Non-profit versus for-profit health organizations

The debate on whether all healthcare institutions should be non-profit evokes many complex and topical issues. What needs to be examined is whether non-profit hospitals are inherently better than for-profit hospitals, and whether there is enough evidence-based data to support policies dictating ownership.

Private hospitals can either classify as non-profit or for-profit institutions. Non-profits include a majority of the hospitals in the US. The two types of hospitals differ mainly in regulatory rules. Non-profit hospitals do not need to pay property, sales, or income taxes. Despite these differences, the two types of ownerships have been becoming more and more similar and many hospitals have been switching ownership status suggesting that the hospital industry is less stagnant than the public perception assumes.[1]

For-profit and not-for-profit hospitals generate revenues through daily operations. For-profit hospitals are able to generate funds through issuing stocks while non-for-profit hospitals do not have this ability. Accordingly, non-for-profit hospitals can issue tax-exempt bonds and can accept tax-deductible contributions.[2]

Non-profits were created with the intention of servicing the needs of the poor. This subsequently led to non-for-profit hospitals being exempt from taxes, as they were providing certain social services. [3] Today, approximately 85% of hospitals are non-for-profit and are expected to have a charitable mission. [4]

One of the arguments often cited by proponents of turning all health care institutions into nonprofit entities is that they provide more charity care. According to data from the American Hospital Association, there is little difference in the amount of uncompensated care provided between the two different hospitals. This suggests that nonprofits are not providing as much care as they should given their tax exemptions.[5]

While non-profits are viewed as more honorable organizations, this perception is not based on actual data. A study from 10 years ago argues that somewhere between 20% to 80% of all non-for-profit hospitals fail to make societal contributions equal to the amount of taxes they are exempted from. This view has alarmed many communities and officials who are now investigating whether non-for-profit hospitals should qualify for tax-exemptions.[6]

Legal action has been taken in some cases.  Texas has passed a law that requires nonprofits to offer charity care that equals in value their tax exemptions. The Utah Supreme Court has interpreted the state’s constitution as having a similar mandate. Policy makers and health-care advocates have also expressed concern over the tax exempt status of non-profits. For example, the US House Ways and Means Committee made an investigation into the matter in 2004 and concluded that a revocation of the tax exemption would lead to substantial revenue for the federal government that would be more beneficial than their charitable care. Consumer groups have launched suits arguing that not only do certain non-profits not offer enough charitable care, they also engage in aggressive collection methods and charge uninsured patients inflated prices.[7]

There has been a misconception in the public’s perception of the two types of hospitals that is based on factless arguments. Non-profits are viewed as charitable organizations with community centered missions while for-profits are viewed as compassionless and opportunistic.  This perception fails to take in consideration the growing number of convergence between the two types of ownership.[8] Many studies focus on the behavior of for-profits and nonprofits by making the assumption that they have different objectives. This is often not true, as more nonprofits are behaving more business oriented. Other characteristics that should be studied to explain discrepancies in data are free standing versus system hospitals.[9]


Hospital may choose between for-profit and not-for profit status depending on a strategic analysis of their regulatory, political and economic environment.  According to a study conducted by Guy David, the reason behind different ownership statuses is a different ability to benefit from said status, not a difference in objectives. [10] Many health organizations, such as Blue Cross, have been trying to switch to for-profit status for reasons including economies of scale, ability to serve multistate employers, and diversification of risk.[11]

While opponents of for-profit health institutions often argue that for-profits have higher costs and lower quality, many studies contradict this view. In a study conducted on Blue Cross conversions, findings showed that there was no increase in costs due to the conversion and there was no negative effect on healthcare availability.[12]

A separate study showed that hospitals that choose to convert are usually in a poor financial situation, and their finances improve after the switch in ownership. These improvements were measured in reduced Medicare costs and higher overall revenues.[13]

Additionally, nonprofits that retain their status have gradually come to resemble for-profits in numerous ways. For example, more nonprofits are now relying on revenues generated from services versus donations, more of them are depending on their economic performance in order to gain access to specific types of financing, more of them have less ties with the community and are functioning on a more national level, and more nonprofits are engaging in practices traditionally reserved for for-profits such as hybrid arrangements, joint ventures and alliances.[14]

Proponents of nonprofits claim that the two entities have different objectives; nonprofits want to better the community, while for-profits are mostly interested in maximizing profits for their shareholders. Many studies show that not to be the case. For example, in a study performed by Mark Duggan, a professor of economics at MIT, the idea that for-profits and nonprofits have similar objectives is reconfirmed. More specifically, the author rejects the notion that nonprofits are more altruistic. He found that when introduced with increased revenues, both types of hospitals used them to increase their financial assets versus improving medical care quality for the poor. [15]

While there are studies that reflect badly on for-profits, for example the study conducted by Dr. David Himmelstein, further investigation shows that the studies have crucial flaws. The aforementioned study self admittedly mentions that the indicators used to measure quality have serious shortcomings. They use HEDIS quality indicators which do not take into consideration the outcomes of care and also exclude patients who are not continuously enrolled. Additionally, plans may focus their efforts on specific areas that HEDIS measures, thus skewing the results.[16]


According to a study conducted by Dr. Landon which is the largest study conducted on health plan practices, all health plans are exposed to constraints and the for-profit models allows for more flexibility and more available financing resources to deal with them. They also have more resources to invest into higher quality care. According to this study, for-profits have been coexisting with nonprofits without jeopardizing any quality in their services.[17]


While some studies suggest that for-profits actually benefit the healthcare industry, either through introducing new sources of capital or by making more services available, the studies are not conclusive. This supports the argument that the ownership of hospitals should not be dictated by public policy.[18]







Works Cited



David, Guy. The convergence between for-profit and nonprofit hospitals in the United States. International journal of health care finance and economics 9.4 01 Dec 2009: 403-428. Springer. 14 Apr 2011.

