Introduction
For-profit medical institutions, which are at times denoted as investor-owned facilities, try to obtain a profit or a positive return on investment for their stockholders. These institutions are owned by shareholders of a company whose shares are publicly traded or by investors. In contrast, non-profit hospitals are medical institutions that do not seek or generate any profits for owners of the medical facility from the income received for providing medical services to patients (Rosko et al., 2020). In this regard, any profits generated within the context of the provision of medical services are returned to the institution for operations as opposed to being distributed to shareholders. Most non-profit medical institutions provide services at times to individuals unable to raise sufficient funds to cater to their medical bills.
Summary Analysis
Not-For-Profit vs. For-Profit Health Systems
One of the most important questions revolving around the differences existing between for-profit and not-for-profit hospitals is whether the latter is able to generate a profit and, if so, what happens to it, unlike for-profit institutions where profits are shared among shareholders or investors. Similar to every other organization that is financially viable, not-for-profit healthcare institutions must take in more than they pay out in operations, pharmaceuticals, supplies, equipment, and salaries. Any excess revenue generated by not-for-profit healthcare institutions is invested back into the facility in order to improve medical services provided to the community (Rosko et al., 2020). Some of the notable investments under this arrangement include acquiring new technology, replacing old equipment, creating new access points for patients, and offering new services (Rozier et al., 2019).
It is important to note that not-for-profit medical institutions are not publicly traded and, therefore, different from for-profit companies that pay dividends to stockholders, not-for-profit healthcare institutions do not have such obligations. Both the for-profit and not-for-profit institutions have been experiencing similar rates of growth and sharing almost comparable costs as demonstrated in the infographic (figure 1).
Figure 1: Hospital Charity Care Costs Compared
Source: Adapted from Valdovinos (2015)
Notable Distinctions: For-Profit Healthcare Organizations
One of the biggest differences between for-profit healthcare organizations and not-for-profit medical institutions is that the latter is not required by law to pay income and property taxes. Both income and property taxes are direct payments made to the government on a regular basis, and these payments have a significant negative impact on profit margins. All for-profit healthcare organizations have to pay income tax and property tax, unlike not-for-profit healthcare organizations, which are exempt from paying these two taxes (Herring et al., 2018). Nonetheless, despite this requirement, for-profit healthcare organizations have the advantage of using their resources as they wish and investing in areas with the potential to raise more capital. This is an advantage that only for-profit healthcare organizations enjoy. In spite of drawing a lot of criticism from a number of legislators, consumer groups, and numerous labor unions, for-profit medical institutions do not necessarily prioritize profitability at the expense of the quality of services provided (Moon & Shugan, 2020). Contrary to what many people believe, for-profit healthcare organizations operate at comparable levels with not-for-profit medical institutions in terms of quality, if not higher.
In order to generate a healthy return on investment for investors and shareholders, for-profit hospitals must maintain a strong business ethic and business-driven culture. Since these institutions are primarily held to account by their investors and shareholders, they do not have a choice but to maintain a strong business-driven culture. A hospital with a poorly managed organizational culture may experience financial difficulties, and this situation may threaten its financial stability as its investors or shareholders may be inclined to withdraw or liquidate their assets and invest their money elsewhere. Perhaps this explains why most for-profit healthcare institutions are solely committed to generating profits by being aggressive in the market in terms of service provision for a healthy return.
It is nevertheless unfortunate that some for-profit medical institutions are not committed to giving up some of their extra earnings for charity, even in situations where such actions are strongly desired or even needed by community members. Shareholders and investors have divergent interests, and even though some may be willing to assist their immediate communities through donations and charity, others may not share the same view. People have different levels of compassion. Decision-making in for-profit healthcare institutions rests with shareholders or investors, and as such, their involvement in charity work must be sanctioned from the top echelons of power (the board of directors). Commitment to charitable courses has always been a contentious issue as both supporters and those opposed to the concept of corporate social responsibility harbor divergent views on the same (Morsing & Spence, 2019).
For-profit healthcare organizations have the freedom to invest their funds or income in any way that shareholders see fit without any restrictions or asset expenditure ceiling. This capacity translates to some healthcare institutions having a better opportunity and capacity of investing in facility upgrades. It is normal for for-profit healthcare organizations to periodically purchase new medical equipment or invest in new service provision areas while taking advantage of newly developed systems. The capacity to upgrade to new strategies or technological systems is a huge advantage that for-profit healthcare institutions benefit from and, by extension, end-users. Medical facilities that have the capacity and the financial muscle of investing in new technologies can provide better health care services efficiently since they may benefit from new technologies compared to organizations that do not have such freedom (Jeurissen et al., 2020). Having sufficient resources for purchasing new technological applications also translates to greater protection of patients and shareholders from the risk of cyber attacks or loss of personal details through hacking.
