March 29, 2020

Today’s Economist: Uwe E. Reinhardt: The Governance of Nonprofit Hospitals


Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Go to the Web site of any publicly traded profit-making corporation – e.g., the Hospital Corporation of America – and click on the tab “Investor Relations.”

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You will find tabs for annual reports to shareholders and the mandatory filings made to the Securities and Exchange Commission. Among them are 10-K’s, annual reports that are detailed and audited. There is also great detail on the criteria by which executive performance is evaluated by the board of directors, along with dollar figures of actual compensation paid.

Is there anything like this transparency and public accountability in the nonprofit sector? Indeed, who actually owns these entities? To whom do they render account for the sizable real resources and finances under their control? And what benefits do they deliver in return for the exemption from income taxation they enjoy?

These questions are inspired by Steven Brill’s recent, highly critical article on the hospital industry; all of the hospitals in his cross hairs had nonprofit status.

Some people believe that “no one owns a nonprofit corporation,” because nonprofits are owned by something nebulous called “the community at large” or a religious order.

For practical purposes, however, legal control over such an entity rests with its board of directors (or trustees, as they may also be called). They authorize major investments that management wants to make, including the acquisition of other nonprofit entities, and they approve the issuance of debt. They can also decide to sell the entire entity to a profit-making company, with the proceeds going to a nonprofit foundation.

Over the boards of nonprofits hovers some state agency authorized to monitor and regulate their behavior, as was seen rather strikingly in instances when nonprofit boards decided to convert the entities into profit-making entities or when management and board misbehave egregiously.

Unlike directors of publicly traded profit-making corporations, who are elected by shareholders, the directors of community-sponsored nonprofits are not elected by the community, although they may be elected by members if the nonprofit is an association.

For the most part, however, these boards are self-perpetuating; the board members elect successors whenever there are vacancies.

Belying their label, nonprofit entities can, in fact, be heavily profit-oriented and can earn sizable profits, which they delicately call “revenues in excess of expenses” or “available for future services.” Unlike profit-making entities, they cannot distribute these profits to any owners. Instead, they plow them back into investments in plant and equipment or add them to endowments.

By law, nonprofit entities must submit fairly detailed financial reports to the Internal Revenue Service on a Form 990, which has been refined as part of the Affordable Care Act. Form 990 offers considerable detail on a nonprofit’s finances and operations, although nowhere near as much detail as is routinely reported to the S.E.C. by profit-making entities.

But try to find Form 990 on the Web site of most nonprofits. I can predict with almost certainty that you will not find it there.

Do readers believe this to be a good state of affairs?

Certainly the New Jersey Commission on Rationalizing Health Care Resources, on which I had the privilege of serving as chairman in 2007, did not. In a chapter on governance in its final report, the commission noted:

All community members should have access through a prominent section of the hospital’s Web page (e.g., Community Relations), and upon request to the hospital’s public information office, to important institutional documents.

The list of items the commission thought should be disclosed to the general public included:

1. The nonprofit entity’s articles of incorporation, including the corporate mission statement;
2. The members of the board of directors, their term of office and a brief biography of each member, including potential conflicts of interests;
3. The board bylaws;
4. The medical staff bylaws;
5. The three most recent Forms 990;
6. Management compensation, both direct and indirect;
7. The three most recent annual reports to the community;
8. The board’s conflict-of-interest policy;
9. Strategic plans approved by the board that significantly affect the provision of services in the community;
10. The hospital’s charge master (an industry term for the large list of all charges for services and materials) and its sliding fee provisions for the uninsured, as well as the hospital’s billing and collection practices for the uninsured.

Unfortunately, the governor at the time, Jon Corzine, to whom these recommendations were addressed, did not carry them out, presumably in the face of opposition from the hospital industry.

My sense, though, is that the commission was ahead of its time — that before long these disclosures will become routine in the nonprofit sector.

In fact, as often happens in this country, when one institution fails, a compensating actor arises. In this case it is Guidestar, a nonprofit organization providing transparency on the nonprofit sector.

Click on Guidestar‘s home page and enter into the box on the upper right “Montefiore Medical Center New York.” It is a nonprofit hospital system that was harshly attacked by Mr. Brill in his article in Time.

A page will appear listing 16 entities affiliated with Montefiore. Click on the first, “Montefiore Medical Center.” Scroll down until on the left you see Forms 990. Click on “Sign in or create an account.” The latter asks for your e-mail address and a password of your choice. After providing these, you have an account.

