For-Profit Structure Like the HMO

¶ … for-profit structure like the HMO in consideration has a duty to make a profit for its shareholders. By giving the non-profit Marcus Welby Hospital (MWH) a 30% ownership stake in a for-profit structure, MWH potentially takes on an obligation of profitability for its new shareholders. This could mean, theoretically, turning away patients which are not strictly profitable for the institution. For example, Medicare and Medicaid patients are traditionally under-reimbursed for hospitals, thus resulting in losses for hospitals that take such patients (Hayden 2005, p.1). Would MWH have to shift its focus to more profitable 'customers,' those for whom the compensation is greater from insurance companies, to satisfy its ethical obligation as a newly partial for-profit entity and to service its new shareholders?

The exchange is dependent upon MWH contributing a million in capital funds, 35% of the HMO's appraised net worth, which means that MWH is behaving like a for-profit entity -- rather than funneling its profits back into its core institutional functions, it is instead using its profits to make business decisions to increase its revenue. It also intends to use the funds it gains from selling its nursing home to funnel the money back into the HMO trustee's as well as its own 30% profit sharing arrangement. This could also jeopardize its tax-exempt status (Rabkin 1999).

So-called 'not for profit' HMOs have faced increasing critical scrutiny and a for-profit HMO that engages in an alliance with a not-for-profit hospital is likely to face similar criticism. One editorial suggested: "all such HMO corporations that engage in commerce in a necessity of life, namely health care, ought to either pay taxes or compensate for their tax-exempt status by providing meaningful services to their members and the community at large. Their activities should be regulated like utilities, with careful attention to any change of service that would affect the well-being of customers" (Rabkin 1999). Even if the alliance is found to be legally permissible, it seems advisable that the HMO engage in some charitable actions, to preserve the hospital's charitable reputation as well as its tax-exempt status.

Problem #2

The primary difference between not-for-profit organizations and for-profit organizations are that not-for-profits do not disperse their profits to shareholders in the form of dividends. For-profit corporations are only ethically bound to behave in the most profitable manner possible. In fact, some business ethicists consider it unethical for-profit companies to engage in charitable actions that could impinge upon the goal of increasing the corporation's bottom line and the profits of shareholders and/or owners. Non-profits operate as tax-exempt charities and are ethically bound to serve the public good. All funds are diverted back into the organization, to further its stated goals.

One obvious problem with using a non-for-profit structure is that it impinges upon the organization's ability to sell shares to raise revenue. On the other hand, donors are encouraged to make contributions to not-for-profits because their donations are tax exempt. A corporation, in contrast, is taxed as a fictional 'person' under the law. A not-for-profit enterprise has the freedom to pursue a wider range of goals, such as providing heath insurance to consumers who might be 'high risk' yet lack coverage. This may not be strictly profitable, but may be part of the organization's charitable mission.