Should Government Intervene to Protect Nonprofits?

Health Affairs

Volumn 17, Issue 5, 1998, Pages 7-25

  Bloche, M Gregg ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

COST BENEFIT ANALYSIS; ECONOMICS; FINANCIAL MANAGEMENT; HEALTH CARE AND PUBLIC HEALTH; HEALTH CARE POLICY; HEALTH MAINTENANCE ORGANIZATION; HUMAN; LEGAL APPROACH; LEGAL ASPECT; NON PROFIT HOSPITAL; NON PROFIT ORGANIZATION; REVIEW; UNITED STATES;

HEALTH CARE AND PUBLIC HEALTH; LEGAL APPROACH;

COST-BENEFIT ANALYSIS; FINANCING, GOVERNMENT; HEALTH MAINTENANCE ORGANIZATIONS; HEALTH POLICY; HOSPITALS, VOLUNTARY; HUMANS; ORGANIZATIONS, NONPROFIT; UNITED STATES;

EID: 0032162190     PISSN: 02782715     EISSN: None     Source Type: Journal    
DOI: 10.1377/hlthaff.17.5.7     Document Type: Article

References (56)

1. B.C. Vladeck, "Market Realities Meet Balanced Government: Another Look at Columbia/HCA," Health Affairs (March/April 1998): 37-39.
2. K. Eichenwald, "Columbia/HCA Discussions on Cost Shifting Were Secretly Taped by U.S. Informants," New York Times, 2 September 1997, D2; and K. Eichenwald, "U.S. Looks at Columbia/HCA Elderly Programs," New York Times, 22 August 1997, D1.
3. K. Eichenwald, "Columbia/HCA Discussions on Cost Shifting Were Secretly Taped by U.S. Informants," New York Times, 2 September 1997, D2; and K. Eichenwald, "U.S. Looks at Columbia/HCA Elderly Programs," New York Times, 22 August 1997, D1.
4. K. Eichenwald, "$100 Million Settlement Seen in Tenet Suits," New York Times, 30 July 1997, D1.
5. H.B. Hansmann, "The Role of Nonprofit Enterprise," Yale Law Journal 89, no. 5 (1980): 835-901.
6. In formalistic legal terms, nonprofits' earnings, like their other assets, must be used or held in trust for charitable (broadly defined) and/or community purposes and must not inure to the benefit of private interests.
7. H.B. Hansmann, "The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation," Yale Law Journal 91, no. 1 (1981): 54-89.
8. M.G. Bloche, "Corporate Takeover of Teaching Hospitals," Southern California Law Review 65, no. 3 (1992): 1035-1170.
9. M. Freudenheim, "New Jersey Blue Cross Takeover by For-Profit Insurer Is Canceled," New York Times, 11 June 1997, D1; and T. Lewin with M. Gottlieb, "Health Care Dividend," New York Times, 27 April 1997, A1.
10. M. Freudenheim, "New Jersey Blue Cross Takeover by For-Profit Insurer Is Canceled," New York Times, 11 June 1997, D1; and T. Lewin with M. Gottlieb, "Health Care Dividend," New York Times, 27 April 1997, A1.
11. B.H. Gray, "Conversion of HMOs and Hospitals: What's at Stake?" Health Affairs (March/April 1997): 29-47; and B.H. Gray, The Profit Motive and Patient Care: The Changing Accountability of Doctors and Hospitals (Cambridge: Harvard University Press, 1991).
12. B.H. Gray, "Conversion of HMOs and Hospitals: What's at Stake?" Health Affairs (March/April 1997): 29-47; and B.H. Gray, The Profit Motive and Patient Care: The Changing Accountability of Doctors and Hospitals (Cambridge: Harvard University Press, 1991).
13. Ironically, the nonprofits that benefit most from income tax exemption, those with the highest net incomes (as a percentage of revenues), tend to provide the lowest levels of uncompensated care. U.S. General Accounting Office, Nonprofit Hospitals: Better Standards Needed for Tax Exemption, GAO/T-HRD-91-43 (Washington: GAO, 1990).
14. Gray, "Conversion of HMOs and Hospitals."
15. The Treasury Department's defense of nonprofit hospitals' income tax exemption is illustrative. See "Tax-Exempt Status of Hospitals and Establishment of Charity Care Standards," Statement of Michael J. Graetz, deputy assistant secretary for tax policy, U.S. Department of the Treasury, at a hearing before the House Committee on Ways and Means, 102d Cong., 1st Sess (1991), 34-37.
