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?
Article source: http://economix.blogs.nytimes.com/2013/04/12/the-governance-of-nonprofit-hospitals/?partner=rss&emc=rss