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PERSPECTIVENonprofit Ownership, Private Property, And Public Accountability
Mark Schlesinger and Brad Gray have summarized research comparing nonprofit and for-profit health care in a remarkably useful form. Their paper effectively demonstrates how nonprofit and for-profit health care differ. However, their proposal for community control over nonprofit health care organizations in exchange for tax exemption, like many current proposals requiring nonprofit hospitals to provide free care for indigent patients, risks undermining the purpose of the nonprofit organizations and the care they provide. These trade-offs are significant yet have not been acknowledged in policy debate.
THE SIGNIFICANCE OF nonprofit health care is front and center in current political debate. In May 2005, House Ways and Means chairman Rep. Bill Thomas (R-CA) held hearings about nonprofit hospitals in which he worried that he couldn’t tell the difference between nonprofits and for-profits and, therefore, wasn’t sure what taxpayers were getting in return for exemption.1 State policymakers have proposed requirements that nonprofits spend at least minimum revenue percentages on free care for indigent patients. Even the private sector has been involved. Trial lawyers have recently brought, and generally lost, numerous federal suits against nonprofit hospitals, arguing that they provide insufficient charity care. This activity reflects a widely held perception that there is little difference between nonprofit and for-profit health care providers. The hue and cry, however, has been short on facts. Thankfully, in their Health Affairs paper, Mark Schlesinger and Brad Gray have condensed voluminous research comparing nonprofit and for-profit health care into a remarkably useful form.2 However, their call for community control over nonprofit health care organizations in exchange for tax exemption risks undermining the purpose of nonprofit organizations and the care they provide. In their summary, Schlesinger and Gray challenge two skeptical readings of the evidence. First, and most important, their work should lay to rest claims that little distinguishes nonprofit from for-profit health care. It also demonstrates that in the debate over ownership, more is at stake than measuring charity care. Second, the authors help untangle a set of much more difficult issues regarding whether nonprofit behavior justifies state-provided benefits. The authors suggest that it does, despite two commonly advanced objections. They first point out that although the differences might be small, given the large scale of nonprofit providers, small differences matter considerably. They then counter the argument that because ownership-related differences vary across different types of services and markets, there are no generalizable findings. In response, the authors rightly remind us of the importance of considering context when analyzing health care institutions. Identifying interactions among market and ownership types, as some studies do, does not mean that there are no systematic differences among types. Although the authors agree that nonprofits are insufficiently accountable to community needs, they reject a popular view that government should "establish standard criteria against which nonprofits’ performance would be evaluated."3 They base their dissent on the inflexibility of broad top-down regulatory requirements. Instead, they propose state-supported mechanisms that would allow communities to assess and influence nonprofit practices. Their goal is public input, through a deliberative process in which community members would define an appropriate set of benefits that tax-exempt providers would be required to pursue. In the large scale, Schlesinger and Gray are right. In fact, I’d claim that their arguments apply in a wider context than they appreciate. All health care institutions, not just nonprofits, ought to be responsive to local needs. But moving from that observation to policy involves treading on treacherous terrain. As do many others, they overlook both the legal complications and the health care costs of requiring nonprofits to meet externally defined needs. Nonprofit status is centrally concerned not with poverty relief, as many people think, but rather with property ownership. Significantly, it is a form of private ownership, albeit an odd one. No private individual owns nonprofit health care assets. But neither does the state or the communities that nonprofits serve. Rather, nonprofit assets are held in a manner akin to a trust, dedicated to serving a particular purpose that the state has deemed charitable. The provision of health care itself, not only for the poor, has long been considered a charitable purpose. The 1601 Statute of Elizabeth permitted gifts for "relief of aged, impotent and poor people, some for maintenance of sick and maimed soldiers and mariners," among others. In fact, such general health purposes have been thought to be appropriate even earlier. Scholars commonly point to William Langland’s late-fourteenth-century poem, "The Vision of Piers Plowman," as an example of appropriate purposes reflected in the early common law; in the poem, merchants are urged to expiate their sins by donating their fortunes to good works, including the repair of hospitals and helping the sick.4 Contemporary tax law, the federal system that offers benefits to some nonprofits, has long reflected this permissive posture regarding appropriate charitable purposes. To receive federal income tax exemption and tax-deductible donations, nonprofit health care organizations, except for health insurers, essentially need only pursue a charitable purpose and operate in such a way that earnings do not find their way into private pockets, such as in the form of shareholder