16. K. Arrow, "Uncertainty and the Welfare Economics of Medical Care," American Economic Review (December 1963): 941-973. A classic argument for government support for nonprofits, occasionally invoked by critics of investor ownership in health care, builds on Burton Weisbrod's model of private charity as a response to the market's failure to produce a socially optimal supply of "public goods": products and services possessing positive externalities, from which "free riders" cannot be excluded. B.A. Weisbrod, The Nonprofit Economy (Cambridge: Harvard University Press, 1988), 25-31; and B.A. Weisbrod, The Voluntary Nonprofit Sector: An Economic Analysis (Lexington, Mass.: Lexington Books, 1977), 51-76. For an argument that Weisbrod's model does not apply to health care, see M.G. Bloche, "Health Policy Below the Waterline: Medical Care and the Charitable Exemption," Minnesota Law Review 80, no. 2 (1995): 299-405.
17. K. Arrow, "Uncertainty and the Welfare Economics of Medical Care," American Economic Review (December 1963): 941-973. A classic argument for government support for nonprofits, occasionally invoked by critics of investor ownership in health care, builds on Burton Weisbrod's model of private charity as a response to the market's failure to produce a socially optimal supply of "public goods": products and services possessing positive externalities, from which "free riders" cannot be excluded. B.A. Weisbrod, The Nonprofit Economy (Cambridge: Harvard University Press, 1988), 25-31; and B.A. Weisbrod, The Voluntary Nonprofit Sector: An Economic Analysis (Lexington, Mass.: Lexington Books, 1977), 51-76. For an argument that Weisbrod's model does not apply to health care, see M.G. Bloche, "Health Policy Below the Waterline: Medical Care and the Charitable Exemption," Minnesota Law Review 80, no. 2 (1995): 299-405.
18. K. Arrow, "Uncertainty and the Welfare Economics of Medical Care," American Economic Review (December 1963): 941-973. A classic argument for government support for nonprofits, occasionally invoked by critics of investor ownership in health care, builds on Burton Weisbrod's model of private charity as a response to the market's failure to produce a socially optimal supply of "public goods": products and services possessing positive externalities, from which "free riders" cannot be excluded. B.A. Weisbrod, The Nonprofit Economy (Cambridge: Harvard University Press, 1988), 25-31; and B.A. Weisbrod, The Voluntary Nonprofit Sector: An Economic Analysis (Lexington, Mass.: Lexington Books, 1977), 51-76. For an argument that Weisbrod's model does not apply to health care, see M.G. Bloche, "Health Policy Below the Waterline: Medical Care and the Charitable Exemption," Minnesota Law Review 80, no. 2 (1995): 299-405.
19. K. Arrow, "Uncertainty and the Welfare Economics of Medical Care," American Economic Review (December 1963): 941-973. A classic argument for government support for nonprofits, occasionally invoked by critics of investor ownership in health care, builds on Burton Weisbrod's model of private charity as a response to the market's failure to produce a socially optimal supply of "public goods": products and services possessing positive externalities, from which "free riders" cannot be excluded. B.A. Weisbrod, The Nonprofit Economy (Cambridge: Harvard University Press, 1988), 25-31; and B.A. Weisbrod, The Voluntary Nonprofit Sector: An Economic Analysis (Lexington, Mass.: Lexington Books, 1977), 51-76. For an argument that Weisbrod's model does not apply to health care, see M.G. Bloche, "Health Policy Below the Waterline: Medical Care and the Charitable Exemption," Minnesota Law Review 80, no. 2 (1995): 299-405.
20. This line of argument invokes Henry Hansmann's more general thesis that nonprofits are more efficient than for-profits at both commercial and charitable activities when those who pay for the activities are not able to knowledgeably assess their quality. Hansmann, "The Role of Nonprofit Enterprise."
21. Ibid. Hansmann, perhaps the leading proponent of this model, has argued that it probably does not apply to medical care for this reason.
22. There have been few empirical studies of comparative patient confidence in for-profit and nonprofit health care institutions. Consumer surveys suggest that patients see nonprofit HMOs as more trustworthy (and less inclined to skimp on care) than for-profits. Gray, "Conversion of HMOs and Hospitals." On the other hand, the recent explosive growth of investor-owned HMOs, relative to nonprofits, invites skepticism about the significance of this expressed preference for consumers' real-world health care spending decisions.
