Nonprofit health-care organizations in Central Pennsylvania proudly proclaim their status as charitable entities. Nonprofit hospitals market themselves as refuges for the poor and uninsured. Nonprofit insurers tout their efforts to improve people's access to medical services.
Yet many of these organizations are similar to their for-profit competitors. Several nonprofit hospitals, health systems and insurers in the midstate operate forprofit subsidiaries. These entities include pharmacies, dental insurers, real estate companies and printing operations.
Nonprofit health-care organizations operate for-profit subsidiaries for a number of reasons, observers said. The subsidiaries can help an organization protect its tax-exempt status, generate new sources of revenue and broaden its range of services.
Operating for-profit subsidiaries allows tax-exempt health-care organizations to get into new businesses without putting their tax status in jeopardy, said Jack Owen, a Pittsburgh attorney who works with nonprofit groups. A nonprofit group that strays too much from its charitable mission can attract scrutiny from the government entities that give it tax breaks, he said.
"The idea is that when (nonprofit organizations) are getting revenues from these unrelated operations, they don't need government support," Owen said. The group can avoid this scrutiny if it funnels any business not directly related to its mission into for-profit organizations that are subject to taxes.
For-profit subsidiaries are especially attractive to hospitals and health systems because they provide a way for these organizations to raise capital needed for building-improvement projects and new equipment, said Don Kramer, a Philadelphia attorney. Unlike their for-profit counterparts, nonprofit hospitals cannot sell stock to raise money. However, a for-profit subsidiary that makes money can pay dividends to its nonprofit parent, once the subsidiary pays taxes.
Highmark Inc.'s for-profit subsidiaries allow the nonprofit insurer to offer a wide range of products to its customers, said Robert Gray, chief financial officer of the Pittsburgh-based health insurer. Highmark, which operates as Highmark Blue Shield in this area, has several forprofit businesses, including a dental insurer, vision benefits companies and an eyeglass manufacturer. Most profits from these companies are reinvested into the individual companies or used to boost Highmark's reserves, Gray said.
"The successful health insurers will be those that provide a one-stop shop," Gray said.
Capital BlueCross in Susquehanna Township also operates for-profit subsidiaries, according to information from the Pennsylvania Insurance Department. These subsidiaries include Keystone Health Plan Central and Capital Advantage Insurance Co. Officials with the Dauphin County-based carrier could not be reached for comment.
Good Samaritan Health System operates a surgery center and a magnetic resonance imaging, or MRI, center as joint ventures with local doctors. Partnering with doctors meant that the centers had to be operated on a for-profit basis, said Bob Richards, vice president of finance and chief financial officer of Good Samaritan Hospital. The hospital is part of the Lebanon-based nonprofit health system. The system also owns a real estate company that owns the land on which the centers sit, Richards said.
Although it is common for nonprofit health-care organizations to run for-profit subsidiaries, the arrangement does not work for all charities. Many groups consider getting into for-profit businesses but end up rejecting the idea, Owen said.
There are potential pitfalls for nonprofit groups that have for-profit operations, said Christopher P. Markley, senior vice president of community relations for PinnacleHealth System. The Harrisburgbased nonprofit system got rid of its forprofit operations several years ago.
Nonprofit groups are limited in how they can subsidize for-profit operations that start to lose money, Markley said. Charities that start spending too much money to buoy a struggling subsidiary can incur the wrath of donors, he said.
"People give money to a nonprofit thinking they're giving to a charity, not a business," Markley said.
Nonprofit groups also must be careful to report for-profit activities appropriately to government entities such as the Internal Revenue Service, said Gary Dubas, a partner with McKonly & Asbury. The accounting firm is based in Hampden Township, Cumberland County. Having good reporting practices in place becomes critical if the IRS or a state questions for-profit activities, he said.
In addition, many nonprofit organizations are small and lack the expertise and the resources to run businesses, Kramer said.
"It's hard to run a nonprofit, and it takes a lot of effort to also run a business," he said.
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