Duggan, Mark. Hospital market structure and the behavior of not-for-profit hospitals. The Rand journal of economics 33.3 01 Jan 2002: 433-446. Rand Corporation. 14 Apr 2011.

Himmelstein, D. Quality of Care in Investor-Owned vs Not-for-Profit HMOs. Evidence-Based Eye Care 1.2 01 Jan 2000: 122-123. Lippincott Williams and Wilkins. 14 Apr 2011.

Landon, B E. For-profit and not-for-profit health plans participating in Medicaid. Health affairs (Millwood, Va.) 20.3 01 May 2001: 162-171. Project Hope. 14 Apr 2011.

Mark, TL. Analysis of the rationale for, and consequences of, nonprofit and for-profit ownership conversions. Health services research 34.1 01 Apr 1999: 83-101. Blackwell Publishing. 09 Apr 2011.

McNerney, Walter J. For-Profit Enterprise in Health Care. The New England journal of medicine 314.23 05 Jun 1986: 1523-1528. Massachusetts Medical Society. 04 Apr 2011.


[1] David

[2] Hanson

[3] Hanson

[4] Hanson

[5] McNerney, Walter J. For-Profit Enterprise in Health Care. The New England journal of medicine 314.23 05 Jun 1986: 1523-1528. Massachusetts Medical Society. 04 Apr 2011.


[6] Hanson

[7] Hanson

[8] Guy David

[9] sloan

[10] Guy David

[11] Hall, Mark A.,. FOR-PROFIT CONVERSION OF BLUE CROSS PLANS: Public Benefit or Public Harm?. Annual review of public health 27.1 01 Jan 2006: 443-463. Annual Reviews. 09 Apr 2011.

[12] Hall, Mark A.,. FOR-PROFIT CONVERSION OF BLUE CROSS PLANS: Public Benefit or Public Harm?. Annual review of public health 27.1 01 Jan 2006: 443-463. Annual Reviews. 09 Apr 2011.

[13] Mark, TL. Analysis of the rationale for, and consequences of, nonprofit and for-profit ownership conversions. Health services research 34.1 01 Apr 1999: 83-101. Blackwell Publishing. 09 Apr 2011.

[14] Guy David

[15] Duggan

[16] Quality of Care in Investor-Owned vs Not-for-Profit HMOs Himmelstein

[17] Landon


[18] McNerney, Walter J. For-Profit Enterprise in Health Care. The New England journal of medicine 314.23 05 Jun 1986: 1523-1528. Massachusetts Medical Society. 04 Apr 2011.



The Evolution of Medicaid

Medicaid has faced many obstacles since its 1965 enactment. As a program that was originally viewed as a “lousy program for poor people,” it has managed to not only survive for over 4 decades, but it has become an instrumental part of Obama’s Patient Protection and Affordable Care Act in providing coverage for the uninsured. The program’s resilience lays in the way it is financed and the way it is implemented.

While Medicaid costs $350 billion a year, the financial burden is divided among the states and the federal government. Each state has a special agreement with the federal government on what percentage of the Medicaid bill each pays. The federal government pays from 50% to 80%, depending on the state. The poorer a state is, the more the federal government contributes. This severely lessens the financial burden states face when making Medicaid decisions. This also allows for states and the federal government to spend more when the economy is good, and to cut back when the economy slows down.

Medicaid is administered by the states. This allows for various Medicaid programs across the United States that are tailored to a state’s idiosyncrasies. This flexibility has allowed for structural creativity on a state level, thus avoiding many of the hurdles faced with federal run programs. Its beneficiaries have grown beyond the nation’s poor due to the ambiguous eligibility boundaries set by the federal government. Each state has an autonomy that allows it to turn Medicaid into whatever the state’s population needs.

While the first two decades of Medicaid proved tumultuous, with various disagreements on eligibility caps, during the mid 80’s and 90’s it experienced a rapid growth thus moving it from a program for poor people into a program for low wage and low middle class people. This was mostly due to various state mandates to increase eligibility caps. Also, Medicaid started expanding its coverage of pregnant woman in an effort to deal with the rising problems of infant mortality and high risk pregnancies. This gave Medicaid great political capital, thus making it hard for republicans to legislatively act out on their oppositions to the program’s expansion.

Clinton’s presidency also greatly advanced Medicaid through the enactment of the SCHIP programs. These programs were meant to provide insurance to children and gave states $40 billion to spend in 10 years. Clinton gave the states the option of creating new plans or expanding through Medicaid. This gave Medicaid even more leverage, thus adding to its resilience. By the end of the 1990’s, Medicaid and SCHIP spending accounted for 16% of the nation’s healthcare bill.

Another reason Medicaid has done so well is that it has had a more seamless transition into managed care than Medicare did. This is greatly attributed to the fact that Medicaid is an amalgamation of federal rules and state specific policies, thus allowing for states to more efficiently negotiate with managed care plans.

Medicaid is now facing pressure to lower costs and increase eligibility criteria. It can deal with these pressures by raising eligibility to cover most children through family coverage. It can also raise eligibility while lowering costs by allowing uninsured individuals to buy into Medicaid. If their income disqualifies them from automatic enrollment, they could pay a premium in order to receive its benefits. This would increase eligibility without adding on extra costs, and could potentially generate enough revenue to make Medicaid as a whole more affordable.


Heleni Smith, MPH Candidate 2011


Term paper for Issues and Approaches in Health Policy and Management,

Fall 2010