Nonprofit hospitals – When a nonprofit organization pays its CEO $5 million a year, it’s pretty obvious someone is profiting a lot, and that something is wrong. That was the situation in a court case in New Jersey this summer where the supposedly nonprofit Morristown Medical Center (owned by the Atlantic Health System) lost its tax-exempt status as it was operating like a for-profit hospital on almost every level.

In his decision, the judge pointed out that the medical center has various relationships with for-profit subsidiaries and owns several for-profit physician practices and other businesses The court was “unable to discern between non-profit activities carried out by the Hospital on the Subject Property, and the for-profit activities carried out by private physicians.”

Nonprofit Hospitals On The Ropes: Hedge Funds Moving In

In revoking the medical center’s property tax exemption, the judge noted: “By entangling and co-mingling its activities with for-profit entities, the Hospital allowed its property to be used for forbidden for-profit activities.”

The judge also emphasized that Morristown Medical Center paid its executives unreasonably high salaries for a nonprofit, including a completely unconscionable $5 million to its CEO in 2005.

Major implications for nonprofit hospitals in the future

Healthcare industry analysts immediately highlighted that this decision in New Jersey had major implications for other nonprofit hospitals across the country, and the judge was apparently quite aware of the stakes involved in his decision.

“If it is true that all non-profit hospitals operate like the Hospital in this case, as was the testimony here, then for purposes of the property-tax exemption, modern non-profit hospitals are essentially legal fictions,” Judge Vito Bianco noted in his decision.

Hedge funds moving in to buy financially stressed nonprofit hospitals

Hedge funds are also getting involved in buying nonprofit hospitals today. California Attorney General Kamala Harris has recently approved a $260 million investment deal with BlueMountain Capital Management and the Daughters of Charity nonprofit hospital group, in the biggest non-profit hospital transaction in the history of the state. Although the reaction was positive for the most part, as it “saves” the financially struggling hospital chain from bankruptcy, but many are also worried about the future when a for-profit hedge fund buys a Catholic organization with a mission to help poor people.

The sale included numerous conditions, such as requiring the hedge fund to maintain the primary mission of assisting low-income patients, conditions that were too much for another hedge fund suitor last year.

Critics say the deal is the start of a slippery slope, as BlueMountain hedge fund can now buy the whole hospital chain in just a few years. They are to keep at least five of the six hospitals open and maintain Medi-Cal contracts and services, but only for the next 10 years. BlueMountain can do almost anything it wants with the hospital after a decade, and that is very likely to be bad news for low-income California residents.

That said, nonprofit hospitals are in trouble across the country. As the court case discussed above highlights, many nonprofit hospitals have allowed the profit motive to creep deeper and deeper into their operations, meaning that some are losing their tax exemptions and all are coming under increased scrutiny.

Healthcare industry analysts also point out that non-profit hospitals are having problems adequately funding pension plans because of current low discount rates, which hurts their overall financial health and long-term financial viability.