Tax Exempt Status for Health Care Organizations – Get Some Fact$

I’ve been following the controversy about the tax-exempt status of non-profit organizations* since several hospitals (including the major teaching hospital affiliated with my alma mater) were chastised several years ago for charging uninsured patients more than insurance companies would have paid, and then sending collection agencies after these people. This was follow-up by Congressional hearings and investigations. More recently a bill was introduced here in Massachusetts to tax college and university endowments that are over $1 billion (which includes my undergraduate alma mater), and a few days ago the New York Times had an article about this issue and a state court case denying the tax-exempt status of a daycare center.

The rationale for these inquiries, court cases and public discussions is that because these non-profit organizations are tax-free, donations to them cost the government in the form of lost taxes, so they are effectively partially supported by the government, and by extension tax-payers – and therefore, the public should expect to get some benefits in return.

Having done a fair amount of work with non-profit organizations (including Bread for the City – a great community health provider in Washington DC where I served on the Board and chaired their fundraising committee), I’ve learned a bit about non-profit finances and rules.

There are two points that I would like to point out on this issue. First, most (if not all) large non-profit organizations work out financial arrangements to the cities where they are located to help pay for municipal services like fire and police. These are called PILOTs – which stands for Payments In Lieu Of Taxes. Universities and Hospitals are major payers of PILOTs to local communities. Of course, that doesn’t in any way make up for foregone State or Federal taxes.

Second, when people donate to non-profits they do so for many reasons – often because someone they know has asked them to donate. However, what many people do not know is that non-profits are required to provide anyone who asks a copy of their annual report AND a copy of their Form 990 TAX RETURN. (The organization can charge a reasonable copying fee, and smaller non-profits may not be required to file a 990.) And with the age of the internet, it is possible to get 990 Forms on-line from GuideStar. (Registration is free.)

One key piece of information to look at in the Form 990 is how much the organization is spending on fundraising and overhead.  For example, many telephone solicitations for organizations that sound like they are helping injured veterans or your local fire and police may actually be just fundraising machines – with only a tiny bit of the funds raised actually going to provide services or benefits. (I always ask, and often they claim to not know, but sometimes they tell me the number – which is generally below 10%)

The other key factor to look at is how much does the senior staff of the organization make? I did some work for a non-profit, (which I’ll decline to identify), that plead a scarcity of funds (despite having many corporate supporters), but according to their 990, out of budget of about $2 million, their President was being paid almost $500,000 a year – so this person was getting about 25% of their entire budget. This might not be too bad, except what they haven’t produced very much, most of their meetings are closed to the public, and their major goal seems to be providing a venue for senior people from member organizations to get to know each other.

Compare this organization’s financial compensation structure and productivity with another health care related entity – Health Care for All in Massachusetts. HCFA’s head (John McDonough) was paid a bit over $100,000 in 2006 (out of a total budget of about $2.5 million), they have dozens of employees, operate a help-line for individuals seeking public benefits like health insurance and food stamps, and were a major driving force behind the passage of the Massachusetts health insurance expansion law.

This comparison also reminds me of one I did in the mid-1990s between an average major pharmaceutical company and a very well known AIDS education and advocacy organization. The pie charts showing the percentages of their spending looked almost identical – with profits being about equal to retained revenue, marketing being about equal to fundraising, and administration/overhead, research and educational spending percentages also being about the same. (I showed the non-profit’s spending pie chart to an AIDS activist – with retained earnings and fundraising relabeled as profit and marketing – and he wanted to know which Pharma company it was from.)

I make these comparisons to illustrate two point. First, before donating to any non-profit you should look into their finances – if they are reluctant to share that information, then don’t donate and run away. And second, because not all non-profits are alike, whatever legislative or regulatory changes may be considered, we shouldn’t throw the hard-working baby out with the murky bath water.

OK – I’ve vented enough for one posting. I guess the bottom line, is that both Congress and individuals should be looking at where the money from non-profit organizations is going and what good the public is getting for that money.

* There are many types of non-profit organizations under the Federal tax code, but for simplicity I’m referring to the most common – the 501(c)(3) – which is the part of the tax code for community service organizations.

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