For Profits and Non Profits in Health Care

Health Care and Profits

In general, both for-profit and non-profit hospitals in the U.S. aim to increase their profits. Horwitz (2005) studied the mechanisms for profit-making in health care and determined that for-profit hospitals more actively use profit as the basis for determining the mix of services that they offer. For-profit hospitals will also set up in areas with more profitable (i.e. wealthier) patients. For-profit hospitals are also "more likely to respond to changes in service profitability than the other two types." However, this does not mean that non-profit hospitals are not pursuing profit. They may, if anything, pursue profit less aggressively. Their service mix might not be specifically oriented towards profitable procedures, and their response to changes in profitability for different services might change as well. They still aim to be profitable, and some of them are quite profitable, but they are simply slightly less profit-oriented than their for-profit counterparts.

This is considerably different from the non-profit model found outside of the United States, for example in Canada. In many countries, a non-profit hospital is run by the government, and seeks to at best break even. Under a single-payer system, the profitability of the hospital is basically a moot point. But in the U.S., a non-profit hospital still has to recoup its costs, which are driven by the market system, and that alone means that they must seek to cover their variable costs on everything that they do, with a margin, so that they can then cover their fixed costs. Most non-profit hospitals in the U.S. reasonably price in a similar range to for-profit hospitals, but where they earn profits on some services they will usually take a loss on some other services that a for-profit hospital might not perform.

There are several major differences between for-profit hospitals and non-profit hospitals. Non-profit hospitals are not owned by investors, but usually have ownership rooted in charitable or community groups. For-profit hospitals are investor-owned. The investors have a specific interest in earning back returns on that investment, which is why for-profit hospitals tend to be more aggressive with respect to pursuing businesses that will result in increased profit. Investor ownership also means that a for-profit hospital is subject to all rules regarding public accounting practices, and are governed in a legal sense like a corporation. For-profit hospitals, for example, pay a tax on their land, where a non-profit hospital might not have to do that. For-profit hospitals have the ability to tap capital markets for money, either by issuing stock or by borrowing from banks, or via bond issues. This is something that a non-profit hospital cannot do, because non-profits are limited in their ability to access capital markets. Indeed, many formerly non-profit hospitals have converted to for-profit ownership in recent years in order to access capital markets (Becker, 2014).

There is a certain freedom associated with the for-profit model that is its greatest advantage. A for-profit can not only access capital markets, but that type of hospital has complete freedom over what types of services it wants to perform and what types of customers it wants to serve. A non-profit has more trouble raising capital, and there are times when a non-profit might be obligated to take on patients or procedures that are clear money-losers as a result of their non-profit status. The non-profit may, however, receive concessions such a breaks on property taxes. In inner cities, most hospitals are non-profits and this is probably one of the reasons for that.

Consolidation of hospitals has been going on well before the ACA, so let's stick to fact-based narratives here. There was a wave of hospital mergers in the late 1990s and consolidation was ongoing through the entire decade of the 2000s (Dafny, 2014). In terms of supply, first avoid being tricked by thinking that the number of hospitals equates to supply -- it's a poor measure of aggregate capacity. But where there are fewer total providers, that lessens competition for both individual payers and insurance companies, as they choose from fewer systems. Consolidation in the insurance business is a bit different -- where there is less flexibility to structure health care plans, and greater buyer information, there are fewer profit opportunities for insurers. Consolidation to theoretically capture greater scale in back room operations and marketing thus becomes a natural response. The forces that drive consolidation for hospitals have exited for decades, and for insurance companies have always existed, though with the latter those forces have been exacerbated by the ACA. The insurance companies have stated that the need for increased bargaining power on their part is a response to hospital companies becoming larger.