23. Hansmann justifies federal income tax exemption for some nonprofits along these lines. Hansmann, "The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation."
24. Insurance-driven demand has drawn sufficient debt capital to make up for nonprofit hospitals' lack of access to equity capital.
25. Bloche, "Health Policy Below the Waterline." The growing realization that health status is much more closely linked to education and economic opportunity than to medical spending raises new doubts about this spending.
26. In recent years historically low interest rates have made nonprofit firms' ability to issue tax-exempt debt relatively less valuable, while the soaring stock market has made equity financing extraordinarily attractive. These circumstances have made investor ownership unusually popular, in comparison with the nonprofit form, as a means of raising capital.
27. Hansmann, "The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation;" and Weisbrod, The Nonprofit Economy, chap. 2.
28. Hansmann, "The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation;" and Weisbrod, The Nonprofit Economy, chap. 2.
29. Because health insurance premiums constitute a diminishing portion of personal income as income rises, cross-subsidization from insured persons is a regressive way to finance care for the poor, compared with use of public funds raised through a flat or progressive tax. R.A. Carolina and M.G. Bloche, "Paying for Undercompensated Hospital Care: The Regressive Profile of a 'Hidden Tax'," Health Matrix: Journal of Law-Medicine (Summer 1992): 141-165. Proponents of "charity" care as a means for expanding access rarely acknowledge the regressivity of the underlying financing.
30. B. Ackerman, Reconstructing American Law (Cambridge: Harvard University Press, 1984).
31. Federalism attenuates this disadvantage to some extent, by allowing trial of government interventions in a few states before decisions are made about whether to adopt them more widely. Congress occasionally accomplishes something similar by setting up small "demonstration" projects to test novel and controversial policy ideas.
32. See Bloche, "Health Policy Below the Waterline."
33. The federal charitable exemption today extended to nonprofit hospitals was conceived prior to the end of the nineteenth century, when hospitals primarily served the poor. R. Stevens, In Sickness and in Wealth (New York: Basic Books, 1989), 17-30. Nonprofit hospitals' "promotion of health," the activity that qualified them as charities under the exemption, thus was a species of relief of the poor Bloche, "Health Policy Below the Waterline.
34. The federal charitable exemption today extended to nonprofit hospitals was conceived prior to the end of the nineteenth century, when hospitals primarily served the poor. R. Stevens, In Sickness and in Wealth (New York: Basic Books, 1989), 17-30. Nonprofit hospitals' "promotion of health," the activity that qualified them as charities under the exemption, thus was a species of relief of the poor Bloche, "Health Policy Below the Waterline.
35. H. Smith, The Power Game: How Washington Works (New York: Random House, 1988).
36. D. Shaviro, "Beyond Public Choice and Public Interest: A Study of the Legislative Process as Illustrated by Tax Legislation in the 1980s," University of Pennsylvania Law Review 139, no. 1 (1990): 64-106.
37. Some commentators do suggest that the political potency of interest groups renders government inherently less able than the marketplace to rationally organize health care provision. J. Macey, "Health Care Reform: Perspectives from the Economic Theory of Regulation and the Economic Theory of Statutory Interpretation," Cornell Law Review (September 1994): 1434-1458.
38. M. Radin, "Market Inalienability," Harvard Law Review (June 1987): 1849-1937.
39. National Conference on Charities and Correction, "The Division of the Work between Public and Private Charities," in Proceedings of the National Conference on Charities and Correction, ed. A. Johnson (Portland: Press of Fred. J. Heer, 1905).
