It's time to stop pretending hospitals are "nonprofits"

These are massive businesses - frequently chains - that pay executives richly and depend on huge government spending and subsidies to survive. We need to start treating them that way.

How much do American hospitals cost? Over $2 million per bed per year.

Not for a state-of-the-art neonatal unit, or a Level III trauma center. The United States now spends over $2 million every year for an average hospital bed — $1.6 trillion in all.

That’s one key reason the American medical system has fewer beds per capita than many other rich countries. We just cannot afford more beds.

Why do American hospitals cost so much? Heavy administrative spending, patient lawsuits, relentless marketing and advertising, high labor costs, regular investment in new imaging systems (sometimes necessary, sometimes not), construction of shiny new buildings to chase elective surgery patients, and, oh yeah, seven- and eight-figure executive salaries — which have recently exploded.

Pick your poison. One factor does not play much of a role, however.

Charity care.

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Even before Obamacare extended insurance to many poorer patients (at an incredible cost, a cost the system is only now beginning to recognize), many hospitals provided little or no charitable care.

A 2022 study found that 60 percent of hospitals devoted less than 2 percent of their operating expenses to free or discounted care to eligible patients. About 40 percent devoted 1 percent or less. Even hospitals run by religious orders often skimp on charity care and pursue indigent patients for bills they have no way of paying, as a 2024 investigation found.

Yet the vast majority of hospitals hold themselves out as “nonprofits,” quasi-charitable institutions that want nothing more than to serve their local communities.

In reality, they’re about as nonprofit as OpenAI turned out to be.

As a Washington Post opinion piece argued Monday, nonprofit hospitals may actually do less for their local communities than their for-profit competitors:

[Economists] found that because nonprofit hospitals cannot distribute profits to shareholders, they accumulate excess tax-free cash — and spend it on themselves. Their facility-wide general and administrative wage expenses run 26 percent higher than comparable for-profit hospitals. Their managers use the surplus to pursue what the researchers bluntly call “empire-building through capital expansion.”

This dynamic has played out all over the United States, as academic medical centers like the Mayo Clinic, the Cleveland Clinic, or UPMC (which has grown out of the University of Pittsburgh) use their surplus capital (and branding advantage as “nonprofits”) to become regional empires.

Mayo now has nearly 60,000 90,000 [note: I used an outdated figure, my mistake] employees. The Cleveland Clinic has 83,000. UPMC dwarfs both; it is the largest non-governmental employer in Pennsylvania, with more than 100,000 workers.

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(UPMC’s employee and revenue growth since 2005. Too bad life expectancy hasn’t followed.)

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These regional monopolies drive up costs for insurers and patients.

No health insurance company in western Pennsylvania can avoid contracting with UPMC, just as none in northeast Ohio can avoid the Cleveland Clinic. (Having essentially exhausted western Pennsylvania, UPMC is now expanding into Ohio, setting up a potential clash of the titans with the Cleveland Clinic.)

It should go without saying that monopoly providers aren’t just expensive, they are rarely overly responsive to their customers — aka patients, in this case. And patients are already at a massive disadvantage inside hospitals, for all the obvious reasons. Don’t like the local Walmart? Adios, Target’s a couple miles over. No one is walking out of a hospital the day before (or after) an open-heart surgery.

So what to do?

At a minimum, antitrust regulators need to look at these local monopolies the same way they would judge other monopolies, and consider forcing divestitures.

A hospital business dominated by 10 to 20 big national companies and real competition in local and regional markets would be far better than the current set up of regional monopolies — whether those companies were for- or nonprofit.

Another possibility: federal and state windfall profits taxes on executive pay at nonprofit hospitals. The taxes could be graduated, starting at $1 million and rising. High executive pay is fine, when it is set by the market and paid by shareholder-owned companies that must also pay taxes. Nonprofit hospitals benefit from huge direct and indirect government and public subsidies. If they want to pay their executives like business tycoons, they should drop the fiction they’re nonprofit.

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Forcing nonprofits to give more charity care is another alternative, though in the age of Obamacare it’s not entirely clear how that process would work.

An even more radical suggestion: state and federal governments could tax these “nonprofits” on their retained surpluses.

Of course, the nonprofit hospital industry will fight any and all of these changes. And it is a formidable force. It has enormous political power in Washington and even more at the state and local level. In declining second- and third-tier cities across the Northeast and Midwest that have grown to depend on healthcare as a steady employer, hospitals are a critical source of prestige and financial power.

But something has to change.

The current fiction works wonderfully for these “nonprofit” hospitals, especially those that have leveraged into regional chains, and the executives who run them.

Everyone else pays the price.