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Should We Still Have Nonprofit Hospitals?

Patient experience, operations, and charity care muddy the waters between for-profit and nonprofit hospitals.
Building with large H sign for hospital iStock

If you walked into a nonprofit hospital in North Texas, it would look and feel nearly identical to a for-profit hospital. Many patients may not even know there is a difference. Regarding patient experience and hospital operations, the differences between the two are slim, and data show that for-profit hospitals actually provide more charity care than nonprofit.

Texas has the second-highest percentage of for-profit hospitals (behind only Nevada), which makes sense given its pro-market political stance. More than half of the hospitals in the state are for-profit, and North Texas is a prime example of how the systems compete for business. As soon as a North Texas suburb is large enough to support a community hospital, the major systems (Baylor Scott and White Health, Methodist Health, Texas Health Resources, and Medical City) race to build a location there. At times, these systems have hospitals just blocks apart, and both nonprofits and for-profits exhibit similar growth strategies.

How We Got Here

In the pre-industrial healthcare age, only comfort care could be offered to the sick and dying. Without any real understanding of antibiotics and modern medicine, religious organizations provided what they could to help those in need. Healthcare was purely a charity at that point, without much thought toward how to turn the experience into a business.

As medical technology and pharmaceuticals advanced, there were more incentives to make money on healthcare. But even after World War II and the growth of social security, hospitals were run by religious organizations, not business-minded people with MBAs. The hospitals provided care as best they could, but without an eye toward efficiency. If an x-ray was done incorrectly, they would do another, and there were only rudimentary established protocols for procedures and surgeries. If someone could figure out how to run a hospital more efficiently, there were margins to be made.

In the 1980s, the for-profit hospital model took off as smaller nonprofit hospitals closed, unable to keep up with the efficiencies required by Medicare and Medicaid for reimbursement. The race to build larger and larger systems began, with for-profit and nonprofit systems expanding to improve efficiency and market share as cost containment became more critical. By the end of the 1990s, religious nonprofit hospitals were employing the same efficiency standards that for-profits had pioneered.

Aggressive marketing and advertising campaigns, tough negotiations with insurance companies, and salaries for providers and administrators became competitive whether one was working for a nonprofit or for-profit hospital system, especially in an urban area like North Texas, which has brought us to the healthcare industry we have today. 

Evaporating Differences

One might think that a nonprofit hospital would provide more charity care, but a 2018 Health Affairs report found that nonprofit hospitals actually provided nearly 40 percent less charity care than for-profit hospitals. For every $100 of care delivered, nonprofit hospitals contributed $2.30 of charity care, while for-profit hospitals provided $3.80 for every $100 of care. Government hospitals provided $4.10 for every $100.

“Many government and nonprofit hospitals’ charity care provision was not aligned with their charity care obligations arising from their favorable tax treatment,” the report read. “Policymakers may consider initiatives to enhance hospitals’ charity care provision, particularly hospitals with government and nonprofit ownership.”

Of course, nonprofit hospitals don’t pay taxes and are required to give a certain amount back to society, while for-profit hospitals pay taxes. But the competitive edge, financial pressure, and operational processes that may have distinguished for-profit entities in the past are no longer as clear.

Dr. Britt Berrett is uniquely positioned to weigh in on the differences between the two. He served as CEO of Medical City Dallas before moving to be an executive vice president at Texas Health Resources on the other side of Central Expressway. He is now director of the Center for Healthcare Leadership and Management at UT Dallas. “I was grateful that same level of discipline that I experienced in the taxpaying entity was occurring in the tax-exempt,” he says. “They just term it differently—’Stewards of sacred resources’ vs. ‘We’ve got to be very efficient.’”

Berrett found that moving into the nonprofit world did not mean a shift away from focusing on the business side of operations nor an increase in the caring nature of the providers. For-profits may have quicker access to capital and be accountable to stockholders if they are public, but that doesn’t mean the nonprofits aren’t just as shrewd.

The origins of healthcare were all about charity and without a focus on economic advancement, but now the differences between the two types of hospitals have evaporated. Nonprofit hospitals are clearly profitable, and they pay staff salaries, invest in new buildings, and pay for lobbyists, just like any other for-profit entity. All this begs the question: Should hospitals retain their nonprofit status?

The focus on profitability for both types of hospitals is evident when looking at geography. There are only two hospitals south of I-30 (both Methodist Health) in Dallas. All other nonprofit and for-profit facilities are sprinkled through more affluent communities and suburbs, with higher levels of fully insured potential patients. “There are geographies where they won’t go that a Parkland will go,” Berrett says.

While nonprofit health systems do their needs assessments and send millions to different causes in their communities, isn’t that also what government is for? The taxes that for-profit hospitals pay also make their way to community services and do so with voters’ input. Don’t city, state, and national lawmakers assess the community’s needs and direct funds to those needs as well? Why not let the voters choose where the potential taxes from nonprofit health systems go?

Moving Forward

There hasn’t been a real challenge to the nonprofit status of a hospital in decades, and there are unlikely to be any shifts moving forward. But hospital service costs are unsustainably growing, and from 2007–2014, hospital prices rose 42 percent.

With that level of cost increase, there will come a day when anything is up for grabs. For now, though, the similarity between nonprofit and for-profit hospitals may be a good thing for the future of healthcare.

“When you have competition, you see greater innovation and creativity,” Berrett says. “They have to respond to the same environmental issues. If there is no competition, then maintaining the status quo is a comfortable place to be. When there’s competition, then you elevate innovation and creativity.”

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