A few weeks ago, we touched upon three initial findings on the nonprofit landscape. Today we're focusing on one finding in particular, how medical and educational institutions behave differently from all other tax-exempt organizations. And are treated as such.
These institutions, commonly referred to as "Meds ’n’ Eds," make up nearly one-quarter of the nonprofit sector (in terms of raw number of organizations). They have the same filing status—they are 501(c)(3) public charities—as a local Goodwill. Yet many consider them to be separate entities and often dismiss them when analyzing the nonprofit sector, the exclusion rarely warranting a footnote.
Why is this exclusion so common? And why is it generally accepted? Here’s a data scientist’s reasoning.
The Size Divide
While we may perceive hospitals and educational institutions to be different from other nonprofits, perhaps due to their high price tags, masses of customers, and big-budget, business-like operations, are Meds ’n’ Eds actually different from the rest of the sector?
The answer is yes; we can see this by looking at the size of hospitals and universities against the rest of the sector. As discussed in our previous post, the majority of nonprofit organizations are small and spend less than $1 million annually. Hospitals and universities, on the other hand, tend to be quite large and spend more than $50 million annually.
It's no surprise that hospitals and educational institutions incur such high costs. They both employ a large number of highly educated professionals and maintain large campuses. Even the maintenance and repair of the campuses can be quite costly.
Comparing these expenses to those for a soup kitchen, day care center, or community soccer league might lead to a better understanding why hospitals and universities tend to be larger than other organizations.
It's natural, economically, for these organization types to be the largest. Because they have to pay for extremely costly equipment—MRI machines, for example—as well as for highly specialized employees, growing in size and serving more people gives them a better return on investment for their expenses.
Meds ’n’ Eds aren’t the only types of organizations that have high-cost structures, as can be seen in the above graph. Meds ’n’ Eds make up roughly 90 percent of the highest size division (Powerhouse), leaving 10 percent to other types of organizations. For example, PATH, an international human rights organization, incurs costs up to $285 million annually.
In the end, it all boils down to cost structure. Meds ’n’ Eds are, in general, better off as exceedingly large organizations, while the rest of the nonprofit sector tends to be on the smaller side.
This concludes our discussion of Meds ’n’ Eds. We hope you enjoyed it and are excited to provide more in-depth discussions soon.
How We Analyzed the Data
We looked exclusively at IRS data for nonprofits recognized by the IRS as tax exempt. Currently, 1.6 million exempt organizations are registered with the IRS.
Which factors did we analyze? For simplicity's sake, we focused on size and cause area.
How did we classify the nonprofits? Using the same classification system as the Boston Foundation, and the New York Risk Report, we grouped organizations by their cause areas (NTEE codes) and looked at expenses, not revenue, to determine their sizes.
Here are the divisions by cause area (NTEE code groupings):
- Educational Institutions (B)
- Hospitals & Care Organizations (E)
- All other
Here are the divisions by size:
- Grassroots (≤ $1 million)
- Small ($1 million - $5 million)
- Mid-size ($5 million - $10 million)
- Large ($10 million - $50 million)
- Economic Engine ($50 million - $5 billion)
- Powerhouse (> $5 billion)
Kerstin Frailey is the director of data science at GuideStar. She did her graduate work at Cornell and her undergraduate studies at Yale. She works out of our Oakland office where she enjoys being part of the thriving nonprofit community.
Madeline Kardos is a marketing communications associate at GuideStar. When she isn't helping nonprofits update their GuideStar Nonprofit Profiles, she writes for GuideStar's top-rated blog. Follow GuideStar on Twitter and Instagram to stay up to date on the latest nonprofit sector news.