earnings.5 With the exception of 1956–1969, when an Internal Revenue Service (IRS) revenue ruling required nonprofit hospitals to be "operated to the extent of [their] financial ability for those not able to pay for the services rendered," health care itself has been considered a sufficient charitable purpose for exemption, regardless of whether or not hospitals provided charity care.6 A few recent cases suggest that charity care may again become a major component of the public benefit requirement.7 The state tax-exemption history has been much more complicated, but many states track this permissive federal law in defining community benefit broadly, if they define it at all. But just because we’ve always done it this way doesn’t mean that we must continue. These pages regularly document problems that all health care institutions, regardless of ownership, need to cooperate in solving. Health care spending is rising again—almost $1.9 trillion in 2004, with a chilling growth rate of 7.9 percent—and, as has been true historically, hospital spending accounts for a disproportionate share of the increase, with $58.6 billion of spending representing an 8.6 percent growth rate over 2003, most flowing through nonprofit institutions.8 However, implementing policies that undermine the private nature of nonprofits is risky. It could lead to unintended consequences for both nonprofit organizations and health care. Mandating the use of private, charitable property for narrowly defined community purposes, even in exchange for exemption, violates the goals of charities law. Nonprofit institutions are meant to allow private actors, within broad constraints, to create and implement their own ideas of what counts as the public good. Nonprofit scholars, including Schlesinger and Gray, are fond of quoting Alexis de Tocqueville to demonstrate the significance of nonprofits. Yet de Tocqueville’s observations are often lost in translation into contemporary discourse. In Democracy in America, he stressed that voluntary associations help weak individuals counter state power. He further predicted their growing importance; as the tasks of production became more complex, large organizations, such as government, would be increasingly tempted to expand.9 Schlesinger and Gray assure us that their proposal is "the antithesis of ‘micromanagement’ by government—as long as policymakers don’t try to dictate particular responses to community needs."10 The invocation of deliberation and community consultation is nice, but what legally enforceable duties do the authors envision? Without more detail, it is hard to imagine how a list of community-generated benefits would have enough bite to matter, yet not rise to the level of government control they legitimately fear. Further, what prevents a small, dedicated group from imposing a minority view on nonprofits? It could be that unmet community needs are so critical that health care providers should be required to respond to such views. Indeed, I suspect that the widespread public anger at how little charity care hospitals provide has more to do with public expectations of health care providers than expectations of nonprofit institutions. If so, other than the brute fact that state attorneys general have unique powers over nonprofits, why should community-benefit requirements be limited to nonprofits? Responding to community need could be a condition of state licensure for all health care organizations. However, this suggestion brings us back to Schlesinger and Gray’s reasons for rejecting a popular proposal for nonprofit accountability: establishing standard criteria against which to measure performance. Whether those standards are set at the state or the local level, it has proved difficult to determine what exactly we want our health care institutions to do. In those limited areas where we do know, we have designed incentive systems. As the authors note, even then—in programs like the disproportionate-share hospital (DSH) payment program—there has been mixed success in achieving efficient outcomes because of the opportunities for gaming. There is, however, some promise in pay-for-performance programs such as diabetes management.11 In those cases where there is consensus on appropriate health care provision, there is no reason to turn to the blunt regulatory tool of community-benefit standards rather than targeted incentives. These instances, however, are the relatively easy ones. Much of what we want our health care organizations to do is hard to define and hard to measure. There is no reason to assume that progressively passing authority down along levels of government—from federal to state to local, or even all the way down to community groups—will make it easier to decide which interests should prevail, tell private nonprofits what they ought to be doing, and get it right. Regardless of our wealth, level of disability, or insurance status, we all need access to health care institutions we can trust. Requiring nonprofits to respond to particular community needs, like caring for the uninsured, inevitably claims resources from someplace else in the nonprofit budget, often a place hard for outsiders to observe, such as personnel quality or forgone services. These trade-offs might be worthwhile. But they should be considered in light of the evidence compiled by Schlesinger and Gray, and the research they call for, including the interactions among ownership types. Mandates, even those that result from community input, come with costs.
Jill Horwitz (jrhorwit{at}umich.edu) is an assistant professor of law at the University of Michigan in Ann Arbor. The author thanks Don Herzog, David Hyman, Marion Fremont-Smith, Bruce Frier, Doug Kahn, Peter Seigelman, Chris Whitman, Jim Hines, and Gil Seinfeld for comments.
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