Big medical institutions also have an advantage over smaller organizations. For-profit healthcare corporate entities that own multiple health care institutions can benefit more by leveraging their resources such as specialized consultants or in-house legal counsel as opposed to hiring external professionals in times of need. This is a benefit that only for-profit corporations benefit from since most not-for-profit healthcare organizations operate independently. There are other benefits of scale that huge for-profit healthcare corporations benefit from, including learning about best practices from units that form part of the value chain. Companies that operate a chain of for-profit medical institutions may rely on each other for help, building each others’ capacity and making improvements through internal consultation with their sister facilities. Given that many not-for-profit healthcare institutions operate independently, they miss out on such advantages.
In a majority of states, including California, the hospital industry is considered one of the most influential and powerful lobbyists. Some of the most powerful lobbying companies originate from the medical sector. Compared to not-for-profit healthcare institutions, for-profit medical companies operate under no limitations or restrictions with respect to legislative advocacy for legislation that helps in maintaining their profitability. It is, therefore, common for the big corporate entities within the medical care sector to hire private lobbyists and policy professionals as a way of promoting their agendas. Some of these efforts become successful, particularly in situations where such organizations collude for mutual benefit. For example, Pfizer, one of the leading pharmaceutical and biotechnology companies in the U.S., is a renowned lobbyist. The company is ranked 77th on the Fortune 500 list of companies, and in 2021, it spent $6.67 million on lobbying (Robertson, 2021). Even though it is primarily focused on biotechnology and the production of pharmaceuticals, it is a good example of a for-profit company with a huge voice in the healthcare sector in terms of lobbying. Another equally strong company is Cigna Corp, which provides insurance and medical care services to patients in the U.S. Cigna Corp spent $4.31 million between the months of January and June 2021 in lobbying (Robertson, 2021). It is also renowned for lobbying. Not-for-profit healthcare organizations are not incentivized in any way to push for laws because they are not profit-driven.
Notable Distinctions: Not-For-Profit Healthcare Organizations
Even though not-for-profit medical care institutions enjoy tax-exempt status from income and property taxes, their major sources of revenue are from the community, minor investments, and donors. Donations by these stakeholders are used to meet the demands of care provision for patients served by non-profit-making healthcare organizations. It, therefore, means that not-for-profit medical institutions do not realize or declare profits compared to for-profit companies. Even though they face some restrictions on their capacity to invest, devoid of compromising their status as non-profit-making organizations, any overages obtained are re-invested directly into making the required medical improvements, including updating technology, buying new equipment, and maintaining facilities.
Whereas for-profit healthcare organizations maintain a business-driven culture, not-for-profit healthcare institutions generally promote a service-driven culture. As entities that are primarily service-driven, healthcare organizations within the not-for-profit category negotiate more aggressively when deliberating on issues such as managing costs within the context of managed care contracts. As stipulated in the IRS exemption requirements (501(c)(3)), not-for-profit medical care institutions have a limited capacity with respect to their ability to advocate or lobby for medical care reforms (Herring et al., 2018). They are debarred from lobbying and advocacy, and these two activities cannot form part of their activities as they risk losing their non-profit-making status.
Discussion
It is important to note that despite the highlighted differences, there are numerous aspects shared between for-profit healthcare organizations and not-for-profit medical institutions. First, studies indicate that there are no major differences in the standard of care, operational efficiency, or even the environment within which these two types of organizations operate. Both for-profit and not-for-profit medical institutions exist on the list of the worst-performing hospitals and equally the best-performing hospitals in the country. As such, there are no reasons that support the argument that the management and quality of a medical institution have any relationship with its tax status. The for-profit or not-for-profit status of a medical entity should, however, be of interest to the community benefiting from the services provided and equally to members of staff in order to understand how resources are allocated and how the medical institution operates under the given circumstances. Nevertheless, the end consumer and perhaps the most important stakeholder, the patient, should never be worried or concerned with such issues because they do not and should never have any impact on the provision of healthcare services.
The not-for-profit medical institutions enjoy a special tax status as aforementioned, although they do give something in return for not paying taxes. The tax exemptions are meant to acknowledge the community benefits that the not-for-profit healthcare institutions provide their respective communities. Federal regulations instituted through the Internal Revenue Service (IRS) demand that not-for-profit hospitals provide specific community benefits in order to counterbalance their special tax status. Some of the community benefits listed include promoting health, training, and education of medical care professionals, the uncompensated expenses of providing Medicaid, as well as charity care. In order to ensure that medical institutions provide community benefits that satisfy community needs, the federal government mandates all hospitals are enjoying the special tax status to undertake a periodic Community Health Needs Assessment (Pennel et al., 2015). This assessment is conducted every three years. Hospitals are subsequently required to develop a strategy for implementation consistent with the identified needs. Equally, not-for-profit healthcare institutions are mandated to evaluate and report on the effect of their programs, and they are also required to report on a yearly basis the status of certain taxes.
