Are nonprofit hospitals a scam?

Picture this: An organization that raked in $18 billion last year. Their CEO takes home $7 million annually. They sue poor people over unpaid bills, have bankrolled 80 for-profit startups, and are currently building an NBA training facility. Oh, and they don’t pay any income, property, or sales tax.

Believe it or not, I’m describing Cleveland Clinic, one of the nation’s approximately 3,000 nonprofit hospitals.¹

There’s a lot of talk about the ills of for-profit healthcare---as there should be---so people sometimes assume that nonprofits are the solution. If we take away the profit motive, hospitals will stop chasing revenue and finally put patients first, right?

In short, no. Nonprofit hospitals justify their tax breaks by claiming they provide essential community benefits like providing healthcare to those who can’t afford it, but in reality they usually pocket far more in tax savings than they spend on their communities. In fact, a whopping 86% of nonprofit hospitals spend less on charity care² than what they save in taxes---meaning taxpayers are essentially subsidizing hospitals that aren’t giving back nearly as much as they’re taking.

But nonprofit hospitals at least provide more charity care than for-profits, right? Also no. Turns out, they provide about the same amount---and sometimes even less. Even in low-income areas, where you’d expect nonprofits to step up, there’s no meaningful difference.

By now, you might be confused. Isn’t the whole point of a nonprofit that they don’t behave like this? What’s going on? And if both nonprofit and for-profit hospitals are prioritizing money over everything else…why are we giving one of them billions in tax breaks? Are we getting scammed??

I’ll address all these ideas below. But first, if you take one thing away from my entire Substack, let it be this: industries are hard to regulate because the people inside them are smart, motivated, and not particularly interested in being regulated. No one just shrugs and accepts new rules that cut into their bottom line---they work very hard to find ways to continue making a livelihood within their new constraints. And they often do so in ways that are creative, unexpected, and create a host of their own problems that regulators never saw coming.

So what even is a nonprofit?

When most people hear the word “nonprofit,” they think of organizations with charitable missions---things like homeless shelters, food banks, or scholarship funds. That’s largely true. At its core, a nonprofit organization is meant to serve the public good rather than generate money.

But in a more technical sense, what actually makes an organization a nonprofit isn’t just its mission, it’s a weird quirk about ownership. Unlike for-profit companies, nonprofits aren’t “owned” by anyone. This means that nonprofits can’t be bought or sold like regular businesses. It also means that there are no stockholders expecting dividends or owners cashing in. Instead, any money a nonprofit brings in must be spent or reinvested into the organization to support its mission.

This is where the term nonprofit causes confusion: these organizations can and do turn a profit (when revenue exceeds expenses). But instead of distributing the surplus, the money stays where it is.

This mechanism is what allows nonprofits to safely accept donations. Think about this: if you gave $100 “donation” to a café, the owner would use it in a way that benefits them. Maybe they’d buy better coffee beans to attract more customers to their business, but maybe they’d just pocket it. That’s how businesses work: money flows toward whatever keeps them competitive or profitable, and the extra is kept by the owners. But with a nonprofit, there’s no owner collecting the extra cash. In theory, this ensures that donations actually support the cause rather than someone’s personal bank account.

Unlike for-profit companies, nonprofits don’t pay federal income taxes, and in many cases, they’re also exempt from state and local taxes. The rationale is that nonprofits provide essential social services like healthcare, charitable aid, and education that would otherwise fall on the government to provide. Instead of taxing these organizations and then using that revenue to fund similar programs, we let them keep their earnings tax-free so they can continue their work. In exchange for this sweet tax-free status, they’re expected to reinvest their earnings into their mission.

But here’s where things get murky.

Hospital Rags to Hospital Riches

For the nonprofit hospital system to make sense, you have to consider how dramatically healthcare has changed over the past fifty years---most notably, how much money is now at stake.

Nonprofit hospitals weren’t always a thing. In the early 20th century, most hospitals were either public (government-run) or religious/charitable institutions that operated on donations and grants. They often provided care to anyone who needed it, including people who couldn’t pay. Medicine itself was a lot simpler too. The tax code was written at a time when doctors were making house calls and prescribing cocaine and vibrators and today we have robotic-assisted microsurgery. Over the past fifty years, advances in medical technology, the rise of specialized care, and the expansion of government and private insurance have driven explosive growth, making modern hospitals one of the largest and most profitable sectors of the U.S. economy. The profession of medicine is old, but the industry of medicine is very new.

So hospitals have gotten a lot more expensive to run and the U.S. healthcare system has gotten a lot more complex, and during that time a lot of these charitable hospitals evolved into large, powerful health systems. What happens to a nonprofit at the center of a massive industrial boom?

Well, remember that quirk that requires all the profits to stay within the organization? This structure has led to an unintended side effect: nonprofit hospitals amassing enormous financial reserves over time.

Here’s how it happens: Since nonprofits aren’t allowed to distribute profits, they reinvest their excess revenue back into the organization. In practice, hospitals often spend their surpluses on expansion---buying up smaller hospitals and clinics, constructing new buildings, or investing in high-end specialty services that attract lucrative, well-insured patients. The money doesn’t disappear; it just gets absorbed into a growing institutional footprint.

Over time, this creates a stockpile effect. With no owners to return their profits to, nonprofit hospitals can just keep piling up cash. There’s no pressure to spend down their reserves, so a lot of this money is invested.

