Earlier this month, a Federal court in Massachusetts unsealed a “whistleblower” lawsuit that had been filed against the American Kidney Fund (AKF) in 2016. It alleged that AKF, a charity which provides financial support for people unable to afford kidney dialysis, favored applications from patients who received treatment at clinics run by its principal corporate donors, Da Vita and Fresenius (who were also named in the complaint). People who obtained treatment elsewhere (including, according to the lawsuit, a clinic in Indianapolis) encountered difficulties in obtaining assistance for the procedure, whose cost averages $90,000 per year.
AKF claimed that an employee who had been let go was behind the charge and denied wrongdoing. Nonetheless, while this case has some unique circumstances, it highlights the risks organizations face when they accept support from companies whose businesses are closely related to their charitable activities.
Corporate giving in 2018 – both cash and in-kind — accounted for 5.4 percent of donations to charity, or about $20 billion, Giving USA 2019 estimates. In addition, companies provide at least as much annually through a variety of sponsorship programs with nonprofits, such as underwriting sporting events, conferences, and dinners, or paying to use an organization’s name or logo on sweatshirts and other apparel. The difference between the two types of support is that businesses are not supposed to receive a direct benefit from their philanthropic gifts, but they can from their sponsorships.
In the real world, however, the line between the two has always been fuzzy and is becoming fuzzier. The motives for corporate giving are rarely completely altruistic, nor in the view of observers such as, most famously, the Nobel Prize-winning economist, Milton Friedman, should they be. Companies are ultimately accountable to their investors or “stakeholders” and as a result, their managers and directors have long believed that their philanthropy should properly contribute to business objectives, albeit in indirect ways, such as by improving employee morale or corporate reputations. However, in recent years, Michael Porter and other influential business strategists have argued for a more direct approach that would make “corporate social responsibility” a part of business planning, since, as they see it, it can have an impact on a company’s bottom-line.
At the same time, charities face risks if the billions of dollars they get each year from corporations confer too much benefit to the donors. Two decades ago, responding to complaints that business underwriting of collegiate football bowl games helped the companies more than the nonprofit organizations running the games, the Internal Revenue Service issued guidelines aimed at limiting what companies could receive (such as tickets or product tie-ins) in return for their support. Exceeding those limits could cause a nonprofit to be taxed on the income it receives, because the IRS would consider it a marketing payment, “unrelated” to the organization’s tax-exempt purposes. With the line between corporate giving and sponsorships becoming blurrier, charities now need to be especially watchful.
The AKF case highlights what could happen if they are not. Prior to the late 1990s, companies that operated large dialysis clinics routinely absorbed any out-of-pocket expenses for the procedure that Medicare (which covers most of those who need it) did not pay for. But with the enactment of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which aimed at enabling those needing medical care to obtain it on equal terms from any provider, this practice looked like a form of price discrimination, favoring the large clinics over the smaller ones and making switching clinics more difficult for patients. Enter the American Kidney Fund, which created a program to help dialysis patients with their additional costs, supported by contributions from the large clinic operators. A 1997 “advisory opinion” from the federal Department of Health and Human Services approved AKF’s plan, as long as only the patients’ financial needs were considered, not where they were receiving treatment.
Since the program’s inception, AKF has become one of the largest nonprofits in the United States, with annual revenues exceeding $250 million, mostly for helping the 80,000 people unable to afford dialysis. According to The New York Times, nearly 80 percent of its income came in grants from Da Vita and Fresenius, who serve most of the dialysis patients in the United States. The lawsuit alleges that people using clinics run by companies that had not contributed to AKF (about 40 percent of some 200 companies, The Times estimates), have been “blocked” from receiving help to pay for their medical expenses.
AKF denies that and the truth may eventually emerge in court. If it did violate the plan it had submitted to the Department of Health and Human Services, AKF could be liable for sizable payments to settle claims from people who should have received help with their dialysis costs but did not.
Charities supported by other corporations are also facing criticisms for providing significant business benefits from what are supposedly philanthropic activities. A recent issue of The Economist, for example, noted that “half of America’s 20 largest charities are affiliated with pharmaceutical companies.” Since they largely underwrite co-payments for expensive drugs for people without sufficient insurance, they boost company sales as well (and can also subsidize price increases). Philip Hackney, a law professor at the University of Pennsylvania, has called on Congress to take a closer look at such practices.
In an era in which corporations are expected to be “socially responsible” by being philanthropic, charities need to find ways to utilize their help without appearing to be unduly advancing business interests. Otherwise, if not taxed on their incomes or legal actions, they may encounter skepticism about what they are really doing, and why.
Access the other posts on tainted money.
Leslie Lenkowsky is Professor Emeritus in Public Affairs and Philanthropy at Indiana University.