Opinion | Why Are Nonprofit Hospitals Focused More on Dollars Than Patients?

Nonprofit hospitals have been caught doing some surprising things, given how they are supposed to serve the public good in exchange for being exempt from federal, state and local taxes — exemptions that added up to $28 billion in 2020.

Detailed media reports show them hounding poor patients for money, cutting nurse staffing too aggressively and giving preferential treatment to the rich over the poor. Nurses and other workers recently resorted to strikes to improve workplace safety at Kaiser Permanente and the Robert Wood Johnson University Hospital in New Brunswick, N.J.

That’s not the end of it. Nonprofit executives have embarked on an acquisition spree, assembling huge systems of hospitals and physician practices to raise prices and increase profits. Ample evidence indicates that the growth of these giant systems makes health care less affordable for patients, families and businesses.

Over the past year, a new hospital strategy has come to the fore, the cross-market merger. In the past, most mergers and acquisitions involved hospitals or physician groups in the same geographic area. Now health care systems are reaching far and wide to find other hospitals to acquire. This is exemplified by the California-based Kaiser’s acquisition of Geisinger Health in Pennsylvania announced in April. Since then, hospitals in Missouri, Texas and New Mexico were involved in two other cross-market mergers. In another example, Advocate Aurora Health’s merger late last year with Atrium Health created a juggernaut with 67 hospitals strung across six states, from Wisconsin to North Carolina. We are witnessing the advent of the new American megahospital system.

Calling these hospitals nonprofits can be confusing. It doesn’t mean they can’t make money. What it means is that they are considered charities by the Internal Revenue Service (as opposed to being owned by investors, like for-profit hospitals). And in return for their tax exemptions, these institutions are supposed to invest the money that would have gone to taxes into their communities by lowering health care costs, providing community health services and free care to those unable to afford it and conducting research. These hospitals proliferated after federal tax rules about 50 years ago made it easier to qualify for tax exemptions. They now make up more than half of the nation’s hospitals.

So why are nonprofit hospitals behaving in ways that seem to focus more on dollars than patients? Hospitals are undergoing a reckoning about their role in the national health system. The United States will require fewer hospital beds in the future if current trends continue. This looming likelihood — plus financial challenges from the pandemic, a severe worker shortage, rising inflation and stock market volatility — has put nonprofit hospitals in survival mode.

Accordingly, they have prioritized protecting their finances, focusing on scale and market power. Unfortunately, these actions too often come at the expense of their mission to serve their communities. This has meant less charity care for patients who cannot afford expensive surgeries or emergency room visits and higher prices for those who can.

How do we get hospitals to refocus on their communities rather than on profits? Through their boards of directors. Their role is to tell hospital executives what to focus on and prioritize. And you would think that focusing on the mission would be the top priority, though boards aren’t doing this consistently.

The key is getting boards to act in service of the mission. They need greater accountability. And that’s where lawmakers and policymakers can help, by finding ways to encourage or require boards to resist the growth interests common to organizations. Hospital systems, like living organisms, tend to put survival and proliferation above all else.

A good first step is to reform how boards reward hospital executives to accomplish the mission. Instead of paying leaders to pursue conventional financial goals, executives’ compensation should be tied to metrics reflecting the mission. Perhaps the most visible example of this is the heavy focus of nonprofit chief executive compensation on financial performance. A survey by the American College of Healthcare Executives noted that only about a quarter of nonprofit hospitals tied chief executive bonuses to community services. This prioritizes revenue from patient care over caring for patients. Instead, health care organizations should tie meaningful amounts of executive compensation to metrics like reducing disparities in care.

This is feasible. As the same survey indicates, some hospitals are already doing this. We need capable leaders charged with executing the mission, even if it means making a hospital smaller.

And policymakers can help, too, by creating clearer standards for measuring community benefits. This will help nonprofit boards to provide incentives to executives around community-based objectives. A study published last year in the journal Frontiers in Public Health found that for most hospitals, expectations are vague and what is considered community service is difficult to document, quantify and assess.

Policymakers can also hold boards more accountable. The I.R.S. and state and local governments can look more closely at whether hospitals are rewarding their executives to deliver community benefits. Regulatory action may be required. And there are examples of this. In Pennsylvania, four hospitals lost their exemptions from local property taxes in part because eye-popping chief executive compensation didn’t align with its nonprofit mission. It is undeniable that executives will prioritize what they get paid to accomplish.

A second related issue is that too many boards are full of members who have financial skills or have made big donations. To shift toward their mission would almost certainly require hospitals to reconstitute their boards. They would need to replace some financially minded members with community-minded ones. And regulators like the I.R.S. may need to remove the tax-advantaged status for egregious actors so that boards take this threat seriously, just as in Pennsylvania.

While more regulation is not the panacea for U.S. health care, nonprofit boards may need even more help to reprioritize if they cannot do it themselves. There is an argument to put limits on profits for nonprofit organizations. Unlike health insurers, whose administrative costs and profit margins are capped at 15 to 20 percent, nonprofit hospitals have no limits. This could be fixed through legislation by Congress.

Ultimately, we need hospital boards to step up and chart their own courses. It is precisely because there is no one-size-fits-all solution that we need boards to organize around the mission. The needs of a rural community are different from those of an urban area around an academic center. Further, hospitals in rural areas often provide not just care but also much-needed jobs. But that’s why our best chance to fix hospitals may lie in activating boards for the common good.