Legislators Continue Scrutiny of Tax-Exempt Hospitals; Article Examines Their Finances

Last month three U.S. Senators focused their attention on tax-exempt hospitals. Two of them, Senator Elizabeth Warren (D-Mass.) and Senator Ron Wyden (D-Ore.) directed their ire toward McKinsey & Company, asking it to explain its role in helping nonprofit hospitals “take financial advantage of low-income patients.” The other, Senator Tammy Baldwin (D-Wisc.) focused on the Ascension Health system, asking its CEO to explain activities at some of its hospitals that recent press reports highlighted , including patient safety concerns, the closure of a labor and delivery unit, and sizeable for-profit investment activities.

And a recent article by Brian D. Cadman and Elena Patel (both at the University of Utah, the former in the School of Business and the latter in the Department of Finance) focuses on nonprofit hospital finances. It is titled Nonprofit Regulation and Earnings Distribution: Nonprofit Hospital. Here is the abstract:

Organizing as a nonprofit amplifies agency problems through limited ownership and restricted earnings distribution. We examine how these agency problems influence the distribution of economic profits by nonprofit hospitals, which dominate the population of tax-exempt organizations and account for a large fraction of the US economy. Using detailed hospital-level financial data, we find that nonprofit hospitals earn large economic profit. We also show that these hospitals hold five times more cash and 85% more retained earnings than for-profit hospitals. In addition, we document that general and administrative labor expenses are 60% larger, physician labor expenses are 32% larger, and expenses for drugs provided to patients are 31% larger for nonprofit hospitals. Finally, we find that nonprofit hospitals invest more in land improvements and buildings. The evidence suggests that nonprofit hospitals distribute economic profits through wages and capital expenditures.

Lloyd Mayer