Op-Ed: The Proliferation of Nonprofit Organizations

The Op-Ed below was published in the March 11, 2008 edition of the Providence Journal.  (Please note: You may have to register with www.projo.com to read the original editorial entitled, "The Executive Director State.")

The editors of The Providence Journal have again chosen to express dismay at the number of nonprofit entities operating in our state, suggesting that wiping out smaller organizations might be a way to deal with this issue.   I suggest that we examine some of the root causes of the problem before adopting a solution.

The trend towards an ever larger nonprofit sector is occurring in every country of the developed and developing world.  The number in the US has doubled since 1977, standing now at 1.4 million.  Why? Nonprofits come into existence wherever and whenever there are resources to fund them.   Corporations wish to be viewed as generous to the communities in which they operate so they give money to nonprofit organizations.   Foundations have their own missions and use the nonprofit sector as the vehicle to accomplish their aims.  Government wants certain things done and uses the sector to do them. 

The foundation community has contributed by providing start up funds to new agencies, some of which start because their founders feel that existing organizations are ignoring their issue or community.   Small, new nonprofits are nimble and entrepreneurial and able to respond quickly to emerging needs.  They are the cutting edge of the sector and are often the source of innovative approaches and a testing ground for new ideas. However, once open, these entities have remarkable staying power because they soon find government contracts.

The partnership between the government and nonprofit sector began in the 60’s.  A 1990’s analysis of international trends directly correlates the existence of nonprofit activity with government funding and shows that when government contract rates contain sufficient profit margins, for profit entities enter these markets.  The incursion of for profit hospitals in response to the extraordinary funding of Medicaid and Medicare is an example.  Where government fees are less generous, nonprofits tend to be the sole providers.   Nonprofit contractors are cheaper than other alternatives because they are willing to subsidize government fees with funds donated by others.    Wages and pension costs are universally lower than in government or for profit businesses due to the willingness of nonprofit professionals to put mission before personal financial well-being. 

If government is in control of contracting, why are so many nonprofits involved?    The sector, in response to government incentives, has grown sets of agencies (silos) for each new need or new population needing attention.  We have sets of agencies that deal with particular diseases, mental health issues, physical health issues, the poor, the developmentally disabled, the elderly, child welfare issues, the needs of minority communities, etc.   Within these service silos, further proliferation has occurred.  When a small group of providers begins to work together effectively to influence how services are shaped, state governments increase the number of providers in that silo to reduce the influence of the founding few.  They do that by openly inviting others to open new agencies. The larger silos require state positions to license and regulate and review them, evolving a parallel state bureaucracy.

So we have both a nonprofit sector and state government that has only grown larger, but let’s be clear.  The nonprofit community did not create itself by itself.   Its shape and size have largely been driven by the choices of those who fund them.   The root of the problem is the structure of health and human services and how government and the nonprofit community provide these services.  What is required is a complete rethinking of how we, as a society, care for those who are not so blessed.  Incremental changes, or wiping out all the small agencies, will not address the fact that our current human service system is unsustainable and will only become more so as the baby boomers age.  We must start this change process by asking two questions: (1) what are the values and principles that should drive RI’s approach to supporting individuals who need help, without regard to the source of the impairment?  And, (2) given those values and principles, what is the most minimal role of government that will allow those principles and values to become real?   When we have answers to those two questions, we can redesign the service systems that support these individuals in a more sensible way, providing a constructive transition for all concerned. 

The Governor, with the Legislature’s support, should appoint a group of independent individuals to design and create a plan to transition to a more efficient and effective system.  These individuals must have knowledge of how government and the nonprofit community interact.   Above all, this must be a thoughtful process undertaken by people of vision and intelligence whose primary concern is the well being of our state’s most vulnerable citizens.   The results of that redesign, I am sure, will not only require fewer nonprofits than currently exist but will also bring greater efficiency to RI government.