Philanthropic Arms Races vs. Charity
posted by Frank Pasquale
There have been a number of interesting pieces on charitable giving this holiday season. Peter Singer estimates how much individuals ought to feel morally obliged to give. Arthur Brooks argues that conservatives and the working poor are more inclined to charitable giving than society at large.
All of these news stories, as well as the supernova of Buffett-benevolence, tend to focus attention on charitable giving to the poor. However, some estimate that only 10% of all charitable giving in the U.S. helps the underprivileged. This has led to Congressional hearings on the topic, with some Republicans complaining about the nonprofit status of hospitals with low rates of charity care, and some Dems questioning donations to elite universities:
Representative Thomas and others are particularly vexed by nonprofit hospitals, often noting that data from the American Hospital Association calculated that their average spending on uncompensated care was 4.4
percent of their costs in 2002, compared with 4.5 percent for their commercial cousins. Representative Charles Rangel of New York, the senior Democrat on the Ways and Means Committee, has asked whether a better target may be universities, which sit on tens of billions of dollars in assets while tuition increases are outpacing inflation.
A big question here is: what’s behind these dynamics? As I suggest below the jump, a lot has to do with a pernicious interplay between increasing inequality and pervasive use of ranking systems as measures of quality for credence goods. In fields like education and health, where the quality of one’s experience is very difficult to evaluate objectively, ranking systems are forcing leaders into an arms race to acquire ever more resources.
Michael Kimel offers the following critique of multibillion dollar endowment campaigns:
In fiscal year 2006 alone, the top 25 university endowments grew an average of about 16%. . . . . [But] financing professor poaching feeds a vicious cycle of ever-increasing faculty salaries. As business journalist Joe Nocera noted recently, competition usually causes prices to go down, but competition among universities for faculty and students actually causes prices and costs to rise because “the ever-upward spiral of bigger salaries and better facilities and all the rest of it makes the running of the university that much more expensive.” In the words of John V. Lombardi, chancellor of the University of Massachusetts, “It’s an arms race.”
This is a valid (and ever more salient) point, but needs to be situated in a larger story about growing inequality. The elite universities aren’t just poaching talent from one another; they are also competing with other sectors of the economy. As Jacob Hacker shows in The Great Risk Shift, inequality is not just rising in general, but also among highly skilled workers. Taxpayers may not “have an interest in subsidizing ‘endowment races’ that suck scarce philanthropic resources from underfunded charities,” but they also don’t have an interest in the chasms of inequality that make such arms races necessary. Moreover, any agreement to limit salaries might provoke antitrust scrutiny.
Hospitals are facing similarly Darwinian competitive dynamics, and similar pressures toward wasteful spending (well, at least they don’t hoard!). Consider a great piece on “Hospital Wars” in Time. The reporter covers a growing battle between general and specialty hospitals–the latter are “leaner” entities, often having shed “ER’s” and other traditional forms of community service in pursuit of higher profits for physician-owners and the most advanced medical technology. Accusing their new competitors of “cherrypicking,” general hospitals are fighting back:
Such competition is fueling the arms race. “[New equipment] is one of the areas that we’ve beefed up since all the specialty stuff happened,” says [the CEO of a general hospital]. . . . [Its competitor] has remodeled its operating rooms, opened a $54 million, four-story critical-care building and invested in its own gadgetry. “We compete on technology and have to stay state of the art,” says Francie Ekengren, chief medical officer. And if they build it, we’ll fill it. The Medicare Payment Advisory Commission found that health-care markets with specialty hospitals have roughly 6% more cardiac surgeries and 9% more bypasses than markets without them. It’s not that doctors deliberately push unnecessary surgery, but when a choice of treatments exists, capacity and monetary incentives have been known to influence the choices physicians make.
So the Republican Congress’s recent decision to encourage “competition” in hospital care by letting lapse a Medicare moratorium on specialty hospitals has ended up spawning that great bugbear of conservative health economists: induced demand, which occurs when the need to pay for expensive equipment or facilities causes doctors to promote their use, regardless of genuine need.
What can we learn from the education and hospital wars? First, that “competition” is not always a good thing, and that some “everyday arms races” can be pretty wasteful.
Second, my sense is that a greater targeting of the charitable tax deduction is necessary. Donations intended to alleviate poverty, or serve the underprivileged, should be favored. I presented a philosophical case for this at the normative political theory section of the APSA conference, and I hoped to write it up as an article, but I don’t have enough time to really make this happen in 2007 doing it on my own. So this leads to a bleg: would anyone expert in tax like to co-author this with me? I’d be happy to send you what I already have–just write me at FIRSTNAME.LASTNAME@GMAIL.COM. (Sorry for the code–I’m getting way too much spam!)
December 21, 2006 at 9:39 pm
Posted in: Behavioral Law and Economics, Economic Analysis of Law, Politics
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Responses (1)
Maryland Conservatarian - December 22, 2006 at 6:29 pm
“It’s not that doctors deliberately push unnecessary surgery, but when a choice of treatments exists, capacity and monetary incentives have been known to influence the choices physicians make.”
…says Time without actually supporting that affirmation. From what I’ve read , Wichita is now a lot better off than it was a few years ago because they have new equipment, new buildings and it reads like the doctors are doing what they want to do. I think competition has worked in this instance.
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