By C. Richard Patterson, MD

According to the American Hospital Association (AHA Hospital Statistics, 2012 edition), there were 4985 community hospitals in the US in 2010.  Of those:
  • Private, Not-for-Profit:  2904
  • Private, For-Profit:  1013
  • State or Local Government:  1068

 These community (non-federal, short-term care) hospitals accounted for the following:

  • Share of all US hospital beds:  85.4%
  • Share of all hospital admissions:  95.1%
  • Share of all hospital expenses:  90.3%

 According to the 2008 AHA statistics, beds were distributed thusly:

  • Private, Not-for-Profit:  70%
  • >Private, For-Profit:  14%
  • Governmental:  16%

All these distributions are dynamic, with a trend toward increasing shares by for-profit companies through the acquisition of private and governmental not-for-profit hospitals.

While there are exceptions, state and municipal hospitals are over-represented in the so-called “safety net” category, i.e. hospitals that serve the medically indigent.  It is clear that most insured Americans receive their hospital care from either for-profit (FP) or not-for-profit (NFP), non-governmental hospitals.

What are the differences?  (Spoiler alert:  it is NOT that NFP’s are against profit.)

The fundamental difference is in the founding purpose of the organization. In the eyes of the IRS, FP’s are created for the purpose of making a profit, period.  NFP’s are created for some other purpose, usually a charitable one.

It is not that NFP’s cannot make a “profit”, alternatively termed “margin”, “excess revenue over expenses”, et alia.  As a matter fact they must or face extinction.  The distinction is in what they may do with their profits.  FP’s may distribute their profits to share-holders/investors, or they may plow all or some of those profits back into their facilities.  NFP’s do not have investors; all their profits must be re-invested in services and properties.

In order to gain IRS designation as a NFP, an organization also has to demonstrate some level of community benefit as opposed to investor benefit.  IRS designation is critical, because the qualifying organization is declared tax-exempt.  Profits are not taxed, property taxes are not paid, tax exempt bonds may be issued, and contributions from individuals or organizations are deductible from the donor’s tax burden.

There is some tension between the FP and NFP communities.  NFP’s characterize themselves as mission-driven, providing services to all without regard for ability to pay.  By contrast, they suggest that FP’s are avaricious, interested only in those services and populations most likely to produce distributable profits and increased value for stockholders.  They warn that FP’s will skim, leaving the NFP’s with non-viable market shares and possible closure.

FP’s point out that, in addition to the benefit of paying a full share of taxes, they also provide substantial levels of uncompensated care to their communities.  Further, the level of “charitable” services necessary to qualify for NFP status is ill-defined, and FP’s cite data (e.g. the National Bureau of Economic Research) alleging that 20 to 80 percent of NFP’s do not provide community benefits equal to the cash value of their tax exemptions.

The two sides also exchange shots and purportedly affirming studies regarding quality of care, operational efficiency, contribution to professional education, skimping on support services, provision of high-tech facilities, etc.

All this squabbling aside, this is where I see the private hospital sector going:

  • reforms in how we pay for healthcare will result in the closure of some hospitals, either in part (#beds, services offered) or in whole—NFP’s are considered to be at greater risk;
  • payment reform will intensify the pressure for consolidation among hospitals for the purposes of gaining contracting leverage, economies of scale, access to capital, marketing clout, et alia;
  • the tax-exempt status of NFP’s will undergo more scrutiny;
  • FPs and NFPs will resemble each other more and more in their business practices;
  • patients and payers will likely wind up with less rather than more choice in locally accessible healthcare systems.

 Less choice does not mean you should drop your guard and take whatever is available, however.  I am convinced that a substantial burden of these reforms will rest upon those of us who seek healthcare services.  We need to be better informed, more inquisitive, more engaged, and more willing to travel, if necessary.

Admitting my bias as a physician, I believe a key to our effectively shouldering that burden will lie in relationships with a doctor or a group of doctors.  That’s the next problem and the next blog:  we’re running out of doctors.

  Richard Patterson is a retired surgeon who blogs at dailydudley.com.