Nonprofit Community Hospital Mulls Becoming For-profit—At What Price?

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May 24, 2016; Des Moines Register

NPQ has written extensively about changes in hospitals and healthcare services, including the wave of hospital mergers, acquisitions, and closures since the Affordable Care Act was passed in 2010. One little-noticed trend is some nonprofit hospitals questioning whether requirements placed on nonprofit hospitals under the ACA and restricted access to investment justify maintaining their tax-exempt status.

Central Iowa Healthcare in Marshalltown, Iowa, may become only the second for-profit hospital in the state if its proposed sale to LHP Hospital Group is given final approval by the respective organizations and Iowa’s attorney general. This community hospital has the challenge of being a “tweener” hospital—too small to benefit from the economies of scale of large hospital systems, yet too large to qualify as a “critical access hospital” and benefit from the CAH program’s higher payments that small and remote hospitals receive to serve Medicare-eligible patients. Under the proposed agreement, LHP would provide management services for the hospital and the 220-bed Mary Greeley Medical Center in Ames, Iowa, would be included as a partner. The attorney general’s role would be to protect the public interest and assure that the nonprofit hospital’s assets continue to be used to benefit the public in Iowa and not leave the state.

It seems counterproductive to sacrifice tax exemption and voluntarily assume the burdens of taxation in a healthcare market with shrinking profit margins and extensive financial as well as programmatic regulation. However, one key benefit of for-profit status is access to capital markets for investment. A nonprofit hospital’s donors, like most donors to most charities, tend to be local and often take years to cultivate for major gifts. A for-profit corporation can sell an investment on relatively short notice on a national or even worldwide basis to people with no connection to the hospital.

We’re watching transactions like this one to see if a trend is developing where community hospitals continue serving residents, but at the price of sacrificing some of their connections to their communities and the community accountabilities built into nonprofit structures and regulations.—Michael Wyland