Investor-Owned vs. Not-for-Profit Hospitals

Q1: What are the arguments for conversion of not-for-profit hospitals to investor-owned?

A1: There are several key factors to consider when evaluating the benefits of conversion from not-for-profit to investor-owned status:

Increases community tax base: Investor-owned hospitals pay local taxes and therefore increase the community tax base.

Charitable trust funds community health initiatives: When not-for-profit hospitals are converted to investor-owned hospitals, a charitable trust is created with the proceeds. This trust funds important community health programs and initiatives.

Greater access to capital: Not-for-profit trustees that are frustrated by the difficulty of gaining access to capital markets may look to conversion as a way to create investments in better technology and additional services, and to make improvements in, or replace entirely, the hospital plant.

Increased efficiency: When a larger hospital system purchases a not-for-profit, the system brings with it economies of scale in specialized management talent, supply purchasing and technology investment -- all of which result in increased efficiency.

Implement a strategy change through a foundation: Hospitals have become extremely complicated businesses because they combine high capital intensity, high labor intensity and heavy regulation. A strategy change that puts the hospital operations in the hands of a company with expertise in this area and establishes a foundation whereby trustees oversee the allocation of financial assets to community needs can be a reasonable response to these challenges.

(Study: What Does the Research Say About Hospital Tax Status Conversions. Cain Brothers.)

Q2: Is there evidence that suggests there is a reduction in service when hospitals convert from not-for-profit to investor-owned status?

A2: In fact, investor-owned hospitals are better able to improve service through better facilities, more highly skilled staff -- especially medical specialists, new and upgraded technology. They are better able to do this due to their access to capital.

Q3: The number of hospital conversions from nonprofit to investor-owned status is on the rise, doesn’t this mean that as investor-owned hospitals strive to please their shareholders and cut staff and expenditures in the hospitals they’ve converted, patients will suffer?

A3: Hospital conversions are not on the rise. Most importantly, just as with not-for-profit hospitals, investor-owned hospitals’ primary mission is providing high quality care that achieves positive patient outcomes and a valuable service to the community.

Q4: Why is there an increase of not-for-profit hospitals selling out to investor-owned hospital groups?

A4: Hospital conversions from not-for-profit to investor-owned are not increasing.

Q5: After acquiring not-for-profit hospitals, do investor-owned hospitals provide the same level of charity care?

A5: Just as with not-for-profit hospitals, investor-owned hospitals’ primary mission is providing high quality care that achieves positive patient outcomes and a valuable service to the community.

Q6: Since not-for-profit hospitals have no shareholders and pay no taxes, can’t they operate with a lower level of return and invest more money in items such as computer systems, automation, facilities and other improvements?

A6: Actually, investor-owned have broader access to a wide variety of capital markets, which allows them to invest more heavily in upgrading facilities, technology and staffing. Viewed another way, the investor-owned hospital must invest more to recruit physicians and attract patients to improve its financial position and satisfy shareholders.

Q7: Is it true that investor-owned hospitals, motivated by profit and more heavily burdened by taxes, have fewer skilled personnel per patient?

A7: Investor-owned are more strategic about staffing, focusing more on clinical staff than administrative and, in fact, centralizing administrative functions to make them more efficient.

Q8: What are investor-owned hospitals doing in response to the surge in demand for hospital care?

A8: One consequence of the surge is that investor-owned and not-for-profit hospitals are providing more and more care to uninsured patients. Additionally, due to their access to capital, investor-owned hospital systems are able to respond quickly to the surge in demand for hospital beds in their community by building new facilities, purchasing new and upgraded technology and providing necessary staff training.

Q9: Investor-owned hospitals must be aggressive competitors and generate profits by reducing costs, pumping up profitable product lines and taking market share from not-for-profits, doesn’t this compromise the quality of the care they provide to patients?

A9: All hospitals need to maintain a healthy margin to compete and to invest in new services and equipment. It is irrelevant whether a hospital is not-for-profit or investor-owned. Competition is healthy and the end result is better care for patients. The market for hospital services is growing and there is ample room for both investor-owned and not-for-profit to coexist in the same community.

Q10: Isn’t there an inherent conflict of interest in an investor-owned hospital in that managers of for-profit organizations are ultimately accountable to owners who generally seek to maximize the value of their investments, while nonprofit managers are accountable to boards of trustees, whose members lack an ownership stake and who may be chosen in a variety of ways and have a variety of values, motivations, and goals, including community service?

A10: Unless a hospital can first satisfy healthcare needs of the community, it cannot satisfy shareholders or bond holders. All hospitals must be operated in a financially responsible way. Not-for-profit hospitals are responsible to bond holders just like investor-owned hospitals are responsible to shareholders and bond holders as well. Ultimately, both are responsible to the community. If a hospital doesn’t provide high quality care it certainly will fail.

Q11: There is concern that the increasing commercialization of health care means that not-for-profit hospitals are less able to serve and provide leadership and benefits to its community and, in addition, that when not-for-profit hospitals convert to investor-owned status, the new entity provides less charity care and fewer community benefits?

A11: Investor-owned hospitals provide the same level of charity care as not-for profit hospitals. In addition, they pay local taxes which benefit the community. They also fund public health programs and initiatives through the charitable trust that is created when the hospital is converted to investor-owned status.

(Study: Does The Sale of Nonprofit Hospitals Threaten Health Car for the Poor? Gary J. Young, Kamal R. Desai, and Carol VanDeusen Lukas; Article: Weighing Profits Against Healthcare. Nancy Salem.) (FAH statistic)

Q12: Does the presence of investor-owned hospitals have an adverse affect on the financial situation of the not-for-profits in the same community?

A12: To the contrary, investor-owned hospitals bring with them a capital infusion into the community, which benefits patients across the board. Investor-owned hospitals have broader access to a wide variety of capital markets, which allows them to upgrade facilities with the latest technology, hire highly skilled healthcare professionals, invest in staff training and quickly respond to community healthcare needs. Investor-owned hospitals consistently set the standard for patient care that demonstrates better treatment and management techniques to the entire hospital industry – for the advantage of patients and communities. Investor-owned and not-for-profit hospitals comfortably coexist in hundreds of communities across the country.