Friday, April 4, 2008

"Nonprofit Hospitals Strike It Rich" - Wall Street Journal April 4th

This morning's top-of-the-fold story tells how a relative handful of big nonprofit hospitals net huge profits, pay out multi-million dollars bonuses to CEOs and spend virtually nothing on true charity care - the reason for their tax exemption in the first place.

Is there a connection between this story and the wealthiest universities hitting their endowment returns harder to give students a break on soaring tuition costs? Is there a connection between egregious nonprofit behavior and a recent Chronicle of Philanthropy piece reporting that only 68% of Americans think charities are making good use of their money? Is the public waking up? Maybe so. Are the serfs hoisting their pitchforks and storming the castles? Are the big plaques that hold up the buildings about to be peeled off the walls? Not quite yet.

Twenty-five or 30 years ago I made a speech on this very topic to an audience of hospital fund raisers at a conference in San Diego. My take was on the charity exemption because back then even the largest among them did not make the money some do now. But then as now many offered as little free care as they could. I asked these nice folks why anyone should donate money to their institutions.

I also poked pins in their eyes by suggesting that in most cases their earnest fund raising efforts produced only incremental returns (one or two per-cent of total revenues) (still true for most) and if you backed out fund raising costs most of these places could cut their budgets by half a point and eliminate their jobs. For some reason much of my audience was not pleased. Feathers flew. But a few actually agreed with me.

My point then was that the charitable exemption was and is widely abused by hospitals of all sizes, everyone in the industry knew it and I warned then that government would ultimately be prodded into doing something. As we know the feds move slowly and it took nearly three decades (though a few legislators made half hearted efforts over time). For the last few years Senator Charles Grassley (R) has been going after charity's abuse of the tax break. There is not yet legislation to show for it and in the Cave of the Winds all bets for anything meaningful are always off. The charities' lobbying has been intense; nothing will happen before the elections.

But I can just imagine the meetings, the gnashing of teeth, the wringing of hands going on this morning in the conference rooms of hospitals named in the Journal story and many others unnamed as well. I could write (and have) the-sky-is-not-falling snail mail messages and e-blasts that will be going out to the muk-muk donors - along with the contribution reply envelope or "click-here-to-donate-now."

Philanthropy is venture capital. R&D can bring real benefit and better health care to all of us. Government grants are flat or declining. But like the drug companies' justifying high prices citing R&D cost - when it's really marketing - the facts are in the small print. Not that a hospital financial statement is either comprehensible or comparable to that of another hospital.

Charities need to have funds in reserve - whether they're called endowment, or as in business retained earnings (cash). But it is the responsibility of a governing board to strike a balance between hoarding funds and spending to fulfill charitable purpose. Top tier universities realized the big donors want to see mission fulfilled. Others pointed out that earning 15-20 % and spending only 3-4% was piggy.

The big hospitals have been and are still in denial. But once the crisis management firms are called in you can expect to see the largest of the largest wiping away the large tears as they suddenly see the poor at the door sill.

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