Healthcare Management Explaining the Differences

Healthcare Management

Explaining the Differences between for-Profit and Non-Profit Hospitals

Of the many differences between for-profit and non-profit hospitals, the greatest can be found in the regulations and requirements of the Internal Revenue Service (IRS). Over the last five years the IRS has been vigorously enforcing and auditing all healthcare providers that claim to be in compliance to section 501(c)(3) of the Internal Revenue Code (Zaleski, Esposto, 2007). A secondary requirement is Form 990, which includes a series of requirements non-profits must meet in order to be considered for exclusion of state and federal taxes (Carlson, 2010). Both section 501(c)(3) and Form 990 have gone through drastic modifications over the last ten years, with much more oversight being included in each (Greaney, 2006). As a result, the ability to gain non-profit status as a hospital is becoming more difficult and ironically, more costly to maintain (Greaney, 2006). These changes within the industry have also create a much higher level of consolidation as well, with more for-profit hospitals acquire non-profit ones to build out their services portfolios (Speizman, 2009). The intent of this analysis is to evaluate how the differences continue to become more significant between for-profit and non-profit hospitals and how the challenges of operating the latter have continued to escalate.

Assessing for-Profit and Not-for Profit Hospitals

The burden of financial reporting and compliance is much greater on non-profit hospitals compared to their for-profit counterparts, in addition to much greater focus on quality of healthcare and level of information and knowledge sharing throughout their organizations. The for-profit hospitals have far greater control and leverage over their financing options, have potentially more control over their pricing strategies, and also have greater visibility into their long-term costs and capital structures (Zaleski, Esposto, 2007). A for-profit hospital can also create a more leveraged relationship with suppliers, especially fi they are part of a broader medical group, thereby getting a far more attractive price on components and suppliers. In addition to these benefits, the for-profit hospitals have much greater freedom in how much and by which metrics they pay their senior management compared to the non-profit counterparts (Speizman, 2009).

For non-profits, their pricing is highly regulated including their price increases, which must be substantiated after analysis of operating costs in many states (Zaleski, Esposto, 2007). There is also the need for non-profits to create more detail and a thorough analysis of their expenses and create audit trails for all expenses, especially fi the total operating budget is over $500,000, which is the threshold amount for Form 990 use as a non-profit healthcare provider (Carlson, 2010). A not-for-profit hospital must also provide an assessment of how they are continually upgrading their training and services departments, and show through financial analysis and reporting how the funds set aside for these areas is actually used as well (Greaney, 2006). Not only is the auditing and compliance requirements significantly different between for-profit and not-for-profit hospitals, the visibility and reporting into key technology investments to benefit a hospitals' performance is also reported as well. Of all areas of difference however the most significant is in the area of how each charges for services from a market and competitive valuation standpoint (Zaleski, Esposto, 2007). This area of pricing is what separates for-profits in terms of their ability to quickly raise prices if needed, in addition to changing pricing strategies quickly. This often results in for-profit hospitals having a very expensive financial operations and financial reporting function, with specialists on the hospital accounting and finance department payrolls who specialize in taxes, compliance to section 501(c)(3) and in the case of larger for-profit financial intuitions, tax attorneys (Zaleski, Esposto, 2007). For the non-profits the same level of compliance and reporting is necessary from an income and salary reporting level to maintain section 501(c)(3) and Form 990 status with the IRS (Carlson, 2010). Non-profits must also be in compliance to section 4958 in the event they pay excess salaries or compensation relative to industry benchmarks and the audit-based levels the IRS has determined through continual evaluation of section 501(c)(3) corporations.