The Nonprofit Game

UNFAIR COMPETITION: THE PROFITS OF NONPROFITS by James T. Bennett and, Thomas J. DiLorenzo, Lanham, Md: Hamilton Press, 214 pp., $19.95 cloth; $10.95 paper

IF you never thought nonprofit organizations were worth thinking about, much less reading about, you ought to think again and read ``Unfair Competition: The Profits of Nonprofits,'' by James Bennett and Thomas DiLorenzo.

This extensively documented and instructive book reveals how many nonprofit institutions are legally involved in more than the charitable or educational work they advertise. In fact, only 10 percent of nonprofits are involved in charitable work of any kind, leaving a huge percentage of the rest selling products on the free market in direct competition with profit-seeking companies.

The private nonprofit sector, which includes groups ranging from the United Way to huge hospital chains, is composed of 1.2 million organizations that produce 10 percent of the gross national product.

The problem is not that nonprofits sell goods and services, but that they sell them at an advantage over for-profits by using a wide variety of governmental favors. Nonprofits pay no federal income tax, state income tax, or property taxes, and they are not regulated by bureaucracies such as the Federal Trade Commission. Nonprofit employees can contribute more in tax-free money to retirement accounts than employees of for-profits. Nonprofits receive special prices from the taxpayer-supported postal service.

Some of the most painful side effects of this unfair competition have been felt in the hospital industry. In 1910, 56 percent of the 4,359 hospitals in America were profit-seeking entities; by 1984, thanks to government favoritism to nonprofits, only 15 percent of 6,782 were profit-seeking. The rationale for promoting nonprofits is that they provide better care because they have no incentive to reduce quality in order to maximize profits, and they more readily offer care for the indigent. Don't believe it.

The authors provide compelling evidence that for-profit hospitals are more efficient and cheaper and that they provide better care than nonprofit and government hospitals. Profit-seeking hospitals ``do as much, if not more, to serve the needy.'' And nonprofits ``can rarely be considered charitable institutions.'' While profit-seeking hospitals direct profits to owners or shareholders, nonprofits direct net revenues (the profits) to trustees, administrators, doctors, and nurses in the form of salaries, benefits, and perks.

So great is the incentive for nonprofit hospitals to seek profits that some are running highly profitable catering services for the general public, while others have become middlemen in the pharmaceutical business, sometimes to the detriment of medical consumers. Using tax and regulatory relief, ``an entire industry has sprung up to purchase excess pharmaceuticals using [nonprofits'] special discount,'' with the excess being sold at a higher price to ``brokers'' who push them on the retail market.

Profit-seeking physical fitness clubs are also being outrun by unfair competitors, mostly the YMCA. Though the YMCA has an image of getting poor kids off the street and into the gym, some YMCAs of the '80s provide glittering, ``no-kids'' facilities with plush carpeting and the hushed, dignified ambience of a ritzy men's club: uniformed attendants, squash courts, gleaming Olympic pools, massage tables, saunas, lounges with color TVs, and full fitness centers. And some offer classes on subjects like ``Our Changing Tax Laws,'' ``Building Your Estate,'' and ``Preserving Assets.''

Nonprofits have also taken over a hefty chunk of the audio-visual, computer, and software industries. Universities and other ``nonprofit'' organizations have established huge, nationwide marketing divisions that use tax benefits and regulatory relief to undercut the prices of profit-seeking companies on ``educational'' products ranging from Macintosh II computers and computer programs to children's videotapes.

``Unfair Competition'' provides the hard evidence for what successful entrepreneurs already know: Without a head start, many nonprofits wouldn't be competing at all. But using taxpayer largesse and legislative privilege, they have driven out of business entrepreneurs who have jeopardized their own lives and money. The losers in this rigged game would say that if the business of America is business, it is overgenerous to simply accuse nonprofits of unfair competition - they'd call the business of nonprofits downright un-American.