Made by History

For Hospitals, ‘Nonprofit’ Doesn’t Mean ‘Charitable’

8 minute read

In June, a New York Times investigation revealed that a wealthy nonprofit hospital system in the Midwest has been withholding care from debt-strapped patients. This revelation highlighted how, when it comes to healthcare, “nonprofit” is far from synonymous with “charity.”

Instead, many nonprofit health systems employ aggressive collections procedures that prioritize profits over people. And while some see them as a byproduct of the modern medical system, these procedures are actually nothing new. For more than 70 years, the health care industry has used public relations campaigns to legitimize medical debt and hide the large profits they make. The result is tens of millions of Americans trapped in debt—all for care in hospitals subsidized by the public.

President Franklin D. Roosevelt tried to include national health insurance in his New Deal in the 1930s. When he was unsuccessful, his successor Harry Truman tried again. But like Roosevelt, he ran into bitter opposition from the American Medical Association (AMA) and the American Hospital Association (AHA). The medical associations demonized the idea of a national health insurance program as socialism. Yet, they understood that linking national health insurance to the Communist menace wouldn’t be enough to defeat such proposals. They had to offer an alternative—one which promised Americans access to health care, especially expensive hospital care.

Their answer was to push for nonprofit hospitals. 

George Bugbee, the AHA’s executive director and the main Washington lobbyist for the nonprofit hospital sector, worked closely with Surgeon General Thomas Parran to flesh out details of what in 1946 would become the Hill-Burton Act. The bill provided nearly $4 billion for nonprofit hospital construction during the 1950s and 1960s. This money ensured that communities would have hospitals—but it offered no legal commitment to providing Americans with health or hospital care.

Read more: The Surprising Origins of 'Medicare for All'

While the Hill-Burton Act generated strong bipartisan support, there was fierce disagreement as to whether it would be a starting point or an end point. Conservatives like Sen. Robert Taft (R-Ohio) strongly believed that the bill, along with legislation that subsidized employer-based health insurance and provided grants to states to care for the medically indigent, would solve the problem of access to medical care. Liberals, by contrast, worried that Hill-Burton would result in taxpayers subsidizing a health care system with no promises that Americans could afford care.

These fears proved founded. Hill-Burton catalyzed a hospital building boom that included 40% of the counties that lacked a hospital in 1945. Yet, hospital prices continued to increase, and many patients at nonprofit hospitals could not—or would not, according to hospital administrators—pay their bills.

Hill-Burton required nonprofit hospitals that received construction funding to provide a “reasonable volume” of free care to residents who could not afford to pay. But no regulation stipulated what constituted a reasonable volume.

That freed the AHA and state hospital associations to encourage member hospitals to aggressively pursue the increasing number of patients who couldn’t afford their bills. The association prodded hospitals to make every effort to collect payment at the time of admission for uninsured and under-insured patients. In 1950, for example, one administrator in Warsaw, N.Y., wrote that the hospital’s follow-up cards have “given us excellent results in securing payment from delinquent accounts, [and] the follow-up procedure starts the moment of the patient’s admission.”

Recognizing, however, that hounding patients to pay bills could create backlash, the AHA and state associations taught nonprofit hospitals how to conduct public relations campaigns to spin such efforts. 

Throughout the 1950s, AHA’s monthly journal Hospitals counseled members on how to explain why costs kept increasing and why patient bills were necessary. One such article by Hiram Sibley, the executive director of the Connecticut Hospital Association, advised hospital executives to tout “new equipment” and “hospital expansion,” and explain how they’d benefit patients and the community. That would enable executives to show “how medical developments must be reflected in the patients’ bills.” As Bugbee put it, hospitals needed to “Exploit these exciting and dramatic” advancements instead of apologizing for their bills.

But public relations campaigns could only do so much, and patients began to criticize hospital billing and collection procedures. One administrator in Connecticut, for example, reported that while the number of unpaid bills were down, staff had started to receive “complaints from patients who said they had been ‘insulted’... because of the way admitting officers had asked for money.”

Rather than adjust their policies, the AHA counseled member hospitals to engage in another round of public relations campaigns. To protect their standing in the community, hospitals needed to change local opinions regarding rigorous collections. 

One hospital in South Dakota followed this advice. It used banks to offer loans to patients to cover medical debt. Not surprisingly, using banks to finance medical debt worked well to reduce unpaid accounts. However, still worried about public opinion, the hospital also collaborated with the local newspapers to explain its “predicament.”

One local paper wrote about how residents should feel a “propriety interest” in the hospital, because they financed it, “keeping it open, improving and enlarging it.” But there were people who would “never will pay their bill unless forced to do so. Yet these people become sick just the same as those who carry their share of the load.”

The campaign pitted those who could pay against those who could not. And the hospital defended charging “intentionally high interest” to those who could not pay to encourage those patients to go “to the bank rather than the hospital for this paper.” In other words, going into debt to pay for care was not only acceptable, but expected. 

The passage of Medicare and Medicaid in 1965 convinced many—including the IRS—that national health insurance was right around the corner. This perception exacerbated the billing situation because national health insurance would have eliminated the need for charity care. As such, the IRS expanded the definition of what nonprofit hospitals could count to fulfill their obligations for tax-exempt status. This change gave hospitals more leeway to avoid providing free care without losing their tax-exempt status.

Yet, the IRS misread the politics of healthcare. It took 45 years for another significant coverage expansion to take place with passage of the Patient Protection and Affordable Care Act (ACA) in 2010. 

The law included new requirements for nonprofit hospitals. But, perhaps due again to the false hope of the ACA eliminating the need for charity care and erasing medical debt, as well as fierce lobbying from the nonprofit hospital industry, the regulations only required more reporting to justify hospitals’ nonprofit status. Again, they were silent on the amount of charity care that should be provided and continued to allow nonprofit hospitals to legally pursue aggressive collections.

Today, a staggering 100 million Americans have medical debt, and their bills make up about half of all outstanding consumer debt in the United States. Equally staggering are the debt-collection policies of nonprofit hospitals—which account for two-thirds of the country’s hospitals—and their continued use of public relations to convince Americans that all patients should pay, whether they can afford it or not. In response to the Kaiser Family Foundation’s recent report on medical debt and hospital collections, a nonprofit hospital executive sounded like his counterparts from the 1950s: “We don’t want to promote the concept that medical bills just go away, especially for those who are able to pay.”

Read more: She Owed $227,000 in Medical Bills—Even With Insurance. Here's What it Took to Pay Them

Such ideas are as old as the non-profit hospital movement itself. And they ignore both the fact that taxpayers subsidized the building of these hospitals as public goods, as well as the massive profits such hospitals make—which often go to lavish executive salaries. In 2018, nonprofit hospital CEOs were paid on average $600,000 per year, though some of the largest systems pay much more: Kaiser Permanente’s CEO made $18 million, and the CEO of Ochsner’s academic hospital health system in New Orleans received $5 million in compensation.

By pitting “deserving patients" against “undeserving” ones, hospitals justify continual increases in costs and the need for aggressive collections, all while executive compensation continues to rise and Americans are drowning in medical debt. This system has failed to serve the public well for more than a half century, and it’s time to recognize the speciousness of the arguments made by hospital executives.

Colleen M. Grogan is the Deborah R. and Edgar D. Jannotta Professor in the Crown Family School of Social Work, Policy, and Practice at the University of Chicago and the author of Grow and Hide: The History of America’s Health Care State. Made by History takes readers beyond the headlines with articles written and edited by professional historians. Learn more about Made by History at TIME here.

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