Nonprofit vs. For-Profit Hospitals: What’s the Difference?

According to the American Hospital Association, there are over 920,000 staffed hospital beds in the United States and 5,139 community hospitals in the country. Non-governmental nonprofit health systems account for the largest number of facilities at 2,960. There are also 1,228 for-profit investor-owned hospitals and 951 state and local government hospitals.

All hospitals employ physicians and other medical staff, care for patients and operate in a tightly regulated framework. However, there are key differences between for-profit and not-for-profit hospitals. Please continue reading to learn more.

What are for-profit health systems?

For-profit hospitals are essentially for-profit companies that are owned by investors and shareholders. They provide care to patients but also generate returns for investors. Because they are business-driven, for-profit hospitals can acquire the most advanced medical technologies and offer superior care to patients.

What does it mean when a hospital is nonprofit?

A not-for-profit hospital means the hospital's profits do not go to shareholders or investors. Instead, the profits return to the hospital and are used for its operations. Not-for-profit hospitals' tax-exempt status requires them to provide more community-based health programs and care to every patient, irrespective of their financial status.

What are the strategic differences between nonprofit and for-profit hospitals?

Tax Status

For-profit hospitals pay local and state taxes to municipal and state governments, which have community benefits. Taxes paid by for-profit hospitals support local governments in infrastructure development, such as roads and schools, and other government programs. Nonprofit hospitals do not pay taxes. They are exempt from paying federal and state income tax, sales tax, and property taxes. They also enjoy other tax benefits.

Corporate Culture

For-profit health systems have the burden of paying taxes and showing financial returns for shareholders, so they have to be more cost-efficient. As a result, for-profit hospitals are more operationally disciplined and cost-conscious. On the other hand, nonprofit hospitals tend to be less financially driven and more service-driven toward providing clinical services.

Compensation Structures

Such as any business, for-profit health systems are under pressure for financial performance. They are usually a publicly traded company or private equity firm that has to maintain profitability to keep shareholders happy. The focus at these facilities is, therefore, on profitability. To this end, many for-profit hospitals use monetary incentives such as stock options to reward robust financial performance. Also, they are quick to cut costs when they start to lose money. On the other hand, the compensation packages for leadership roles, such as a chief operating officer or senior vice president at a nonprofit hospital, are less likely to be incentive-based.

Scale

It is in the operational interest of for-profit hospitals to operate on a large scale. For example, about a dozen for-profit health systems owned 635 hospitals as of 2016, roughly half of all for-profit hospitals in the country. The scale allows for-profit hospitals to access capital, expertise, and resources. It also allows them to standardize best practices across facilities to achieve their business goals.

Competitive Edge

When for-profit healthcare systems negotiate managed care contracts, they tend to be more aggressive in negotiations and have an advantage over nonprofits. However, a not-for-profit health system doesn’t have to pay the same taxes as a for-profit, so it can take the income and use it to grow or provide community benefit.

Are nonprofit hospitals better?

The majority of hospitals in the US are not-for-profits. Good hospitals need to be both service-driven and business-driven. Here are some pros and cons of nonprofit and for-profit health systems.

Location

There are nearly 5,200 non-profit hospitals in the US compared to approximately 1,200 for-profits. People seeking health care have more locations to choose from in the nonprofit healthcare sector. However, the number of for-profit versus nonprofit hospitals depends on the location. Approximately half of all for-profits in the US are located in Nevada and southern states like Florida and Texas. Nonprofits are concentrated in the West, Southwest, Midwest, and Northeast. It was illegal to profit from healthcare before Nixon signed the 1973 HMO act into law, and many states have not embraced this new model.

Cost

Nonprofit hospitals usually charge less for services and medical procedures compared to for-profit hospitals.

Quality of Care

Statistics have shown that not-for-profit hospitals perform better than for-profit hospitals in treating common illnesses and have a lower death rate. In contrast to for-profit hospitals, whose first priority is their shareholders, a non-profit puts its patients first so they get better care. Patient satisfaction with healthcare services tends to be higher at non-profits.

Accessibility to Care

Because of their tax exemption status, the federal government requires not-for-profit hospitals to provide health care to anyone who needs it. They are obligated to treat all health conditions, even if they are not life-threatening, regardless of the patient’s ability to pay for the treatment. On the other hand, for-profit hospitals are allowed by law to refuse care to patients who cannot pay for treatment as soon as they are out of danger.

Community Support

The responsibility of nonprofits is toward the community. Their community outreach may include free acute-care centers in low-income communities. These community health organizations offer the same level of care for less money, home health services, and health clinics in rural areas. In contrast, the responsibility of for-profit hospitals is toward their investors and not the communities they serve. They have to be profitable enough to pay dividends to their shareholders and move the organization toward greater financial stability. Therefore, for-profits aim to maximize profits rather than respond to community needs.

Specialty Services

Nonprofit hospitals frequently provide services such as trauma wards, burn units, drug treatment programs, and psychiatric care, which are expensive but financially less viable. Nonprofits aim to provide all the services that benefit a community, even at the expense of the hospital’s profitability. For-profit hospitals tend to focus on the most profitable services, such as complicated diagnostics or cardiac procedures that require advanced technologies.

Facilities and Equipment

Many nonprofit hospitals struggle financially and have huge debts. They may not have the capital to buy the latest medical technologies. Their for-profit counterparts enjoy financial stability, are debt-free, and can purchase advanced medical technologies. As a result, in some cases, for-profits may provide better medical and surgical services than nonprofits. An exception to this rule is the non-profit institution, the Cleveland Clinic, which offers some of the best care in the world.

Administrative Hurdles

Both for-profit and non-profit hospitals have the ability to consolidate billing, medical records, and other administrative services across locations; however, for-profits are known for their efficiency in streamlining processes and carefully tracking revenues. Non-profit hospitals sometimes face more administrative difficulties and bureaucratic hurdles but may have more flexibility to help low-income patients, ultimately providing more free care to its patient populations. Patients may need to jump through more hoops to have billing issues resolved at a non-profit, but it may lead to reduced or forgiven bills depending on each patient’s situation.

Waiting Times

Because nonprofit organizations offer more charity care, waiting times to see healthcare providers tend to be longer at these facilities, even with private insurance. It is common to have a waiting time of 24 hours in a large city with a busy emergency room.

Wrapping Up

In summary, nonprofit hospitals and health facilities are a staple to the healthcare industry in the US. Before 1973, all hospitals were not-for-profit, funded mainly by charitable donations, religion, or research and educational funds. For-profit hospitals are owned either by investors or the shareholders of a publicly-traded company. While for-profit hospitals have traditionally been located in southern states, the financial crisis of the early 2000s led to the acquisition of many nonprofit hospitals by for-profit companies.

Another major difference between the two classes of hospitals is that for-profit hospitals can lawfully release patients who lack the ability to pay for further treatment after they establish that they are out of danger. Nonprofit hospitals are obligated to treat all conditions, whether life-threatening or not, regardless of the patient's financial or health insurance status.

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