With the 2014 deadline for implementation of the Affordable Care Act (aka Obamacare) looming, the U.S. is taking a hard look at all aspects of health care. Nonprofit hospitals are some of the entities catching heat.
Recently the City Of Pittsburgh filed a court challenge against the University of Pittsburgh Medical Center (a 501(c)(3) tax exempt entity) claiming that the UPMC acted more like a corporation than a charity by closing hospitals in poorer neighborhoods, paying seven figure salaries for top executives, and allocating less than 2% of net revenue for free/discounted patient care. 
Before we discuss the current state of nonprofit hospitals, let us discuss the basics of how they differ from for-profit and other hospitals.
What Types of Hospitals are available in the U.S.?
There are three distinct types of hospitals available in the United States: government (aka public) hospitals, nonprofit hospitals, and for-profit hospitals.
1. Government or Public Hospitals. What is a public hospital?
- Government or public hospitals are government owned and receive government funding.
- Some of these hospitals are often affiliated with medical schools and treat the under-insured or uninsured and those who qualify for Medicaid.
- Other examples include military and veterans hospitals that treat active and retired military and their families.
2. Nonprofit Hospitals. What is a nonprofit hospital?
- Nonprofit hospitals are nonprofit corporations based on a charitable purpose.
- Most often are affiliated with a religious denomination.
- Nonprofit hospitals are the most traditional means of delivering health care in the United States. Of the hospitals found in the urban United States, approximately two-thirds are nonprofits. The other one third is comprised of government/public hospitals and for-profit hospitals.
3. For-Profit Hospital. What is a for-profit hospital?
- The For-profit hospital represents a corporate model of health care.
- Like other for-profit corporations, the administrators of for-profit hospitals are charged with creating a profit and furthering programs that achieve higher dividends for investors.
Differences between Nonprofit Hospitals and For-Profit Hospitals: Taxation, Care & Ability to Pay, Capital
- Tax-exempt – Nonprofit hospital revenue is exempt from federal and state taxation as long as the revenues are used exclusively for exempt purposes, including running the hospital.
- Care & Ability to Pay- Nonprofit hospitals must render care to all patients regardless of ability to pay and often initiate community based health programs.
- Capital – Sometimes nonprofit hospitals may not have much capital available for new technology. And traditionally nonprofit hospitals have charged less for medical procedures than for-profits and have utilized revenue to provide free or discounted patient care.
- Care & Ability to Pay – For-profit hospitals may refuse to treat individuals who are believed to be unable to pay. Before a patient can be transferred for inability to pay, stabilizing treatment must be rendered if the patient has a life threatening illness or injury.
- Capital – For-profits traditionally have more capital than non-profits, and therefore can afford to create state of the art facilities and systems. Some criticize for-profit hospitals for offering administrators of for-profit hospitals with higher salaries, which can leave less money in the salary pool for nurses and staff. Other criticism suggests that since for-profits seek to increase the profit margin, they may employ fewer nurses or less-expensive, less-trained employees, such as nurses’ aids instead of nurses.
Is there a measurable difference in the care rendered?
According to a Canadian study of hospital mortality, for-profit hospitals perform worse than nonprofit hospitals when treating common medical conditions and have higher death rates. Some speculate the slight decrease in mortality in nonprofit hospitals is due to having more trained staff, i.e. nurses around.
Nonprofit Hospitals in the News
Some nonprofit hospitals are making news because employees are expressing interest at having their hospital bought out by for-profit health systems that presumably have more capital to buy down hospital debt and invest in new technology that will increase patient care.
Other nonprofits are taking heat for having large amounts of revenue that are not used to fund patient care.  The March 4, 2013 edition of Time magazine features an article by Steven Brill that discusses where the cost of health care is coming from. In it, Brill calls out nonprofit hospitals for charging high fees and thereby increasing the problem of the high cost of health care. He specifically mentions M.D. Anderson and stated that although it is a officially a nonprofit unit of University of Texas it has revenue that exceeds the cost of the care rendered by so much that it’s operating profit for the fiscal year 2010 was $531 million dollars, according to a report filed with the U.S. Department of Health and Human services.
The California legislature has drafted a bill aimed at disclosure of nonprofit hospital charity spending. Proposed California legislation would require nonprofits to report the amount of revenue used on charity care.  The bill would require that 5% of a nonprofit’s net revenue be used to fund charity care, defined as direct patient care.
Some other recent news stories about nonprofit hospitals
Future for nonprofit hospitals considered
The traditional paradigms of nonprofit and for-profits hospitals appear to blurring. Proponents of the for-profit model note that administrators of some nonprofit hospitals are making as much money as administrators of for-profits, that many for-profits donate as much or more of their revenue to charity patient care than some non-profits, and that for-profits are finding more economical ways to deliver care than nonprofits.
As the national health care conversation continues, nonprofit hospitals can expect additional scrutiny of how their hospitals are run and how revenue is generated and spent.
Elizabeth (“Liz”) McCown is a Texas attorney serving of counsel to the Cullinane Law Group. Liz McCown received her law degree from Texas Tech University School of Law (2003) and is a member of the Texas and Washington State Bars. Liz is also a certified mediator.
The Cullinane Law Group works exclusively with the nonprofit sector. The firm sets up and maintains strong and legally compliant nonprofits that have solid bases for long-term success. We provide risk management and offer practical solutions for sound governance. We help nonprofits, foundations, and health care organizations throughout the United States who seek to create positive change.