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Co-Ops and the Non-Profit Hospital Boondoggle

By Philip Klein on 9.17.09 @ 10:46AM

In my article on the Max Baucus health care bill over on the main site, I note that far from being a free market alternative to a government plan, the non-profit co-ops he proposes creating would be elgible for $6 billion in government money to fund start up costs and would be exempted from federal taxes. But what would actually happen if the co-ops came into existence? So far, free market types have predicted co-ops would be a government plan by another name that could use unfair advantages to squeeze out private insurers, while liberals have argued that they would be a complete flop, with limited enrollment and not enough scale to seriously pressure private insurers into behaving humanely. An alternate way of looking at it is by examining another sector of the health care field in which there are non-profit and for-profit businesses: hospitals.

As it turns out, non-profit hospitals (which account for the majority of hospitals in the U.S.) are a a giant scam in which businesses benefit from their favorable tax status and rake in billions while in many cases they fail to deliver enough charity care to justify their tax subsidies. Last year, an analysis by the Wall Street Journal found that "combined net income of the 50 largest nonprofit hospitals jumped nearly eight-fold to $4.27 billion between 2001 and 2006..." The analysis also found that these so-called "nonprofits" were doing better than for-profit hospitals: "77 percent of the 2,033 U.S. nonprofit hospitals are in the black, while just 61 percent of for-profit hospitals are profitable..."

These nonprofits plough their earnings into construction projects and lush executive pay packages. They also buy political influence, which not only maintains their non-profit status, but protects them against competition. Over the years, for instance, they have used their power in Washington to block the growth of smaller specialty hospitals which are typically run by doctors and focused on one area (such as the heart), allowing them to give patients better one-on-one service than the massive and often dehumanizing factory hospitals.

Interestingly enough, elsewhere in his bill, Baucus seeks to address the problem by placing more demands on non-profit hospitals. But one could easily see how the non-profit co-ops would develop into something similar. In the beginning, perhaps, they'd be on their best behavior, but over time, we may just end up with a group of insurers that aren't operating with a social conscience, and yet are benefitting from unfair tax subsidies. It would be enough to infuriate both the left and right.

For a longer discussion on non-profit hospitals, see Regina Herzlinger's Who Killed Health Care?