Once you have signed in, you will see on the left the Form 990s for several years. Click on 2010, the last year for which the form is available for Montefiore. You will now have before you a rather detailed glimpse into the financial affairs of Montefiore in that year. And what you see does not exactly square with the picture Mr. Brill painted of the institution, at least in my view.

Part 1, Page 1, provides a convenient summary. You can infer from it that the system’s total 2010 profit of $102.3 million (Part I, Page 1, Line 19) was 3.95 percent of total revenue of $2.587 billion (Line 12). That profit margin was below the United States average for 2010, which ranged from 5.3 percent for major teaching hospitals to 6.9 percent for nonteaching hospitals (see Chart 6-19, on Page 79).

Mr. Brill made much of the connection between executive compensation at nonprofit hospitals and their prices. So let us go to Part VII, Page 8 of Form 990. We see in Line 1b that Montefiore in 2010 spent $17.1 million on the compensation of “officers, trustees, key employees and highest paid employees.” That is 0.69 percent — less than 1 percent — of total expenses of $2.485 billion (Part I, Page 1, Line 18). Do we view executive compensation as a major driver of Montefiore’s prices?

You may want more detail on executive compensation. Here you have to go to a supplement toward the end of the filing, “Additional Data.” It makes reference to Part VII, where we had found the total of $17.1 million for executive compensation. We learn that trustees are not paid any compensation. We also learn that the chief executive’s total compensation in 2010 was slightly more than $4 million, or 0.16 percent of total expenses. Once again, it is not a major price driver.

Like Mr. Brill, readers may have strong philosophical views on executive compensation in the nonprofit setting. But from the viewpoint of total costs and prices, it is a trivial sideshow.

Finally, we learn from Montefiore’s Form 990 that private charity, as distinct from government grants, contributes only a tiny fraction of revenues (see Part I, Page 1, Line 8 and Part VIII, Lines 1a to 1g for details).

So I find it puzzling that nonprofit entities have been so reluctant to post their Form 990s on their Web sites, given that the form is available through Guidestar anyhow. What is there to hide?

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The Media Equation: A Tabloid Shame, Exposed by Earnest Rivals

In America, newspapers have been seen as an expensive hobby for Mr. Murdoch, the bane of the News Corporation’s shareholders, but as it turns out, the newspapers in Britain may end up being more costly to him in the long run.

So useful in wielding influence, if not producing revenue, his newspapers are the very thing that brought his company into the cross hairs, and delayed, at least temporarily, his efforts to expand it by gaining full control of British Sky Broadcasting, the largest pay television company in Britain.

Logic and fairness would suggest that it was folly to concentrate so much power in the hands of someone who already controlled many national media assets. So where was the outrage? Well, check who owns the megaphone. The News Corporation has historically used its four newspapers — it also owns The Sun, The Times of London, and The Sunday Times — to shape and quash public debate, routinely helping to elect prime ministers with timely endorsements while punishing enemies at every turn.

Don’t take my word for it. After David Cameron was elected prime minister, one of the first visitors he received at 10 Downing Street was Mr. Murdoch — discreetly through a back entrance — and Mr. Cameron spoke plainly last week about the corrosively close relationship. “The truth is, we’ve all been in this together,” he said.

“The press, the politicians and leaders of all parties.” To which a dumb Yank like me might say, “Duh.”

The only thing Mr. Cameron didn’t do was point to Mr. Murdoch himself. But he didn’t really have to after the tactical ruthlessness of Mr. Murdoch’s familiars was laid bare for all to see.

Newspapers, as anybody will tell you, aren’t what they used to be. Part of the reason that the News Corporation was willing to close down a paper with a circulation of about 2.7 million copies every Sunday was that its revenue was under $1 billion. (The News Corporation’s heir apparent, James Murdoch, has always seemed eager to shed some of the company’s newspapers, though I doubt that putting the nail gun to this paper was what he had in mind.)

Still, how did we find out that a British tabloid was hacking thousands of voice mails of private citizens? Not from the British government, with its wan, inconclusive investigations, but from other newspapers.

Think of it. There was Mr. Murdoch, tying on a napkin and ready to dine on the other 60 percent of BSkyB that he did not already have. But just as he was about to swallow yet another tasty morsel, the hands at his throat belonged to, yes, newspaper journalists.

Newspapers, it turns out, are still powerful things, and not just in the way that Mr. Murdoch has historically deployed them.

