This strikes at an issue we haven't really addressed enough in non-profits: how much community benefit do they need to offer?

A non-profit simply means that there are no investors who can profit from the business. However, I think we haven't really thought enough about how much community benefit they need to offer to justify being tax exempt - and it's a hard problem.

For example, let's say I run a non-profit hospital. We start getting a lot more revenue than costs. At a for-profit company, that's profits, but we don't have any investors. I decide "No, we shouldn't lower prices or forgive medical debt. I want to use that excess money to create a fancy new medical building with my name on it and to create a medical research unit that will bring prestige to the hospital (and hopefully useful medical research that will help people in the future)." Right now, that's an allowable non-profit use of that money. Universities do things like this all the time: a fancy new student center takes precedence over lower tuition.

How do we deal with this? It's hard. New buildings aren't simply unjustified costs. My city wants to build a new elementary school because the current one is crumbling. A hospital or university will likewise need to invest in its facilities, but at some point it potentially crosses a threshold from necessary and useful spending toward vanity and serving the institution more than it serves the mission. Universities spend money on research-only professors who don't teach and things like that drive up tuition costs, but is that a reasonable expense for a university? It can depend on who you ask because different people will have different opinions on the purpose of a university.

It's also hard because a successful non-profit will want to reinvest in itself and keep enough excess on hand in case something bad happens. Let's say I'm running a hospital and our costs are $1B in 2022 and we took in $1.2B. I use the excess $200M to rebate some of the fees to patients and forgive some medical debt. In 2023, our costs are again $1B and we took in $0.9B. Now I'm in a tough position. Do I lay off staff? Pay cuts? Take out a loan for $0.1B? What if 2024 is also a lean year?

Likewise, let's say that I'm trying to run a patient-friendly facility. We take people without insurance and don't make them worry about the cost. Even if I'm able to successfully run my facility, other non-profit facilities that aren't as friendly are taking in more money. They start to pay their doctors better. Their facilities are newer and better kept. Nurses complain that I'm being stingy with their contract. The other hospitals are publishing fancy papers and their doctors are giving conference talks that attract donors away from my hospital.

I think there's a survivorship thing happening here. If you have too little runway, you don't survive lean times. You run out of money and one of the less friendly hospitals "buys" your hospital (which often isn't a cash purpose since they're non-profits, but some sort of promise of keeping the mission of being a hospital alive).

Should the government bail out non-profits who are serving the community better? Maybe, but it's hard to define that. The fancy non-profit hospitals will argue that they're serving the community even better. The rich and connected probably see the fancy hospitals as better and are likely their donors. The general public probably doesn't understand that one hospital might be more forgiving than another. So the general political consensus will likely be "why should the taxpayer bail out a place that's 'poorly run' when the 'well run and better' hospital is willing to bail them out with no cost to the taxpayer?"

So, in order to keep my hospital, I can't run it too friendly. Plus, for my ego, I'd rather people think well of my hospital. I'd like to brag about the fancy new facility and have people think I'm doing something amazing. We give a lot more esteem to the president of Harvard than to the president of a school that's educating and helping way more people, but isn't as fancy.