Researchers have undertaken studies to establish the real differences between for-profit and not-for-profit healthcare organizations over the years in a bid to understand the pros and cons of the two categories. For example, a Congressional Budget Office (CBO) study published in 2006 highlighting the differences between for-profit and not-for-profit hospitals indicated that there were significant differences in uncompensated care. For-profit healthcare institutions had a 4.2% rate of uncompensated care compared to a rate of 4.7% for not-for-profit institutions. Hospitals owned by the government had the highest rate of uncompensated care costs to patients, which reached a maximum of 13%, which is almost triple that of for-profit hospitals (Congress of the United States, 2006).
A previous study was done in 1999 compared over 40 non-profit-making medical institutions that had transitioned to the for-profit status. The latter study by Young and Desai (1999) did not demonstrate any significant differences in the provision of unprofitable services, levels of uncompensated care, or differences in costs. The same study demonstrated that some medical institutions experienced major changes after transitioning to for-profit status. Three years later, approximately seven out of the 43 hospitals involved in the analysis had enhanced their uncompensated care levels by over 40%. Contrastingly, a quarter of the entire group of hospitals had lessened their level of uncompensated care by a huge margin of over 40% (Young & Desai, 1999). Some studies indicate that for-profit medical institutions have a higher likelihood of promoting services that bring in bigger profits, including open-heart surgeries (Jeurissen et al., 2020). Equally, they have a high likelihood of downplaying unprofitable cost centers such as substance abuse treatment and psychiatric emergency care. For-profit medical institutions equally react more promptly to changes in governmental funding sources and the law compared to not-for-profit organizations.
Recommendations
From the presented positions on the two types of service providers, for-profit healthcare organizations are better placed at responding to the changing market dynamics compared to not-for-profit medical facilities. As rightfully noted, for-profit healthcare organizations are able to generate capital from private investors in exchange for dividends or equity to shareholders. Considering that not-for-profit healthcare facilities are solely dependent on donations, it is clear that for-profit healthcare facilities stand a better chance in terms of service continuity because these organizations decide their own fate and are less dependent on the goodwill of individuals through donations. The capability of introducing new systems and responding to the changing dynamics of the market is also another advantage that for-profit institutions enjoy over not-for-profit healthcare organizations. As aforementioned, there is no superiority of either system because both categories provide high-quality services, which are not affected in any way by their tax-exempt status. Given that California allows for-profit ownership of hospitals, Selfless Health should accept the takeover.
References
Congress of the United States. (2006). Nonprofit hospitals and the provision of community benefits. A Congressional Budget Office (CBO) Paper. https://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/76xx/doc7695/12-06-nonprofit.pdf.
Herring, B., Gaskin, D., Zare, H., & Anderson, G. (2018). Comparing the value of nonprofit hospitals’ tax exemption to their community benefits. INQUIRY: The Journal of Health Care Organization, Provision, and Financing, 55, 0046958017751970.
Jeurissen, P. P., Kruse, F. M., Busse, R., Himmelstein, D. U., Mossialos, E., & Woolhandler, S. (2020). For-profit hospitals have thrived because of generous public reimbursement schemes, not greater efficiency: a multi-country case study. International Journal of Health Services, 51(1), 67-89.
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Pennel, C. L., McLeroy, K. R., Burdine, J. N., & Matarrita-Cascante, D. (2015). Nonprofit hospitals’ approach to community health needs assessment. American Journal of Public Health, 105(3), e103-e113.
Robertson, M. (2021). Top 20 healthcare lobbyists by 2021 spending through June. Becker’s Hospital CFO Report. https://www.beckershospitalreview.com/finance/top-20-healthcare-lobbyists-by-2021-spending-through-june.html.
Rosko, M., Al-Amin, M., & Tavakoli, M. (2020). Efficiency and profitability in US not-for-profit hospitals. International Journal of Health Economics and Management, 20(4), 359-379.
Rozier, M., Goold, S., & Singh, S. (2019). How should nonprofit hospitals’ community benefit be more responsive to health disparities? AMA Journal of Ethics, 21(3), 273-280.
Valdovinos, E., Le, S., & Hsia, R. Y. (2015). In California, not-for-profit hospitals spent more operating expenses on charity care than for-profit hospitals spent. Health Affairs, 34(8), 1296-1303.
Young, G. J., & Desai, K. R. (1999). Nonprofit hospital conversions and community benefits: new evidence from three states. Health Affairs, 18(5), 146-155.