The Guardian stayed on the phone-hacking story like a dog on a meat bone, acting very much in the British tradition of a crusading press, and goosing the story back to life after years of dormancy. Other papers, including The New York Times, reported executive and police complicity that gave the lie to the company’s “few bad apples” explanation. As recently as last week, Vanity Fair broke stories about police complicity.

Mr. Murdoch, ever the populist, prefers his crusades to be built on chronic ridicule and bombast. But as The Guardian has shown, the steady accretion of fact — an exercise Mr. Murdoch has historically regarded as bland and elitist — can have a profound effect.

His corporation may be able to pick governments, but holding them accountable is also in the realm of newspaper journalism, an earnest concept of public service that has rarely been of much interest to him.

The coverage last week, on a suddenly fast-moving story that had been moving only in increments, destabilized the ledge that the News Corporation had been standing on. James Murdoch regretted everything and took responsibility for almost nothing. What looked like an opportunity for him to prove his mettle as a manager of crisis might yet engulf him.

Andy Coulson, the former editor of News of the World who became the chief spokesman for Mr. Cameron, has been arrested. And Rebekah Brooks, chief executive of News International and previous editor of The News of the World, responded by saying that it was “inconceivable” that she knew of the hacking.


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A Watchdog Professor, Now Defending Himself

Mr. Protess, who taught at the Medill journalism school at Northwestern University, was the founder and driving force behind the Medill Innocence Project, which was instrumental in exonerating at least 12 wrongly convicted defendants and freeing them from prison, including five who were on death row in Illinois, and in prompting then-governor George Ryan to clear the rest of death row in 2003.

But during an investigation into a questionable conviction, the Cook County state’s attorney turned her attention instead on Mr. Protess and his students. Since then, questions have been raised about deceptive tactics used by the Medill students, about allegations that Mr. Protess cooperated with the defense lawyers (which would negate a journalist’s legal privilege to resist subpoenas) and, most damning, whether he altered an e-mail to cover up that cooperation.

Medill, which enjoys an international reputation, in significant part because of his work, removed him from teaching in April, and this week he resigned from Northwestern altogether. It has been a breathtaking reversal for Mr. Protess, who says he believes he is being pilloried for lapses in memory and a desire to defend his students.

“I have spent three decades exposing wrongful conviction only to find myself in the cross hairs of others who are wrongfully accusing me,” he said in an interview.

It is often said that academic politics are so vicious because the stakes are so low, but in the matter of Mr. Protess and the wrongly convicted men he helped to free, the stakes could not have been higher.

“He is in the hall of fame of investigative journalists in the 20th century,” said Mark Feldstein, an associate professor of media and public affairs at George Washington University. “Using cheap student labor, he has targeted a very specific issue, and that work has reopened cases, changed laws and saved lives.”

Dennis Culloton, a lawyer who served as press secretary for Governor Ryan, said that Medill’s work led in part to the decision to essentially shut down Illinois’s death row. “I think it would have been an academic discussion if not for David’s work,” he said.

Behind that public success, however, there were gnawing tensions within Medill. Mr. Protess’s tendency to clash with authority did not end with law enforcement. He came into conflict with at least two deans of the Medill school, including the current one, John Lavine, who started in 2006 after a long career in newspapers.

Mr. Lavine is a polarizing figure at Medill: he is widely credited with stabilizing an institution that was suffering financially but he also led a successful effort to rename the school the Medill School of Journalism, Media, Integrated Marketing Communications, a change he said reflected the school’s broader agenda but one that was widely ridiculed by alumni and journalists.

Mr. Protess said the project initially received support from the dean, but now says that was a charade, “an attempt to seem as if he were fighting for the First Amendment when in fact he was undermining the Innocence Project at every turn.” Mr. Lavine counters that he had no choice but to remove Mr. Protess: “What I saw warranted the decision that I made.”

Mr. Protess (whose son Ben is a reporter for The New York Times) started the Innocence Project at Medill in 1999 after spending much of his career looking into questionable convictions for Chicago Lawyer magazine. Working with the Center on Wrongful Convictions, a sibling project at the Northwestern Law School, Mr. Protess methodically vetted cases, laid out lines of inquiry for his student journalists and guided them through their reporting assignments.

As the list of exonerations grew, the global reputation of Medill — and Mr. Protess — soared and students were drawn to the project to be trained in the real-life crucible of capital cases.

“His class was life-changing,” said Evan S. Benn, a former student of Mr. Protess who is now a reporter at The St. Louis Post-Dispatch.

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