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At a hearing yesterday in Kansas, one legislator bristled at my mention of hospitals making profits from the 340B drug program. If they’re “nonprofit,” how can they make profits? Or, put another way: Don’t believe your lying eyes.

The federal tax code creates multiple categories of nonprofit corporations. Basically, these entities cannot have shareholders or other owners with a right to their profits (what’s left of their revenues after expenses are paid). Instead, any profits must remain in the corporation, which must exist for one of the tax code’s specified reasons (charity, education, science, etc.). The benefit from this classification is exemption from federal income tax, and often from many state and local taxes as well.

Nonprofits can be extremely profitable. Not for investors, of course, but for employees. Just ask hospital executives and physicians. Or, as I suggested to the Kansas legislator, walk through the parking lot at your nearest big hospital. Plenty of people rake in serious profits from nonprofit hospitals.

None of this is new. An academic paper in 1983 explained (emphasis added):

The trend toward nonprofit hospitals is not explained by the failure of the health service markets and is not the result of a desire to serve the public interest more effectively. Although a number of arguments have been advanced to explain the shift, the hypothesis that seems most consistent with the existing evidence is that the nonprofit form of organization serves most effectively to strengthen the restrictive character of the market for physicians' services and thereby to serve the individual economic interests of the physicians.

More recently, KFF Health News explained the situation this way:

One owns a for-profit insurer, a venture capital company, and for-profit hospitals in Italy and Kazakhstan; it has just acquired its fourth for-profit hospital in Ireland. Another owns one of the largest for-profit hospitals in London, is partnering to build a massive training facility for a professional basketball team, and has launched and financed 80 for-profit start-ups. Another partners with a wellness spa where rooms cost $4,000 a night and co-invests with “leading private equity firms.”

Do these sound like charities?

These diversified businesses are, in fact, some of the country’s largest nonprofit hospital systems. And they have somehow managed to keep myriad for-profit enterprises under their nonprofit umbrella—a status that means they pay little or no taxes, float bonds at preferred rates, and gain numerous other financial advantages.

This is a massive market distortion, which is the technical way of saying it’s unfair. Small doctors’ offices pay taxes. Surgery centers pay taxes. Other kinds of medical businesses provide tremendous benefits to their communities but still pay taxes. Yet giant hospital systems can masquerade as nonprofits and receive huge tax breaks while making more in revenue and paying higher salaries than these other kinds of corporations.