In the world of healthcare facilities, the for-profit model is becoming increasingly popular.
In fact, the number of for-profit hospitals in America is growing, and more and more nonprofit hospitals are exploring potential transitions to an investor-owned financial model.
While traditional wisdom once held that nonprofit hospitals maintain a firm advantage over for-profit hospitals—potentially indicated by the 3:1 nonprofit to for-profit ratio in the U.S.—the tides seem to be turning.
But what’s making the grass seem so much greener under the for-profit model? And how different are the benefits of these two ownership types?
What is a nonprofit hospital?
Nonprofit (also known as not-for-profit or NFP) hospitals qualify as charities according to the IRS, meaning they are not required to pay property tax, state or federal income tax, or sales tax.
In exchange for this tax-free existence, nonprofit hospitals are expected to distribute any additional capital back into their surrounding communities. Because of this, however, nonprofit hospitals face regular scrutiny by healthcare policymakers concerned with whether and how the facilities follow through and contribute to their communities in a meaningful way that justifies the generous tax exemptions they receive.
What is a for-profit hospital?
For-profit hospitals, on the other hand, are investor-owned. Unlike nonprofit hospitals, these facilities aim to make profits for their shareholders. Some of the largest for-profit hospital chains in the U.S. include Hospital Corporation of America, Tenet and HealthSouth.
For-profit facilities like these are generally among the highest-billing hospitals in the country.
How do nonprofit and for-profit hospital operations compare?
When it comes to day-to-day functions, it can be hard to differentiate the two ownership types. From a physician’s standpoint, the two operate similarly, generally relying on standard corporate hierarchies for organizational structure. One marked difference is that for-profit hospitals typically use considerable portions of their available budget for marketing and advertising initiatives, as compared with nonprofit facilities.
The concept of hospital advertising raises many ethical questions among industry experts. Some say these funds can, instead, be better used to improve patient experience or quality of care. Others question the benefits of advertising at all, as many for-profit hospitals exist in areas where there are few competing hospitals from which to choose.
For-profit hospitals tend to serve lower-income populations, while nonprofit hospitals are generally found in communities with higher average incomes and fewer under- and uninsured patients.
Looking into the uncompensated care disparity, Definitive Healthcare data is able to offer some insights. On average, nonprofit hospitals maintain higher bad debt to net patient revenue (NPR) ratios than their for-profit counterparts, although the for-profit hospitals with the highest bad debt to NPR ratios tend to maintain higher ratios than nonprofit facilities.
Surprisingly, one 2020 study found that nonprofit and for-profit hospitals provide similar levels of charity care—another type of uncompensated care—when examined as a percentage of total expenses.
Want to learn more about uncompensated care and how significant the impact of bad debt can be? Read our blog, Balancing uncompensated care and hospital bad debt.
Or, watch this webinar replay to learn how the healthcare market has evolved to meet new industry demands following the COVID-19 outbreak.
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