July 13, 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?

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

High & Low Finance: Uncertainty in Washington, Windfall for Others

Let us pause to give credit where credit is due.

The so-called fiscal cliff, and Washington deadlock, dominate the news these days, but the reality is that Congress has accomplished a lot. Thanks to it, as well as to President Obama, action has been taken that will accomplish the following goals:

¶ Provide immediate economic stimulus through the payment of billions of dollars to American individuals.

¶ Significantly increase tax receipts in the current fiscal year, thus reducing the budget deficit, with much of the money coming from higher-income Americans who will voluntarily take steps to increase their 2012 income tax liability.

¶ Bolster charitable giving substantially this year.

¶ Demonstrate which companies rolling in cash have attained that status by keeping profits overseas, rather than bringing them home to reinvest.

Many of those accomplishments could be limited, however, if President Obama and House Speaker John A. Boehner accomplish what everyone says they want — a quick compromise to avoid the automatic tax increases and spending cuts set to begin Jan. 1 — and so reduce the uncertainty that is having such beneficial effects.

Each day that passes without a deal brings more companies declaring special dividends, and more high-flying stocks being sold off to capture capital gains that will be taxed at today’s low rates. Tax advisers for wealthy people who have some control over the timing of their income are advising them to take the income now, rather than to defer it to next year.

Among the companies that have declared special dividends in the last few weeks are HCA, once known as Hospital Corporation of America; Costco, the retailer; and a clothing company whose name neatly symbolizes the spirit of this holiday season: Guess Inc.

The guessing concerns the shape of tax law next year. I cannot recall a December with more uncertainty about the following year. The fact that the stock market is up this month, albeit only a little, should remind us that the cliché “investors hate uncertainty” is nonsense. There is always uncertainty, but sometimes there are reasons to think things will work out well.

One virtual certainty is that taxes on capital gains and dividends are going up for high-income people — the very people who get most of those types of income. Each is now taxed at 15 percent. At a minimum, the Medicare payroll tax is to be extended to all taxable income over $250,000 for couples and $200,000 for individuals, and raised — for them only — to 3.8 percent on that excess income.

But it could be much worse for people who get a lot of that income. If the Bush tax cuts simply expire — the no-deal case — the top capital gains rate goes to 20 percent, plus the 3.8 percent topper for the high-income people. Dividends lose all tax preferences. They will then be taxed at ordinary income tax rates, which will rise as high as 39.6 percent, plus that 3.8 percent.

You can see the impact of that in the stock market. At the end of the year there is usually “tax loss” selling, as people liquidate their losers to get tax losses to offset other gains. This year there is “tax winner” selling. Most of the stocks in the Standard Poor’s 100 — basically, the largest companies in the United States — have risen this month. But five of the six stocks that performed best over the last two years have lost ground, including Apple.

As for dividends, there are extras galore — Bloomberg has counted $21 billion worth — not to mention early payments. Many companies decided to accelerate dividends that would normally have been paid in early 2013, and some did more. Oracle decided to push the first three 2013 dividends into this year. Larry Ellison, its founder and chief executive, will have an extra $199 million in dividend income this year.

Not all companies are doing that, of course. Apple, whose balance sheet indicates it is rolling in cash, has not announced any such move. The problem may be that Apple arranges its affairs so that a lot of its profits seem to be overseas. That lets it avoid American corporate taxes until it brings the money home, so paying the money out would force it to pay a lot to Uncle Sam.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/12/14/business/uncertainty-in-washington-windfall-for-others.html?partner=rss&emc=rss