Money Talks, but Does It Heal?: (Not) For-Profit Health Providers in the United States
“I can’t afford to spend any more time here. I don’t have the money,” said a survivor of a California mass shooting in Half Moon Bay last January, prompting concerns about his financial ability to meet medical expenses.
In the realm of health economics, the escalating cost of medical services that continues to strain individuals and families has made it imperative for organizations and healthcare providers to examine their cost structures. The option between for-profit and not-for-profit (NFP) models assumes center stage as healthcare organizations grapple with the economic challenges of providing high-quality treatment while still managing expenses. Not-for-profit healthcare providers are exempt from federal income taxes as well as state and municipal property taxes. On the contrary, for-profit healthcare providers are under ownership of investors and are obligated to fulfill tax liabilities associated with operating as a business.
For-profit and not-for-profit healthcare providers have come to play a prominent role in the American health system for over the years. Their presence has grown significantly, influencing various aspects of the healthcare landscape. Many studies have attempted to compare the performance of these two types, but none have shown conclusive results. While economic theory foresaw that for-profit health care providers would exhibit superior cost-efficiency and management compared to not-for-profit ones due to market-generated incentives; and that nonprofit enterprises are occasionally perceived as inherently inefficient and unable to compete effectively, some noteworthy questions are provoked; truthfully, do for-profit and not-for-profit hospitals remain essentially distinctive in today’s practice, or are they converging as “physician-cartels” that operate in a similar economic and competitive environment? Amidst the complexities of the U.S. healthcare landscape, does a for-profit model guarantee superior performance?
Profitability vs. Philanthropy: Are the For-Profit and NFP Hospitals Converging?
The clash between professionalism and market control is long-standing and inescapable. Historically, medicine and other professions have distinguished themselves from business and commerce by asserting a higher purpose beyond mere commercialism. Despite our predominantly capitalistic society, there has always been apprehension regarding the possible adverse effects of profit-driven motives in health care.
Since 1913, the federal government has distinguished between NFP and for-profit hospitals by exempting NFP hospitals from most revenue and property taxes. NFP hospitals are obligated to provide free or below-cost medical services and are prohibited from distributing any profits but reinvest them to the hospital in exchange for the tax exemption. In contrast, for-profit hospitals can distribute their profits to their owners or share-holders, leading stockholders to prioritize profitable financial statements rather than how well the hospitals meet community needs.
Subsequently, the implications of the dissolving distinction between for-profit and NFP hospitals have been a headline of debate by researchers. Policy analysts, social scientists, and advocates for the poor are apprehensive about the possibility of diminishing safety nets for the poor, uninsured, and underinsured provided by some NFP hospitals if they become indistinguishable from their for-profit counterparts. NFP hospitals have been delivering services that were not conventionally perceived as revenue-generating, such as burn units, neo-natal intensive care, and emergency departments. But the distinction between for-profit and not-for-profit healthcare providers is becoming less clear due to various factors.
First, capital sources for NFP hospitals have shifted, as donations and governmental grants decline. Revenues have come from billing for services; the increasing capital intensity in healthcare, the reduced reliance on charitable contributions, and the significant inflation in the 1960s and 1970s have resulted in capital needs primarily being fulfilled through retained earnings and debt, just like for-profit institutions.
Second, while the persistent economic pressure imposed by investor-equity capital on the managers of investor-owned enterprises is unique to the for-profit sector, economic pressure is not exclusive to the for-profit sector which drives various strategies in both for-profit and NFP hospitals. To improve the bottom line, they develop multi-institutional agreements to gain economies of scale and greater access to capital, integrate vertically to increase control of patient flow and market share, emphasize cost control, and restrict uncompensated treatment.
Third, not-for-profit organizations can and do generate profits, as shown by U.S. hospitals in 1984, most of which are not-for-profit, with an average total net margin of 6.2% (American Hospital Association, 1985). In any case, survival of an organization clearly requires revenues exceeding operating expenses as equipment and renovations needed to keep an institution acceptable to doctors and patients necessitate new capital infusions.
Fourth, various forms of not-for-profit/for-profit hybrids have become prevalent in hospitals in recent years. These include (a) for-profit subsidiaries established by not-for-profit institutions; (b) contracts with for-profit companies for management or specific services, (b) joint ventures between for-profit and NFP multihospital systems; and (d) for-profit alliances (such as Voluntary Hospitals of America, American Healthcare Systems, SunHealth) serving NFP hospitals.
