Differences Between NFPs and For-Profits are Marginal

Christopher Cheney, March 14, 2016

Is the distinction beginning to blur between for-profit and nonprofit healthcare organizations?

This article first appeared in the March 2016 issue of HealthLeaders magazine.

For-profit and nonprofit hospitals are fundamentally similar organizations with subtly different cultural approaches to managing the economics of healthcare.

All acute care hospitals serve patients, employ physicians and nurses as their primary personnel, and operate in the same regulatory framework for delivery of clinical services.

For-profit hospitals add a unique element to the mix: generating a return for investors. This additional ingredient gives the organizational culture at for-profits a subtly different flavor than the one at their nonprofit counterparts, says Yvette Doran, FACMPE, chief operating officer at Saint Thomas Medical Partners in Nashville, which is affiliated with Ascension Health, a nonprofit based in St. Louis that owns 131 hospitals in 24 states and the District of Columbia.

"When I think of the differences, culture is at the top of my list. While quality care is a priority for both, the culture at for-profits is business-driven. The culture at nonprofits is service-driven," she says.

However, the fundamental similarities of all acute care hospitals blunt the impact of the business-driven culture at for-profits, Doran says, noting the differences between for-profits and nonprofits reflect cultural nuances rather than cultural divides. "Good hospitals need both. Without the business aspects on one hand and the service aspects on the other, you can't function well."

Doran has prior work experience at Franklin, Tennessee–based for-profit Community Health Systems. CHS operates 202 hospitals in 29 states, and reported 2014 net operating revenues of $18.6 billion and adjusted EBITDA of $2.8 billion.

The executive leadership at Capella Healthcare, a relatively small for-profit health system based in Franklin, Tennessee, shares much of Doran's nuanced perspective on the differences between for-profit and nonprofit hospitals.

"At Capella, we do not believe there are significant differences between for-profit—or taxpaying—hospitals and nonprofit hospitals. In fact, that line of differentiation has become exceptionally blurred in recent years," says Michael Wiechart, president and CEO of Capella, a privately held company that operates 10 acute care and specialty hospital facilities in five states, and for fiscal year 2014 reported $713.4 million in revenue from continuing operations, net of the provision for bad debts, and adjusted EBITDA of $103.3 million.

"Both of us share the mission of delivering the highest-possible quality of care. And both of us must make a sustainable bottom line in order to achieve the mission and to expand care for the future. We are both held accountable on our quality of care, our ability to be good stewards of the operations, and to make our organizations great places to work for both employees and physicians. While each operates by some slightly different rules and regulations based on our business or tax structure, both of us have all of the same basic goals and challenges."

For-profits and nonprofits have a nearly identical mission under ground rules designed to foster and support value-based care, Wiechart continues. "Neither for-profits nor nonprofits have the luxury of ignoring sustainability or patient-care excellence. We're all dealing with the same environment and the same challenges. And it's about who can do it better. Being able to make a sustainable bottom line is necessary for reinvestment and growth for everyone, regardless of your tax status.

"You just have to consider what the motivation is around making the profit. For us, it's about being able to reinvest in our family of hospitals, which we historically have done by reinvesting 100% of free cash flow into growth and quality improvements, not in dividends to shareholders."

Comparing business model theories
In theory, for-profit hospitals should operate with more zealous attention to business objectives than nonprofits because shareholders have their money on the line.

"The absence of a residual claimant with a financial interest in the organization means that no one individual, or group of individuals, has strong incentives to monitor the behavior of the organization at nonprofit hospitals," Rexford Santerre, PhD, a professor of finance and healthcare management at the University of Connecticut, wrote in a 2005 National Bureau of Economic Research report with a Finance Department colleague John Vernon, PhD. The NBER is a private, nonprofit economic research organization based in Cambridge, Massachusetts.

In the absence of mitigating factors such as shared regulatory frameworks and shared interests in providing quality services, financial considerations would dominate decision-making at for-profit hospitals, Doran says. "If I were a fly on the wall at a for-profit meeting, the dollar would be at the top of the list. If I were a fly on the wall of a nonprofit meeting, the patient would be at the top of the list."

In an interview with HealthLeaders, Santerre explains that for-profit boards and their executive leadership teams, which invariably have monetary performance incentives built into compensation packages, face a measure of financial pressure that is absent at nonprofits. "Theoretically, there is a residual claimant, and that residual claimant wants to maximize profit," he says, referring to for-profit shareholders.

In contrast, Santerre says nonprofit boards and their executive leadership theoretically have an "incentive not to compromise quality," noting a nonprofit is required to distribute earnings back into the organization or into its service-area communities. Nonprofits can reinvest earnings in facilities, lower charges to patients, or offer community benefits. In contrast, one of the prime benefits of operating as a for-profit is the opportunity to bank positive operating margin after taxes. "You can take on risks, but you can also gain the rewards as a for-profit," he says.

Christopher Cheney

Christopher Cheney is the senior finance editor at HealthLeaders Media.

Pages

Facebook icon
LinkedIn icon
Twitter icon