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September 3, 2019; HealthLeaders

Among 5,200 non-federal hospitals in the US, 3,000 are nonprofits, 1,300 for-profit, and 1,000 operated by state and local governments. Variation by state, however, is significant, with Florida, Texas, and Nevada having the highest percentage of for-profit hospitals, at just over 50 percent. But what difference does it make for your community if your hospital is a community nonprofit or is owned by outside investors?

HealthLeaders points out three specific differences in the way nonprofit and for-profit hospitals are governed and managed:

  • Nonprofit hospitals are community-oriented institutions, driven by mission rather than shareholder returns.
  • For-profit hospitals must balance community service with shareholder returns; operational efficiencies drive decision making.
  • Nonprofit hospitals tend to plan for continued viability over the long-term; for-profit hospitals concerned with quarterly returns make short-term decisions that may not align with the needs of the communities they serve.

Using the example of Southwest General Health Center, a 350-bed nonprofit hospital in Middleburg Heights, Ohio, HealthLeaders illustrates how nonprofit hospitals realize their community commitments. Mary Ann Freas, senior vice president and CFO, explained to reporter Christopher Cheney that the hospital literally came into being when six local communities responded to the flu epidemic in 1920. Today, she says, the hospital’s mission to serve the community is “reflected in our governance…and our strategic plan.”

At Southwest General, two boards oversee the health system and the health center. Comprised of community leaders, Freas says, “These board members are truly local. They may be local business leaders, school district superintendents, [or] the local college president.”

The Southwest General model is quite different from Nashville-based HCA Healthcare, Inc, which owns 180 hospitals in the US and the UK. Chairman of the for-profit company is Thomas F. Frist III, founder and managing principal of Frist Capital LLC, a Nashville investment firm (and nephew of former Senator Bill Frist). The HCA board includes Nancy-Ann Min DeParle, former director of the Centers for Medicare and Medicaid during the Clinton administration and director of health reform for the Obama administration, who now is a partner at the New York-based Consonance Capital Partners, a private equity firm that invests in healthcare companies. The chairman of Royal Dutch Shell is also on the board.

Private equity investors use scale to drive efficiencies, buying up multiple hospitals and consolidating back-office activities such as billing and collections. Paul Keckley, former executive director of the Center for Health Solutions at Deloitte, told HealthLeaders that with declining reimbursements from major payers, “If you have a lower cost structure…it’s an advantage. Period. And that tends to be an advantage that the investor-owned health systems have. In most markets they operate cheaper.”

Investor-owned hospitals also tend to provide a narrower range of services, sending patients with complex needs to nonprofit systems that have the facilities to handle their care. You won’t find many for-profit hospitals providing neonatal intensive care or organ transplants, because hospitals tend to lose money on these essential services.

The risk with for-profit hospitals is that the efficiencies won’t materialize, and they will simply jettison facilities when overleveraged. Fraudulent billing is also an issue, as companies try to ensure profits by taking advantage of public payers like Medicare or private insurers. Such stories abound in the for-profit hospital market, one of the latest recounted in an August Kaiser Health News (KHN) story. Jorge A. Perez, his family, and business partners bought up rural hospitals in Missouri, Oklahoma, and Tennessee, convincing communities that EmpowerHMS could save their struggling institutions. According to KHN:

At the height of his operation, Perez and his Miami-based management company, EmpowerHMS, helped oversee a rural empire encompassing 18 hospitals across eight states. Perez owned or co-owned 11 of those hospitals and was CEO of the companies that provided their management and billing services. He was affiliated with companies that owned or managed the rest.

Fraudulent billing for lab services led to lawsuits from insurers, which has now resulted in 12 hospitals having entered bankruptcy and eight having closed their doors. Hundreds of employees have lost jobs, and communities have lost not only their health care facilities but property taxes as well.

Struggling rural hospitals face difficult decisions, and nonprofits too can close. Mission Health, the largest healthcare provider in western North Carolina, announced in March of this year that the 130-year old nonprofit could not make the investments necessary to provide top-quality care and would instead sell to HCA Healthcare. An integral part of the communities it serves, Mission Health last year reported spending $100 million on free charity care. It also reported partnering with 17 civic organizations to improve substance abuse care for low-income people.

Will HCA Healthcare continue to make these investments? This is where the real difference between nonprofit and for-profit health systems becomes apparent. The Affordable Care Act requires nonprofit hospital systems to report on the provision of charity care and other community benefit investments. These reporting requirements provide communities with leverage to shape their health care systems in ways that benefit the most vulnerable residents. Where nonprofit hospitals skimp on these programs, community activists can organize and demand these community institutions make different choices.

Mission Health’s community is concerned that the sale of the hospital to HCA Healthcare will inevitably increase costs, as HCA looks to increase profits for investors. Says Ron Freeman, chief financial officer at Ingles Markets, a supermarket chain headquartered in Asheville, “We understand the business reasons [for the deal], but our overwhelming concern is the price of health care. Will HCA after a few years start to press the hospital to make more profit by raising prices? We don’t know.”

It is difficult to blame for-profit health systems for the problem of overpriced care in the US, however. Cost is driven by multiple factors, but probably one of the most relevant in the hospital market is consolidation, whether the system is for-profit or nonprofit. In particular, gigantic nonprofit health care systems like Partners Healthcare in the Boston area and the University of Pittsburgh Medical Center are also driving up prices, according to Elisabeth Rosenthal at Kaiser Health News. These health systems earn large “surpluses” that they are investing in sparkling new money-making facilities for cardiac or other specialized care units that increase revenues. Ensuring that nonprofit health systems continue their investments in charitable care and community programs that address social determinants of health requires constant vigilance by regulators, legislators, and community activists who are cognizant of the needs of their communities.—Karen Kahn