Why are so many nonprofit hospitals (wink, wink) swimming in money?

One owns a for-profit insurer, a venture capital firm, and for-profit hospitals in Italy and Kazakhstan; he just acquired a fourth for-profit hospital in Ireland. Another owns one of the largest for-profit hospitals in London, is collaborating to build a massive training facility for a professional basketball team, and has launched and funded 80 for-profit start-ups. Another is a partner in a $4,000-a-night spa and co-invests with “leading private equity firms.”

Does this sound like a charity?

These diverse businesses are, in fact, some of the nation’s largest nonprofit hospital systems. And they’ve somehow managed to keep countless for-profit businesses under the nonprofit umbrella — a status that means they pay little or no taxes, issue bonds at preferential interest rates, and gain a host of other financial benefits.

Through legal intrigue, regulatory failures, and a significant amount of lobbying, these organizations have remained tax-exempt charities, classified as 501(c)(3).

“Hospitals are among the largest businesses in the United States—nonprofit in name only,” said Martin Gaynor, a professor of economics and public policy at Carnegie Mellon University. “They figured out they could own for-profit businesses and still be nonprofits. So the parking lot is for-profit; the laundromat is for-profit; they’re opening for-profit entities in other countries that are clearly designed to make money. Great job if you can do that.”

Many universities’ strongest revenue streams come from their technically nonprofit hospitals. At Stanford University, 62% of its fiscal 2023 operating revenue came from health services; at the University of Chicago, patient services accounted for 49% of its fiscal 2022 operating revenue.

Of course, the primary source of income for many hospitals will likely continue to be costly patient care. Because they are nonprofits and therefore by definition cannot show anything called a “profit,” excess revenue is called “operating surplus.” Meanwhile, some nonprofit hospitals, especially in rural and inner-city areas, are struggling to stay afloat because they rely heavily on lower Medicaid and Medicare payments and have no alternative sources of income.

But the investments are making an “increasing difference” in the financial performance of many large systems, said Ge Bai, a professor of health care accounting at Johns Hopkins University Bloomberg School of Public Health. The investment income has helped Cleveland Clinic overcome a deficit it ran up during the pandemic.

When many American hospitals were founded over the past two centuries, mostly by religious groups, they were granted nonprofit status for providing free care at a time when fewer people had insurance and bills were modest. The institutions operated on razor-thin margins. But as more Americans gained insurance and treatments became more effective—and more expensive—there was money to be made.

Nonprofit hospitals merged with each other, pursuing economies of scale, such as pooling purchases of linens and surgical supplies. Then, in this century, they began taking over parts of health systems that had long been for-profit, such as physician groups and imaging and surgery centers. That raised some legal questions—how could a nonprofit simply take over a for-profit?—but regulators and the IRS let it happen.

In recent years, for-profit partnerships and ownership have increasingly deviated from the purported charitable mission of providing health care to the community.

“When I first saw this, I was stunned—I said, ‘This is not charity,’” said Michael West, an attorney and senior vice president of the New York Council of Nonprofits. “I’ve wondered for a long time why these entities get away with it. I just don’t see how it’s legal under the IRS code.” West also noted that they don’t behave like charities: “I mean, everyone knows someone who has a $15,000 bill they can’t pay.”

Hospitals receive tax breaks for providing “charitable care and community benefit.” But how much charity care is enough and, more importantly, what types of activities are considered “community benefit” and how should they be valued? IRS guidance released this year remains unclear on the issue.

Researchers who study the subject consistently find that the value of the good work many hospitals do pales in comparison to the value of their tax breaks. Studies have shown that nonprofit and for-profit hospitals spend about the same share of their spending on charity care.

Here are some of the things listed as “community benefits” on hospital systems’ 990 tax forms: creating jobs; building energy-efficient facilities; hiring minority- or women-owned contractors; improving parks by providing lighting and comfortable seating; and creating healing gardens and spas for patients.

All these works are good, but are they really?

Moreover, to justify engaging in for-profit activities while maintaining nonprofit status, hospitals must link their operating revenues to that mission. Otherwise, they pay unrelated business income tax.

“Their CEOs—many from the corporate world—talk nonsense and do somersaults to prove a point,” said Lawton Burns, a management professor at the Wharton School at the University of Pennsylvania. “They do a lot of profitable things—they’re very smart and entrepreneurial.”

It is true that many nonprofit hospitals have become wealthy, diversified businesses. The most visible manifestation of this is the enormous executive compensation of many of the nation’s large health systems. Seven of the 10 highest-paid nonprofit CEOs in the United States run hospitals and are paid millions, sometimes tens of millions, of dollars a year. The CEOs of the Gates and Ford foundations earn much less, at just over $1 million.

When challenged about the generous compensation packages—as is often the case—hospitals respond that running a hospital is a complicated business, and that pharmaceutical and insurance executives earn much more. Moreover, board compensation committees set payouts by taking into account salaries at comparable institutions as well as the hospital’s financial performance.

One obvious reason for regulatory tolerance is that hospital systems are major employers—the largest in many states (including Massachusetts, Pennsylvania, Minnesota, Arizona, and Delaware). They are major lobbying forces and major donors in Washington and state capitals.

But some patients have had enough: Last year, a judge in a lawsuit brought by a local school board ruled that four Pennsylvania hospitals in the Tower Health system had to pay property taxes because executive pay was “exorbitant” and they demonstrated “a profit motive through activities such as charging management fees to their hospitals.”

A 2020 Government Accountability Office report criticized the IRS for not being vigilant in reviewing nonprofit hospitals’ community benefits and recommended ways to “improve IRS oversight.” A subsequent GAO report to Congress in 2023 said, “IRS officials have informed us that the agency has not revoked hospitals’ tax-exempt status for failing to provide sufficient community benefits during the previous 10 years” and recommended that Congress set more detailed standards. The IRS declined to comment for this column.

Attorneys general, who regulate charities at the state level, could also get involved. But in practice, “there’s no accountability,” West said. “Most nonprofits live in fear of the attorney general. Not hospitals.”

Today’s large hospital systems are doing wonderful, life-saving things. But they are not imitating Mother Teresa. Maybe it’s time to end the farce of community benefits for those who exploit them, and for these large companies to pay at least some of their taxes. Communities could then use those dollars in ways that directly benefit the health of their residents.

KFF Health News is a national newsroom that produces in-depth health journalism and is one of the primary operating programs of KFF, an independent source of health policy research, polling, and journalism. Learn more about KFF.