Differences Between NFPs and For-Profits are Marginal

Christopher Cheney, March 14, 2016

"The success of these efforts is measured by companywide reductions in serious safety events, which are shared on a quarterly basis," she says.

Expertise in the corporate office has been a key to success for Capella, which has many executives with ownership stakes in the company, Wiechart says. "We're vested consultants who have a shared interest in our hospitals' success."

Members of Capella's executive leadership teams at the health system and hospital level own 48% of the economic value of the company and control 51% of the Capella board of director voting rights, he says.

The ability to access capital
Scale also plays a crucial role in one of the most significant advantages of for-profit hospitals relative to their nonprofit counterparts: access to capital.
"There's no question that scale is additive to the discussion when it comes to access to the capital markets," Wiechart says, noting investors covet the diversified risk that comes with scale.

Investors are also drawn to for-profits because of their focus on the financial side of their business, says Willis, Capella's CFO. "A significant difference is that we often have better access to capital for investment in our hospitals due to the expectation that we will be good stewards with capital deployment."

Ready access to capital gives for-profits the ability to move faster, says Crowe Horwath's Sanderson. "They're finding that their access to capital is a linchpin for them. … When a for-profit has better access to capital, it can make decisions rapidly and make investments rapidly. Many not-for-profits don't have that luxury."

The result, Wiechart says, is "a better structure through which to access capital dollars for investing in facilities, services, and recruitment. For-profit organizations don't have to rely on taxes or bond support to launch needed services or recruit vital providers. And, while we rely on leadership and support from our communities, we don't have to ask them to fund our investments. Nonprofits tend to rely on their communities for financial support. We can be more nimble or flexible, responding more quickly to what's needed."

Learning from the for-profit model
The similarities between for-profit and nonprofit hospitals outweigh the differences, but there are valuable lessons for nonprofits to draw from the for-profit business model as the healthcare industry shifts from volume to value, Doran says.

When healthcare providers negotiate managed care contracts, for-profits have a bargaining advantage over nonprofits, she says. "In managed care contracts, for-profits look for leverage and nonprofits look for partnership opportunities. The appetite for aggressive negotiations is much more palatable among for-profits."

As patients take on more out-of-pocket costs and become more prominent economic agents in the healthcare industry, the revenue cycle teams at nonprofit hospitals can improve their bill-collection performance through adoption of the business-driven culture at for-profits, Doran says, noting "the level of zest with which you pursue the patient's responsibility" is more intense at for-profits.

Particularly for faith-based nonprofits such as Ascension Health that actively reach out to economically disadvantaged patient populations, embracing elements of for-profit culture will require walking fine lines, she says. "In addition to conducting charity care, we have additional Medical Missions that include the poor and vulnerable within the community. It's a little bit of a twist that makes us different from for-profits."

And of course, a successful organization can better meet its mission. "Good business practices make sense for nonprofits because if you're managed effectively, you can provide care to a lot more people, Reid says. She also notes that nonprofit hospitals can even learn from for-profit organizations outside the healthcare industry.

"Hospitals can learn from other industries on how to align and incentivize employees closer with pay for performance. Semiconductor wafer fabricators are a wonderful model to study. They measure quality, efficiency, and cost in almost real time. I have seen wafer fabricators where frontline employees can see real-time metrics and how they are trending to monthly incentive goals," she says.

"The idea is to make an impact as soon as the data starts trending in the wrong direction—waiting weeks or months for the perfect report results in inertia," Reid says. "Semiconductor employees know how many defects are in the manufacturing line. They know where the defects occur and they know how their efficiency is trending. At hospitals, this approach could be applied to OR turnover times, staffing targets, and bed turnover."

Delivering healthcare services based on value is going to be a far more complicated and risky business environment for all hospitals, and nonprofits can help ensure their existence through adoption of a more business-driven organizational culture, Kahn says.

"If you have any kind of an enterprise in our economy: No margin, no mission. Every hospital has to make a margin," he says. "The no-margin, no-mission imperative is always present on the private investor side; but on the nonprofit side, sometimes they forget that. And they forget at their own risk."

"At some point," Sanderson says, "part of the mission is to be a relevant, thriving healthcare organization. If you have no margin, if you have no money to invest, if you cannot maintain a reputation as a high-quality provider, then it's hard to remain a relevant organization in the communities you serve."

"Since Capella's decentralized management approach involves local control of the hospital, this is particularly important. … Without their support, buy-in, and involvement, the hospital will not make progress."

Christopher Cheney

Christopher Cheney is the senior finance editor at HealthLeaders Media.

Facebook icon
LinkedIn icon
Twitter icon