40. J.D. Seay and B.C. Vladeck, "Mission Matters," in In Sickness and in Health: The Mission of Voluntary Health Care Institutions, ed. J.D. Seay and B.C. Vladeck (New York: McGraw-Hill, 1988), chap. 1.
41. G.F. Anderson et al., Providing Hospital Services: The Changing Financial Environment (Baltimore: Johns Hopkins University Press, 1989), 47-48.
42. See Note 22.
43. R. Titmuss, The Gift Relationship: From Human Blood to Social Policy (New York: Vintage Books, 1971), chap. 5.
44. To the extent that the case for an entitlement to care (or anything else) rests on the belief that access to it is an essential aspect of social membership, charitable provision devalues recipients by casting doubt on their social belonging. M. Walzer, Spheres of Justice (New York: Basic Books, 1983), chap. 2.
45. D. Mechanic, "Public Trust and Initiatives for New Health Care Partnerships," Milbank Quarterly 76, no. 2 (1988): 281-299.
46. D. Wikler, "The Virtuous Hospital: Do Nonprofit Institutions Have a Distinctive Moral Mission?" in In Sickness and in Health, chap. 5.
47. Bloche, "Health Policy Below the Waterline."
48. Employee Retirement Income Security Act of 1974, Sec. 514(a), as amended in 29 U.S.C.A Sec. 1144(a); and New York State Conf. of Blue Cross and Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995).
49. L.B. Miller, "The Conversion Game: High Stakes, Few Rules," Health Affairs (March/April 1997): 112-117.
50. On valuing charitable assets, see N.M. Kane, "Some Guidelines for Managing Charitable Assets from Conversions," Health Affairs (March/April 1997): 229-237. For detailed consideration of this and other regulatory challenges, see P.A. Butler, "State Policy Issues in Nonprofit Conversions," Health Affairs (March/April 1997): 69-84; S.R. Hollis, "Strategic and Economic Factors in the Hospital Conversion Process," Health Affairs (March/April 1997): 131-143; and D. Shriber, "State Experience in Regulating a Changing Health Care System," Health Affairs (March/April 1997): 48-68. In addition, the size and visibility of the largest investor-owned health care firms merit making them a focus for regulatory enforcement programs centering on billing practices, self-referral issues, and quality of care. The ongoing federal investigations into Columbia/HCA's business practices are a case in point. Not only have they forced Columbia/HCA's several hundred hospitals to drop a range of dubious billing and referral-inducing schemes, they also have signaled the entire medical industry that failure to cease such improprieties invites aggressive enforcement action. K. Eichenwald, "A Makeover May Change More than Columbia," New York Times, 8 August 1997, D1.
51. On valuing charitable assets, see N.M. Kane, "Some Guidelines for Managing Charitable Assets from Conversions," Health Affairs (March/April 1997): 229-237. For detailed consideration of this and other regulatory challenges, see P.A. Butler, "State Policy Issues in Nonprofit Conversions," Health Affairs (March/April 1997): 69-84; S.R. Hollis, "Strategic and Economic Factors in the Hospital Conversion Process," Health Affairs (March/April 1997): 131-143; and D. Shriber, "State Experience in Regulating a Changing Health Care System," Health Affairs (March/April 1997): 48-68. In addition, the size and visibility of the largest investor-owned health care firms merit making them a focus for regulatory enforcement programs centering on billing practices, self-referral issues, and quality of care. The ongoing federal investigations into Columbia/HCA's business practices are a case in point. Not only have they forced Columbia/HCA's several hundred hospitals to drop a range of dubious billing and referral-inducing schemes, they also have signaled the entire medical industry that failure to cease such improprieties invites aggressive enforcement action. K. Eichenwald, "A Makeover May Change More than Columbia," New York Times, 8 August 1997, D1.
