For Profit and Nonprofit Organizations

1. Hospital Ownership

The structure and ownership of healthcare organizations play an important role in shaping the quality, accessibility, and affordability of medical services. In the United States, hospitals can be classified into two primary ownership models: for-profit and not-for-profit. Each model presents unique operational frameworks, financial incentives, and impacts on community health outcomes. This lesson explores the differences and similarities between for-profit and not-for-profit hospitals, examining their impact on patient care, financial sustainability, and public health. It will emphasize how an organization’s focus might be affected by type of ownership.

2. Historical Background

Hospitals originated in the Middle Ages as charitable institutions focused on caring for the sick, poor, and marginalized.

did you know

Religious organizations or community groups often founded early hospitals, emphasizing compassion and service over profit. These institutions were seen as extensions of societal and spiritual responsibility, prioritizing patient welfare and community health.

As society evolved, particularly in the 19th and 20th centuries, hospitals began to professionalize and expand their services. Advances in medical technology and the establishment of formal medical education transformed healthcare delivery. With these changes, hospitals increasingly required significant funding for operating, leading to a shift toward more structured financial management.

IN CONTEXT

The post-World War II era marked a significant transition, as healthcare began to be viewed through a business lens. Rising costs, competition for patients, and the introduction of health insurance changed the landscape. Many hospitals adopted for-profit models, focusing on efficiency and profitability to sustain operations. This shift brought about a more corporate approach to healthcare, emphasizing financial performance alongside patient care. However, this shift was difficult for many in the industry who resisted the idea that healthcare was a business. Many wanted to keep healthcare as a charity without the business focus.

Today, while many hospitals still operate under not-for-profit models emphasizing community service, others have adopted for-profit structures, blending healthcare delivery with business principles. This evolution reflects a complex balance between compassionate care and the financial realities of modern healthcare systems.

3. Not-for-Profit, or Nonprofit, Healthcare Organizations

Not-for-profit hospitals are hospitals that operate with a focus on their mission, prioritizing community health over financial gain. These institutions use any profit to improve their services, facilities, and community programs rather than distributing profits to shareholders. This approach often allows not-for-profit hospitals to provide a broader range of services, including those that may not be financially lucrative but are essential for public health, such as emergency care and specialized services for underserved populations. They may rely on grants and governmental programs to invest in special services or equipment, along with donations from the community or special fundraising events.

key concept

Nonprofit hospitals often engage in community outreach initiatives, such as free clinics, vaccination drives, and educational programs. They may work to build a strong connection with the community and become an institution that the public counts on. However, nonprofit organizations often struggle with limited funding and resources. The reliance on donations and government support can be unpredictable.

term to know

Not-for-Profit Hospitals

Hospitals that operate with a focus on their mission, prioritizing community health over financial gain.

3a. Not-for-Profit Tax Status

Nonprofit healthcare organizations provide a service to the community and are exempt from paying federal income taxes because they provide a significant benefit to the public. In return for this tax-exempt status, nonprofits are required to meet certain standards, such as providing community benefits and ensuring their services are accessible to everyone. They provide emergency care and help educate about financial options for care. The IRS requires that a nonprofit healthcare organization operate to serve a public interest rather than a private interest.

3b. Earnings

Nonprofit status does not mean that the healthcare organization cannot be profitable or that it must attempt to only break even each year. It is what they do with the excess that gives them the nonprofit status.

EXAMPLE

Excess revenue is put back into the organization by making improvements or purchasing new equipment.

No owners or board members profit from the excess revenue. Instead, the community and healthcare consumers benefit in some way, since the profits are used to improve care which helps the community.

4. For-Profit Healthcare Organizations

For-profit healthcare organizations are businesses with the goal of making money, and their owners or shareholders benefit financially. These organizations can include private hospitals, clinics, and insurance companies, just like nonprofits. With generating profit as one of their primary goals, they must concentrate on efficiency and cost-effectiveness. They might invest in the newest, most interesting technology and services that attract consumers. They may market and focus on services that are more profitable and focus less on services that are less profitable or not profitable at all.

did you know

In 1968, Hospital Corporation of America (HCA) was formed. Now called HCA Healthcare, it was one of the first for-profit hospital companies in the United States. Today, it is one of the largest providers of healthcare providers in the country, with facilities located in 20 states and in the United Kingdom. It is made up of 180 hospitals and approximately 2,400 other healthcare facilities. In 2023, the company had revenues totaling $17.303 billion.

term to know

For-Profit Healthcare Organizations

Businesses with the goal of making money, and their owners or shareholders benefit financially.

4a. For-Profit Tax Status

For-profit organizations are subject to taxes on their earnings. They may look for tax savings and strategies just like any other business. For-profit hospitals must pay federal corporate income tax, which is generally assessed on their net income. They may also be subject to state and local taxes, which vary by location. Unlike nonprofit hospitals, for-profit facilities usually do not qualify for property tax exemptions. They must pay property taxes based on the assessed value of their real estate. For-profit hospitals may be subject to audits by the IRS or state tax authorities, and they must be prepared to provide documentation and justification for their financial practices.

4b. Decision Making

A for-profit status may affect how the organization operates and makes decisions.

EXAMPLE

They may decide to cut costs by reducing staff or limiting services that are not profitable. This might affect the patient's experience.

On the positive side, they might offer fancy amenities and shorter wait times to attract paying customers. They may also have more resources to invest in cutting-edge technology and specialized treatments. On the negative side, focusing on profitability can sometimes lead to a different culture where a patient may feel that they are just a number or that the hospital is cutting corners with their care.

think about it

Have you been a patient at a for-profit or nonprofit hospital? Have you noticed any differences in the quality of care, amenities, or environment between a nonprofit and a for-profit hospital? How did these differences impact your trust in or impression of the hospital?

It is a difficult balance for these organizations to be sure they are providing ethical and patient-centered care while at the same time focusing on the budget. They may face criticism for prioritizing profit over patient care.