Differences Between NFPs and For-Profits are Marginal

Christopher Cheney, March 14, 2016

Finding unique ways to incentivize employees is part of the business-driven culture for Steward's revenue cycle team, Zar says, adding that nonmonetary incentives can be just as effective as a little extra money in a paycheck. In November, when the health system posted cash collections at a record pace, members of the revenue cycle staff received fleece sweaters with the cash goal for the month embroidered on the sleeve. "People wear those fleeces for bragging rights," he says.

Executive compensation and incentives
For-profit hospitals routinely utilize monetary incentives in the compensation packages of the C-suite leadership, says Brian B. Sanderson, managing principal of healthcare services at Oak Brook, Illinois–based Crowe Horwath LLP. "If your income is tied to the success of the business, you will pay a lot of attention to operational discipline. The compensation structures in the for-profits tend to be much more incentive-based than compensation at not-for-profits," he says. "Senior executive compensation is tied to similar elements as found in other for-profit environments, including stock price and margin on operations."

In contrast to offering generous incentives that reward robust financial performance, for-profits do not hesitate to cut costs in lean times, Escue says, noting cost discipline is a key element of the organizational culture at such hospitals.

"The rigor around spending, whether it's capital spending, operating spending, or payroll, is more intense at for-profits. The things that got cut when I worked in the back office of a for-profit were overhead. There was constant pressure to reduce overhead," he says. "Contractors and consultants are let go, at least temporarily. Hiring is frozen, with budgeted openings going unfilled. Any other budgeted-but-not-committed-spending is frozen. … Even capital spending can be affected. Capital spending almost always creates new operating expenses. Capital spending such as IT projects can be slowed down or stopped."

The impact of tax status
The for-profit hospital business model has several unique characteristics. The most obvious difference—tax status—has a major impact financially on for-profit hospitals and the communities they serve.

"I see taxes as a preferred dividend back to the community. They're first in line," Wiechart says of Capella's local and state taxes. "They give us their trust and their patients. The community can then turn around and redeploy tax payments for other social needs like schools, roads, and public safety."

Hospital payment of local and state taxes is a significant benefit for municipal and state governments, says Gary D. Willis, CPA, executive vice president and chief financial officer at Capella. "Our hospitals are proud of the community support they provide, including the payment of property and sales taxes used to help fund community needs such as support of their local schools, development of roads, recruitment of business and industry, and other needed services. Taxes paid in the communities we currently serve ranged in 2014 between $984,856, in a state with no sales tax, to $3.6 million."

The financial burden of paying taxes helps to create a corporate culture that emphasizes cost consciousness and operational discipline, says Slusser. "For-profit hospitals generally have to be more cost-efficient because of the financial hurdles they have to clear: sales taxes, property taxes, all the taxes nonprofits don't have to worry about."

The advantage of scale
Scale is another hallmark of the for-profit hospital sector.

There are 4,974 community hospitals in the United States, according to the American Hospital Association. Nongovernmental not-for-profit hospitals account for the largest number of facilities at 2,904. There are 1,060 for-profit hospitals, and 1,010 state and local government hospitals.

The for-profit hospital sector is highly concentrated. The country's for-profit hospital trade association, the Washington, D.C.–based Federation of American Hospitals, represents 14 health systems that own more than 1,000 hospitals. Four of the FAH health systems account for about 520 hospitals: CHS; Nashville-based Hospital Corporation of America; Brentwood, Tennessee–based LifePoint Health; and Dallas-based Tenet Healthcare Corporation.

"For-profits represent 20% of the total hospitals but only a handful of companies—companies that have huge sets of assets," says Chip Kahn III, FAH president and CEO. And that scale generates several benefits at for-profit hospitals.

"Scale is critically important," says Julie Soekoro, chief financial officer at Grandview Medical Center, a CHS 250-staffed-bed tertiary care hospital in Birmingham, Alabama. "What we benefit from at Grandview is access to resources and expertise. I really don't use consultants at Grandview because we have corporate expertise for challenges like ICD-10 coding. That is a tremendous benefit."

Grandview also benefits from the best practices that have been shared and standardized across the 200 CHS hospitals. "Best practices can have a direct impact on value," Soekoro says, adding that large health systems can support individual hospitals in several ways. "The infrastructure is there. For-profits are well-positioned for the consolidated healthcare market of the future. … You can add a lot of individual hospitals without having to add expertise at the corporate office."

The High Reliability and Safety program at CHS is an example of how standardizing best practices across every hospital at the health system has generated significant performance gains, she says.

"A few years ago, CHS embarked on a journey to institute a culture of high reliability at the hospitals. The hospitals and affiliated organizations have worked to establish safety as a core value. At Grandview, we have hard-wired a number of initiatives, including daily safety huddles and multiple evidence-based, best practice error-prevention methods. Meetings begin with a safety moment, we have safety coaches throughout the facility, and other structures designed to support safety as a core value.

"For example, at 9 a.m. on weekday mornings at Grandview, each department gets on a facilitywide safety call where we address all manner of safety concerns," Soekoro says. "Frequently heard [comments] may include: 'It's raining today—make sure the entrances are adequately managed for possible wet floors'; or 'Two patients with same name on the seventh floor today—assign different nurses to avoid confusion in dispensing medications'; and 'Based on anticipated volumes today, any anticipated staffing issues?'

Christopher Cheney

Christopher Cheney is the senior finance editor at HealthLeaders Media.

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