This is the same idea as an endowment---the thing you might have heard your alma mater handwringing about (because yes, almost all private universities are also nonprofits). The Cleveland Clinic Foundation, for example, has around $12.5 billion in investment assets, while Kaiser Permanente manage tens of billions in private equity and other investments. These are tax-exempt organizations sitting on financial cushions that rival some of the world’s top corporations or sovereign wealth funds.

Now, I know I’ve been shitting on Cleveland Clinic this whole time, so in the spirit of fairness, it’s worth noting that investments do serve an important operational purpose. Healthcare can be unpredictable, and hospitals need financial stability to weather economic downturns, fund medical research, and invest in new technology. Unlike grant money, which usually comes with strings attached, investment income can be used however the hospital sees fit. A strong investment portfolio ensures they can continue operating during crises, expand access to high-quality care, and remain independent from market pressures that force for-profits to cut costs or chase higher-margin services. For example, their eye-watering nest egg is what helped the Cleveland Clinic overcome the budget deficit they incurred during the COVID-19 pandemic.

It's also worth noting that not all nonprofit hospitals are playing this game. The issues I’m talking about mostly apply to large, well-funded health systems---those with billions in revenue, hundreds of thousands of beds, and multi-hospital networks. Smaller nonprofit hospitals, especially those in rural or underserved areas, often do struggle financially and rely on tax exemptions just to stay afloat. Some genuinely serve their communities in ways that for-profit hospitals often wouldn’t bother with. But the fact that some nonprofits are fulfilling their mission doesn’t change the bigger problem: the largest, wealthiest nonprofit hospitals---the ones that benefit the most from tax breaks---are often the ones least in need of them.

So I think it’s worth asking, are we cool with this? These huge reserves don’t necessarily translate into lower patient costs, more accessible care, or better health outcomes. Instead, they might be funding prestige projects, real estate expansions, executive salaries, or the endless growth of investments, all while hospitals maintain aggressive billing practices and skimp on charity care. Let’s revisit my point from earlier:

Unlike for-profit companies, nonprofits don’t pay federal income taxes, and in many cases, they’re also exempt from state and local taxes. The rationale is that many nonprofits provide essential social services, healthcare, and education that would otherwise fall on the government to provide. Instead of taxing these organizations and then using that revenue to fund similar programs, we let them keep their earnings tax-free so they can continue their work.

Does that rationale still hold up in the age of nonprofit megahospitals? Because right now, it looks like we’re giving nonprofit hospitals billions in tax breaks so they can hoard cash and invest like hedge funds. They aren’t providing meaningfully more charity care than for-profits, they aren’t making healthcare more affordable, and they certainly aren’t acting like charities. And yet, we keep treating them like public goods instead of what they really are: big businesses in one of the nation’s largest and most profitable industries.

By now you might be wondering: if this is really as big a deal as Nova seems to think, why does it seem like nobody is talking about it? Well, probably because it’s fucking boring. It’s the kind of policy discussion that makes people avoid me at dinner parties. Politicians aren’t winning elections by explaining nonprofit tax exemptions to their constituents. It’s easier to shout about divisive (if not politically intractable) issues like single-payer healthcare than to tell voters that their local children’s hospital might actually be a billion-dollar financial empire playing a legal tax dodge.

So yeah, maybe it’s time to revisit the tax code. Maybe it’s time to actually demand something in return from our hospitals. A few ideas:

First, make them earn it. Right now, hospitals claim “community benefit” for things like physician training, marketing, and “research” that sometimes just means funding their own prestige projects. Set a real requirement---say, 5% of revenue---and make it actual charity care. If they don’t meet it, they lose their tax perks.

Second, stop the debt-collection shakedown. Nonprofit hospitals love to talk about their commitment to caring for the underserved, but many turn around and sue low-income patients, garnish wages, and send collections after people who can’t pay. No more tax breaks for institutions that act like loan sharks.

Third, give regulators some teeth. Right now, there’s no real enforcement mechanism to keep nonprofit hospitals in check. The Federal Trade Commission should have the power to regulate them, ensuring they operate in ways that actually serve the public. If they don’t want to play by the rules of a nonprofit, fine---let them pay taxes like everyone else.

So let’s connect the dots: we've created a system where these “nonprofits” receive enormous public subsidies without delivering proportionate public benefits. Every tax dollar they don't pay is a dollar that could fund education, infrastructure, or even direct healthcare services for those who truly need them. And until we demand more accountability, billion-dollar hospital systems will continue operating like businesses while enjoying the privileges of charities. The first step toward change is recognizing that what we're dealing with isn't just a wonky policy issue, it's a massive transfer of public resources to institutions that increasingly resemble the for-profit entities they claim to be different from.

These hospitals have perfected a brilliant formula: Act like a hedge fund, bill like a loan shark, pay executives like Wall Street, and get taxed like a soup kitchen. So sure, nonprofit hospitals weren’t designed to be a scam. But at this point, what else would you call it?

1. I know it sounds like I’m fucking with you but Cleveland Clinic literally generated $18 billion in revenue last year, pays their CEO $7 million a year, sues people for unpaid bills, has launched and financed 80 for-profit start-ups, and is building a training facility for a professional basketball team.

2. Charity care---free or reduced-cost medical care for patients who can’t afford to pay---is the main justification for nonprofit hospitals’ tax breaks.