52. On valuing charitable assets, see N.M. Kane, "Some Guidelines for Managing Charitable Assets from Conversions," Health Affairs (March/April 1997): 229-237. For detailed consideration of this and other regulatory challenges, see P.A. Butler, "State Policy Issues in Nonprofit Conversions," Health Affairs (March/April 1997): 69-84; S.R. Hollis, "Strategic and Economic Factors in the Hospital Conversion Process," Health Affairs (March/April 1997): 131-143; and D. Shriber, "State Experience in Regulating a Changing Health Care System," Health Affairs (March/April 1997): 48-68. In addition, the size and visibility of the largest investor-owned health care firms merit making them a focus for regulatory enforcement programs centering on billing practices, self-referral issues, and quality of care. The ongoing federal investigations into Columbia/HCA's business practices are a case in point. Not only have they forced Columbia/HCA's several hundred hospitals to drop a range of dubious billing and referral-inducing schemes, they also have signaled the entire medical industry that failure to cease such improprieties invites aggressive enforcement action. K. Eichenwald, "A Makeover May Change More than Columbia," New York Times, 8 August 1997, D1.
53. On valuing charitable assets, see N.M. Kane, "Some Guidelines for Managing Charitable Assets from Conversions," Health Affairs (March/April 1997): 229-237. For detailed consideration of this and other regulatory challenges, see P.A. Butler, "State Policy Issues in Nonprofit Conversions," Health Affairs (March/April 1997): 69-84; S.R. Hollis, "Strategic and Economic Factors in the Hospital Conversion Process," Health Affairs (March/April 1997): 131-143; and D. Shriber, "State Experience in Regulating a Changing Health Care System," Health Affairs (March/April 1997): 48-68. In addition, the size and visibility of the largest investor-owned health care firms merit making them a focus for regulatory enforcement programs centering on billing practices, self-referral issues, and quality of care. The ongoing federal investigations into Columbia/HCA's business practices are a case in point. Not only have they forced Columbia/HCA's several hundred hospitals to drop a range of dubious billing and referral-inducing schemes, they also have signaled the entire medical industry that failure to cease such improprieties invites aggressive enforcement action. K. Eichenwald, "A Makeover May Change More than Columbia," New York Times, 8 August 1997, D1.
54. On valuing charitable assets, see N.M. Kane, "Some Guidelines for Managing Charitable Assets from Conversions," Health Affairs (March/April 1997): 229-237. For detailed consideration of this and other regulatory challenges, see P.A. Butler, "State Policy Issues in Nonprofit Conversions," Health Affairs (March/April 1997): 69-84; S.R. Hollis, "Strategic and Economic Factors in the Hospital Conversion Process," Health Affairs (March/April 1997): 131-143; and D. Shriber, "State Experience in Regulating a Changing Health Care System," Health Affairs (March/April 1997): 48-68. In addition, the size and visibility of the largest investor-owned health care firms merit making them a focus for regulatory enforcement programs centering on billing practices, self-referral issues, and quality of care. The ongoing federal investigations into Columbia/HCA's business practices are a case in point. Not only have they forced Columbia/HCA's several hundred hospitals to drop a range of dubious billing and referral-inducing schemes, they also have signaled the entire medical industry that failure to cease such improprieties invites aggressive enforcement action. K. Eichenwald, "A Makeover May Change More than Columbia," New York Times, 8 August 1997, D1.
55. R. Pildes and C.R. Sunstein, "Reinventing the Regulatory State," University of Chicago Law Review (Winter 1995): 1-129; and G. Calabresi, Ideas, Beliefs, Attitudes in the Law: Private Law Perspective on a Public Law Problem (Syracuse, N.Y.: Syracuse University Press, 1985), chap. 5.
56. R. Pildes and C.R. Sunstein, "Reinventing the Regulatory State," University of Chicago Law Review (Winter 1995): 1-129; and G. Calabresi, Ideas, Beliefs, Attitudes in the Law: Private Law Perspective on a Public Law Problem (Syracuse, N.Y.: Syracuse University Press, 1985), chap. 5.