"Not
For Profit Hospitals:
Historically, not-for-profit
health care oganizations-especially hospitals- have yielded important community
benefits beyond the value of the health care they provide. They could provide
these benefits because they were confident the costs would be covered by
philanthropy, or by charging public or private payers higher prices. They
could charge higher prices because their was no real competition....
"As the industry
developed, and as government's role increased, the economic environment
facing hospitals changed. Growth in the number and size of hospitals reduced
the need for general medical and emergency stand-by capacity in most settings
since direct sales volume was sufficient to support services. The implementation
of Medicare and Medicaid legislation in the mid-sixties gave government
a prominent role in financing care to low income and elderly patients,
reducing the need for not-for-profits to provide charity care and sufficient
(in some cases, too much) stand-by capacity. By 1980, the flow of funds
into the industry had increased dramatically, increasing the size and complexity
of hospitals, and substantially altering the quasi-public role of the not-for-profit
sector...
"The primary legal
distinction between not-for-profits and proprietary organizations is that
not-for-profits are prohibited from distributing earnings to owners. Not-for-profits
can have owners, and can earn profits, but profits may not be dsitributed
to owners in the form of annual dividends or other earnings-conditioned
payments. This restriction is termed "the non-distribution contraints.'
An original rationale for this constraint is to keep earnings with the
organization to preserve its assets or provide community benefits, a rationale
which may or may not be recognized by current interpretations of law. In
exchange for this promise, not for protfits are afforded ceratin tax and
other advantages (some of which may be conditioned on the stated area
of activity of the organization). ....Key among the intangibles that consumers
value are stand-by capacity, public goods, and trust. All three figure
strongly in the historical dominance of not-for-profit institutions in
health care markets...
"For Profit Hospitals
can distribute profits to owners in order to attract and retain capital
... The non-distribution constraint eliminates [for the non-profits]
the possibility of raising investment funds in the usual fashion: by selling
shares of ownership in well-established capital markets..... Since philanthropy
decreased as government took on more of the charity care burden, not-for-profits
were left with retained earnings and (frequently tax-subsidized) debt markets
to raise investment capital....
"Economic theory
views the rationale for not-for -profits as a response to market failure
(Weisbrod, 1977(2340; Hansmann, 1980 (96)). For profit firms operate successfully
in markets where consumers willingness to pay for products and services
is captured through direct sales of these items. In some markets, however,
consumers want something less tangible than a can of soup or an automobile.
Because these intangibles are hard (if not impossible) to measure, firms
have a difficult time generating revenue through direct sales. ...
"Today, competition
is heating up. Proprietary companies are expanding in or entering new health
care markets by purchasing or exclusively contracting with hospitals, managed
care organizations and physicisian practices. In response ,
not-for-profit hostpitals are seeking strategic alliances with other organizations,
expanding product lines, integrating vertically, and cutting operating
and administrative costs, often mimicking the aggressive actions of their
for-profit competitors. And employers and state and federal governments
are pushing hospitals to cut prices, making irt more and moredifficult
to finance traditional community benefits.
Many policy makers
support these health care market changes, because they expect competition
to control health care spending, promote efficiency and innovation , and
improve the quality of services. ......
"Where once the voluntary
hospital had been small, basic, and locally controlled, the not-for-profit
of the 1980s was large and complex. And by the 1990s, it was more likely
to be part of a large corporate system, often with distant ownership or
control and strong contractual ties to managed care or other (sometimes
for-profit) insurers. |
"The
Rise of For-Profits
"For Profit Hospitals
can distribute profits to owners in order to attract and retain capital..For
profit firms operate successfully in markets where consumers willingness
to pay for products and services is captured through direct sales of these
items. In some markets, however, consumers want something less tangible
than a can of soup or an automobile. Because these intangibles are hard
(if not impossible) to measure, firms have a difficult time generating
revenue through direct sales..
"Opportunities for
growth were not restricted to the not-for-profit sector. Proprietary systems
of hospitals developed and grew, extending their reach from a few markets
in the southeast to an increasing presence nationwide. The rise of the
for-profit hospital relates both to the diminished public good role of
not-for-profits and to the primary disadvantages of the non-distribution
constraint: the inability to raise capital quickly, and the diffuseness
of control brought about by the absence of clear property rights.......
"Property Rights
In a for-profit
firm, the objective is very clear: maximize the return to owners. In addition,the
owners are an easily identifiable and finite group of individuals. Important
management decisions within such a structure can be made decisively, consistent
with the course that maximizes returns. In a not-for-profit (particularly
a community, rather than a religious) hospital, both ownership and the
interests of owners are less clear. Even the law is vague on issues of
accountability and ownership in not-for-profits. Thus, important decisions
must balance the competing interests of many diverse parties who have varying
degrees of unofficial power (e.g., physicians, executive staff, board members,
influential community members). Such a balancing act is a time-consuming
endeavor in which maximizing return on assets rarely dominates and which
often frustrates decisive management decisions so essential in a competitive
environment......
"Where once the voluntary
hospital had been small, basic, and locally controlled, the not-for-profit
of the 1980s was large and complex. And by the 1990s, it was more likely
to be part of a large corporate system, often with distant ownership or
control and strong contractual ties to managed care or other (sometimes
for-profit) insurers.
"For-profits and
not-for-profits now scramble side by side for market share, often using
similar competitive strategies. In addition, both types of providers are
facing new payment schemes that have raised questions in consumers' minds
about whose interests are being serviced....This apparent conflict erodes
trust in provider organizations, regardless of ownership.
"Thus, the differences
between not-for-profits and for-profits are beginning to fade in the eyes
of consumers, and trust proxies of the past are breaking down. But
while the value of old trust proxies is decreasing, the demand for trust
is not. .....Some of the larger for-profit chains are working hard at generating
new measures of trust which include them, but for the moment, the market
for trust is in chaos....
"Not-for-profits
are more likely than for-profits to provide high cost/low reimbursement
services (e.g., neonatal intensive care, high risk obstetrics, burn
care, trauma centers, therapeutic radiology, HIV treatment) (Pattison and
Katz, 1983; Shortell et al, 1986; Friedman et al, 1990; VHA, 1994).
Not-for-profits may also dominate the provision of innovative treatments....Clement
et al (1990) found that not-for-profits offer more community-oriented services
(many of which are money losers) than for-profits." |