Fifth, even the not-for-profit’s barring against distribution of profits has started to fall apart as legal means are discovered through which not-for-profit organizations are able to create incentive compensation arrangements for management and workers that are essentially profit-sharing schemes.
Lastly, access to tax-exempt financing is not exclusive to not-for-profit organizations. Under certain conditions, for-profit enterprises can obtain tax-exempt debt financing through industrial revenue bonds, construction, and lease-back arrangements.
For-Profit Healthcare Providers, Greater Cost-Efficiency?
The debate over the cost performance of for-profit and not-for-profit healthcare providers remains inconclusive. Many economists argue that for-profit ownership is inherently more efficient because these entities must excel beyond not-for-profit counterparts in order optimize profits. While The Wall Street Journal reported that for-profit providers charge less for insurance (Wall Street Journal, 1997) and cost less in nursing homes (Marmor, Schlesinger, and Smithey, 1986; Philipson, 2000), surprisingly only 13 studies (23%) found for-profits to be superior (see Figure 1). In other words, in nearly 77% of comparative studies conducted since 1980, not-for-profits were either determined to be superior in terms of cost/efficiency or no difference was seen between not-for-profits and for-profits, contrary to what economic theory predicts.
Quality of Care: Not-for-Profits Lead the Charge
A literature review in 1979 found no quality difference between for-profit and not-for-profit providers in the 1960s-1970s (Palmer, Reilly, and Reilly, 1979), while some studies indicated not-for-profit providers excelled in quality, and others varied in their conclusions. Successive to that, a 2002 meta-analysis revealed a higher death risk in for-profit hospitals (Devereaux et al., 2002).
As market competition drives improvement, health economists have argued that there should be little difference in quality between the two types and that for-profit providers typically respond faster to competition (Rice, 1998). Among 149 studies with 69 compared quality-of-care measures; 59% favored not-for-profit providers, 29% found no difference, and only 12% rated for-profits superior (see Figure 1).
Not-for-Profit Hospitals Open Doors for Access to Healthcare
Access to healthcare is of paramount importance, particularly for individuals who face severe health issues. If true to their purpose and mission, not-for-profit providers would exert more effort in facilitating access compared to for-profit providers, whose primary focus lies in prioritizing investor interests, such as profitability, over ensuring accessibility.
According to research from the 1970s, not-for-profit providers can be predicted to outperform for-profit providers on access criteria (Marmor, Schlesinger, and Smithey 1986). Thirty of the 149 papers reviewed here evaluated access between not-for-profit and for-profit providers. Twenty (67%) thought not-for-profits were superior. Only one study (3%) comparing hospitals with data from 1992 discovered that for-profits performed better on this criterion, and nine (30%) found no difference (see Figure 2).
Operating on Generosity: Amount of Charity Care by U.S. Hospitals
When service charges go unpaid, providers describe it as uncompensated care, which is classified as bad debt when collection fails and charity care when no payment is pursued. Some argue that bad debt still counts as charity care, whether due to patient refusal to pay or genuine inability to afford it. Not-for-profit providers are obligated to undertake charity care in order to justify tax advantages (required in the State of Texas) and sustain their objective of volunteerism, philanthropy, and service to the poor.
In 1991, it was discovered that 80% of not-for-profit hospitals provided uncompensated treatment that more than offset the tax benefit gained (Morrisey, Wedig, and Hassan, 1996). It’s still debated whether for-profit providers match the level of charity care provided by not-for-profits; some studies suggest not-for-profit providers excel in this area, while others indicate otherwise.
The nature and attributes of the hospital industry prompt an inquiry into whether for-profit production can attain the anticipated levels of efficiency and consumer satisfaction as foreseen by the competitive market model. Hence, although nonprofit organizations might seem to contrast unfavorably with the competitive ideal, this comparison likely lacks suitability within the hospital sector. Regarding for-profit hospitals, factors such as entry barriers, information asymmetry, and the uncertain role of physicians as the consumer’s agent, might challenge the presumption that they can efficiently provide the desired quantity and quality of services at an efficient price.
Further off, some economic theorists suggest that many not-for-profit hospitals are structured, utilizing various methods, to essentially advance the economic interests of physicians (Pauly, 1980; Pauly and Redisch, 1973; Clark, 1980). As Sloan (forthcoming) notes, “to the extent this is so, the voluntary hospital is only a profit-seeking hospital in disguise, and there is no reason to expect it to behave much differently.” Nevertheless, amid the debates and nuances, not-for-profit hospitals remain integral to the American healthcare landscape, and their enduring significance resonates as a testament to the indelible role of altruism in healthcare.
References
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