hopkins University’s Ge Bai and other health care researchers found that nonprofit hospitals spent about 39 percent less on charity care than for-profit hospitals did. But make no mistake, for-profit hospitals are no angels of mercy. In a 2023 Health Services Research article, Emory University’s David Howard and Penn’s Guy David reported that for-profit hospitals over-admit patients, including straight from emergency rooms, to increase revenues.  

Cui Bono, Professor?

In 2023, a Gallup survey found that only 17 percent of Americans had “a great deal of confidence” in higher education—down from 28 percent in 2015—while 22 percent expressed “very little” confidence in higher education, up from 9 percent in 2015. Reflecting on these and related survey findings, a feature from last October in The Chronicle of Higher Education ran beneath the title, “The Public Is Giving Up on Higher Ed.” 

Indeed. Many people perceive higher education as a fish that has been rotting from its elite private university heads on down. Certain facts feed that negative perception. For instance, the richest schools just keep on getting richer. Based on data reported by OpentheBooks.com, Harvard and nine other universities with endowments that in 2022 totaled $237 billion (up $65 billion over 2018) had scored $33 billion in federal grants and contracts between 2018 and 2022. 

In 2022, real median annual household income for American families was $74,580, while the average cost in tuition plus other fees to attend an Ivy League university for a year was $83,046. The Ivies and their well-endowed peers offer students billions of dollars a year in financial aid, but they also receive billions of dollars a year from students who take out loans. For instance, according to a 2015 analysis by Brookings Institution’ Adam Looney and others, in 2014, debt carried by students and alumni totaled $760 million for Yale, $1.2 billion for Harvard, and $2.1 billion for Penn. 

Federal law permits tax-privileged universities to reap royalties and licensing revenues on taxpayer-funded research that results in commercial products (for example, new drugs) and grants them broad discretion in deciding how to reinvest the profits. The sums involved can be quite large. They are also free to expand their tax-free campus property footprints without needing to document how, for example, bigger and better digs for their faculty members, administrators, or students benefit (or at least do not harm) people living in adjacent neighorhoods, the city’s property tax coffers, or the public at large. 

Still, most people, I’d wager, would vote for tax privileges going to the richest nonprofit universities’ programs in medicine, nursing, engineering, computer sciences, and the natural sciences. Even tax privileges for poets and political scientists might survive a popular vote. But, then again, what’s the case for tax privileges going to their state-of-the-art fitness centers, fancy faculty dining facilities, and business schools inhabiting luxurious campus-based edifices in multiple cities while functioning like pre-service training centers or head-hunting hubs for wealthy Wall Street financial firms? There might well be a good case for such members-only amenities, but it needs to be made. 

It would be hard to dispute that what elite nonprofit universities spend on local, national, and international programs that directly benefit people who are not otherwise affiliated with or touched by the university is a pittance—maybe 1 percent of their total annual budgets. But there is also no disputing that they generate significant direct and indirect economic and societal “halo effects” through employment, capital spending, purchasing goods and services, supplementing municipal services (public safety and others), ancillary spending by students, patients, and visitors, and more. For example, one study suggested that Penn and its health system together pumped more than $14 billion into the university’s local and state-wide economy in fiscal year 2015. 

Send in the GNATs

Senator Elizabeth Warren has joined with Senator Vance in drafting federal laws intended to bring big banks and other huge financial institutions to heel in the public interest. Maybe the strange-bedfellow senatorial duo might have a second act on mega-nonprofits. Specifically, how about something like a Giant Nonprofit Accountability and Transparency (GNAT) Act?

The GNAT Act might direct the IRS, the U.S. Government Accountability Office, and the Congressional Budget Office to collaborate as a GNAT Interagency Task Force. The act might also direct the Centers for Medicare and Medicaid Services and the U.S. Department of Education’s Office of Postsecondary Education to give the task force their complete cooperation. 

The task force’s very first task would be data gathering and data analyses dedicated to fashioning a method for reckoning the total value of the tax privileges (exempt property, deductible donations, grants and contracts, payments to individuals) that a rich nonprofit receives relative to the total value of the direct and indirect benefits (societal, economic, technological, and other) to non-members, wider communities, and the public at large that it returns. And the mission behind the method would be to learn and assess how the top nonprofit health systems and universities utilize their tax privileges. For instance, as indicated by Table 19-1 of the Fiscal Year 2024 Budget of the United States, charitable tax deductions for education and health nonprofits account for scores of billions of dollars each year. Do some of the largest nonprofits have demonstrably better returns on the public’s investment in them than others? Might some deserve an “A” while others merit an unsatisfactory or even failing grade?

There is, of course, nothing being suggested here that would prevent, preempt, or pause narrow and nasty congressional inquiries. But maybe, just maybe, discussing and debating such an act might serve at once to discipline, deepen, and widen the inquiries in accordance with what James Madison, writing in The Federalist No. 10, termed the “public good” and defined as “the permanent and aggregate interests of the community.” One is at least free to hope. 

John J. DiIulio, Jr., the Frederic Fox Leadership Professor at University of Pennsylvania, has taught at several Ivy League universities and co-edited two Brookings Institution books on health care reform. 

Image: Surgeons stand over an operating table. (Unsplash: National Cancer Institute)