There Is A Distinct Different Between Non-profit And For-profit Healthcare Organizations That Boards Should Be Aware Of

For-Profit Healthcare Organizations vs. Not-for-Profit Healthcare Organizations

Most of us schedule our doctor’s appointments and visit the emergency room without thinking about whether the provider makes a profit on our care or not. As community providers, all hospitals provide regular and emergency care. Healthcare providers also enhance communities by providing regular employment opportunities for doctors, nurses and other healthcare professionals. While for-profit and not-for-profit hospitals are all regulated by the same authorities with the same requirements, there are multiple and varied distinctions between them that are more far-reaching than whether they pay property and income taxes. Often, some of the differences have an impact on the composition of board directors and their approaches to healthcare provisions.

Notable Distinctions Regarding For-Profit Healthcare Organizations

The first thing that comes to mind when comparing any for-profit entity with any not-for-profit entity is that for-profit corporations have to pay property and income taxes, which cuts into their profit margins. At second glance, for-profit corporations have the advantage of limitlessly investing their funds to raise capital.

Despite criticism from labor unions, consumer groups and some legislators, for-profit healthcare organizations don’t necessarily sacrifice quality of care over profitability. There are pros and cons with for-profit hospitals as well as not-for-profit hospitals.

It’s true that for-profit hospital boards maintain a business-driven culture. They have to because they’re accountable to their shareholders. Unfortunately, some hospitals are unwilling to give up some of their profits for charitable causes even when it is necessary or strongly desired by members of the community. Shareholders don’t always have the same interests or level of compassion as community members.

On a positive note, not having a ceiling on the ability to invest means that some healthcare organizations have an increased ability to invest in upgrading their facilities, buy costly medical equipment and take advantage of upgrading technology systems.

Healthcare providers that have the financial steam to invest in technology can often offer the best healthcare in the most efficient ways. Having adequate funds for technology also means greater protection from cyber-risk for shareholders, patients and the public at large.

Large healthcare organizations also benefit from their size. For-profit corporations that own many hospitals can make use of many of their own resources, such as in-house legal counsel and specialized consultants, rather than having to hire outside professionals. Another benefit of scale is that large healthcare organizations can share what they’ve learned about best practices with their sister facilities.

In most states, one of the most powerful lobbying organizations comes from the hospital industry. For-profit healthcare organizations don’t have any restrictions or limitations on advocating legislatively for the laws that help to keep them profitable. Most large healthcare organizations employ their own policy professionals and lobbyists to promote their agendas.

Notable Distinctions for Not-for-Profit Healthcare Organizations

While not-for-profit healthcare organizations enjoy tax-exempt status from property and income taxes, they rely on funding from donors, minor investments and the community to be able to provide care for patients. Not-for-profit healthcare organizations don’t realize profits in any real sense. While they have some limitations on their ability to invest without compromising their nonprofit status, they typically reinvest any overages into maintaining facilities, purchasing new medical equipment, updating technology and other necessary medical improvements.

Not-for-profit healthcare organizations typically promote a culture that’s service-driven rather than business-driven. As service-driven entities, not-for-profit healthcare organizations tend to be more aggressive negotiators when approaching expenses such as managed care contracts.

As part of the 501(c)(3) statute, not-for-profit healthcare organizations have some limitations on their ability to lobby or advocate for healthcare reforms. Advocacy and lobbying cannot be a substantial part of their activities, or they risk losing their nonprofit status.

What Do Studies Show Us About the Differences Between For-Profit and Not-for-Profit Healthcare Organizations?

Researchers have pursued many studies to help them understand the pros and cons between for-profit and not-for-profit healthcare organizations. These studies have been informational, but additional studies need to be performed to better understand whether the impact on the quality of healthcare has more to do with ownership or another of many factors that impact quality care.

In 2006, the Congressional Budget Office conducted a study concerning the differences between not-for-profit hospitals and for-profit hospitals that showed wide variations in uncompensated care. For-profit hospitals gave uncompensated care at a rate of 4.2%, as compared with not-for-profit hospitals, which had a rate of 4.7%. Government-owned hospitals more than tripled that rate, offering up to 13% of uncompensated care costs to their patients.

In a 1999 study that compared 43 not-for-profit healthcare organizations that converted to for-profit status, the results didn’t show a significant difference in costs, levels of uncompensated care or provision of unprofitable services, such as trauma, burn and substance abuse care.

The same study showed that some individual hospitals saw major changes. Within three years, seven of the 43 hospitals had increased their levels of uncompensated care by more than 40%. By contrast, 10 of the 43 hospitals had reduced their level of uncompensated care by more than 40%.

Some researchers suggest that some studies have been inconclusive because hospitals and their profitability levels often vary substantiality because of their location and surrounding populations rather than the hospital’s ownership. Other factors, like institutional structures, histories and markets, can have an impact on quality of care and the willingness to provide uncompensated care.

Real estate purchase agreements also often have an impact on benchmark costs of care. Some purchasing agreements stipulate that hospitals must continue to provide the same levels of charity care or maintain the previous hospital’s mission.

For-profit healthcare organizations are more likely to promote treatments that net higher profits, such as open-heart surgeries. They’re also more likely to downplay unprofitable services like psychiatric emergency care or substance abuse treatment.

On a political note, for-profit healthcare organizations respond faster than not-for-profit organizations to changes in the law and governmental funding sources. When governments offered extra funding for certain services such as home health care, for-profit healthcare organizations acted faster and more quickly increased the number of services than not-for-profits. When laws decreased funding for the same services, for-profit healthcare organizations reduced the same services and took that action much faster than not-for-profit healthcare entities.

Tax Status Reflects Changes in Healthcare Organization Boards

Researchers are also following trends in board composition between for-profit and not-for-profit healthcare organizations. Soon after hospitals convert from not-for-profit to for-profit status, boards tend to increase the number of “insiders,” which lends itself to a drop in community representation.

While there are pros and cons to the quality of healthcare between for-profit and not-for-profit healthcare organizations, efficiency is something both types of entities hold dear. In addition to efficiency, both types of entities share a common need for a balance between being driven by business expertise and quality of service.