When Is It More Profitable To Be A Non-Profit?

Where do you think you get the most affordable hospital care?  In a non-profit hospital or a for-profit hospital?

You would think the non-profit facility would have significant cost advantages in that it is operating with an altruistic attitude.  It is also typically exempt from local property taxes and federal and state income taxes.  These are very significant advantages and you would think these would benefit the patient's pocketbook.  You would be wrong.

This link provides the average hospital costs per day for non-profit and profit hospitals by state.

Here are the average costs per day nationally for the most recent reported year of 2010.

Non-Profit                       Profit
  $2,025                           $1,629                             

Brett Joshpe recently wrote about the "Non-Profit Healthcare Myth". 

Steven Brill’s recent Time article, “Bitter Pill,” should refocus attention on non-profit hospitals, which have long deserved increased scrutiny. The exposure comes at an opportune time, as America is grappling both with a healthcare and budget crisis and Congress is discussing long-term budget measures that may include eliminating tax loopholes. If closing tax loopholes, from individual and business deductions to carried interest is all on the table, then the tax exempt status of certain non-profits, particularly hospitals, should be as well.

As Brill and others before him rightly point out, the “non-profit” designation that projects an air of selflessness, benevolence and charity, in many cases, is undeserved. When people hear “non-profit,” many naturally assume that money is not the primary motivation behind the institution.  In reality, however, non-profits, particularly in medicine, have become a huge business in America. Not that there is anything wrong with that, only that we should consider why taxpayers subsidize these entities and what we are getting for that subsidization in return.

In the case of non-profit hospitals, which comprise over 60 percent of the hospitals in America (for-profits and public tax-exempt hospitals make-up the remainder), the answer is not enough.

Joshpe asks the fundamental question that should be asked.  What is the public getting for the non-profit designation that has been given to these facilities?  Has something been lost compared to their original purpose?

Under the Internal Revenue Code (Section 501(c)(3)), non-profit hospitals are eligible for federal tax exemption if they fulfill a charitable purpose. These organizations are also typically exempt from property taxes, are able to accept tax-free donations, and are able to issue tax exempt bonds that lower their cost of capital. Prior to 1969, IRS regulations required that non-profit hospitals actually provide, to the extent of their financial capability, charitable care for those who could not afford medical services. But the IRS relaxed those requirements, and now hospitals need only promote the health of the community at large to meet their tax-free exemption obligations.

As a result, non-profit hospitals often inflict devastating financial pain on individuals that lack insurance or are under-insured. What is particularly troubling too is that these non-profit hospitals are providing virtually no price transparency to patients, one of the fundamental assumptions behind any free market.  Hospital chargemasters create bills seemingly out of thin air, after-the-fact, making the enormous invoices often sent to uninsured or under-insured patients and resulting in financial ruin even more sinister.

Meanwhile, many non-profit hospital executives make millions in salary annually. The non-profits have also embarked on an aggressive M&A spree that has consolidated supply, raising healthcare prices further, and making real consumer choice tougher. Overall, the average, non-profit hospital operates at a profit margin that is comparable to for-profits while receiving billions of dollars in tax subsidies per year.  HCA, one of the largest for-profit hospital operators, alone paid nearly $900 million in income tax in 2012.

We often hear about evil for-profit enterprises.  This is a constant refrain in health insurance as we hear liberals argue that we need Medicare-for-all.  Or all insurance companies should be non-profits.  Everything would just be great if it were not for those blood-sucking, greedy for-profit health insurance companies.  However, looking at the numbers in the hospital world, costs are actually higher for non-profits than with the for-profit hospitals.  In case you hadn't noticed, hospital charges are also the largest component of healthcare spending in the United States.

Joshpe sees a big reason for the higher costs with non-profit hospitals is the lack of accountability.  They are not accountable to tax collectors, shareholders, and most particularly, patients (due to our third party payment system where it is rare that the bill is paid by the person receiving the treatment).

Another reason to reconsider the special status of certain hospitals is the odd paradox that greed may infect the non-profit healthcare model—at the expense of patients—more than the for-profit model.  That is because for-profit hospitals are at least accountable to somebody, namely tax collectors, and, more importantly, shareholders. Shareholders have an incentive to police executives who may otherwise loot an enterprise with high salaries and perks and engage in overly aggressive capital expenditures. While for-profit institutions are primarily concerned with the bottom line, as opposed to charity, they at least must be somewhat cognizant of how the public perceives their business practices.  Ostensibly, non-profits should be as well, but with no shareholders to report to, boards, and therefore executives, are less accountable.

One more example that the world often does not work the way it is supposed to work.  My experience is that when this is the case, the incentives are misaligned.  It seems to me that the tax-exempt status of non-profit hospitals needs to be looked at much closer to insure that they are serving the public good.  If they are not, they should not be given the significant benefits they are receiving.