Nonprofit to for-profit conversions by hospitals, health insurers, and health plans

Conversion of hospitals, health insurers, and health plans from nonprofit to for-profit ownership has become a focus of national debate. The author examines why nonprofit ownership has been dominant in the US health system and assesses the strength of the argument that nonprofits provide community benefits that would be threatened by for-profit conversion. The author concludes that many of the specific community benefits offered by nonprofits, such as care for the poor, could be maintained or replaced by adequate funding of public programs and that quality and fairness in treatment can be better assured through clear standards of care and adequate monitoring systems. As health care becomes increasingly commercialized, the most difficult parts of nonprofits' historic mission to preserve are the community orientation, leadership role, and innovation that nonprofit hospitals and health plans have provided out of their commitment to a community beyond those to whom they sell services.     

How nonprofits matter in American medicine, and what to do about it

Skeptics question nonprofit health care on the grounds that nonprofits fail to distinguish themselves from their for-profit counterparts and do not reliably provide community benefits commensurate with their tax subsidies. Drawing on the most recent and comprehensive evidence, we assess these charges, judging them to be either wrong or incomplete. Although conventional critiques are therefore unconvincing, there are nonetheless important challenges facing the nonprofit sector in American medicine. To address these, we propose reformulating ownership-related policies to define both the appropriate forms of community benefit and the appropriate mix of ownership in terms of local markets and communities.     

Does community-governed nonprofit primary care improve access to services? Cross-sectional survey of practice characteristics.

This study compared community-governed nonprofit and for-profit primary care practices in New Zealand to test two hypotheses: (1) nonprofits reduce financial and cultural barriers to access; and (2) nonprofits do not differ from for-profits in equipment, services, service planning, and quality management. Data were obtained from a nationally representative cross-sectional survey of GPs. Practices were categorized by ownership status: private community-governed nonprofit or private for-profit. Community-governed nonprofits charged lower patient fees per visit and employed more Maori and Pacific Island staff, thus reducing financial and cultural barriers to access compared with for-profits. Nonprofits provided a different range of services and were less likely to have specific items of equipment; they were more likely to have written policies on quality management, complaints, and critical events, and to carry out locality service planning and community needs assessments. The findings support the shift to nonprofit community governance occurring in New Zealand and elsewhere.     

Profit-seeking, corporate control, and the trustworthiness of health care organizations: assessments of health plan performance by their affiliated physicians

OBJECTIVE: To compare the relative trustworthiness of nonprofit and for-profit health plans, using physician assessments to measure dimensions of plan performance that are difficult for consumers to evaluate. DATA SOURCE: A nationally representative sample of 1,621 physicians who responded to a special topics module of the 1998 Socioeconomic Monitoring System Survey (SMS), fielded by the American Medical Association. Physicians assessed various aspects of their primary managed care plan, defined as the plan in which they had the largest number of patients. STUDY DESIGN: Plan ownership was measured as the interaction of tax-exempt status (nonprofit versus for-profit) and corporate control (single state versus multistate health plans). Two sets of regression models are estimated. The dependent variables in the regressions are five measures of performance related to plan trustworthiness: two related to deceptive practices and three to dimensions of quality that are largely hidden from enrollees. The first set (baseline) models relate plan ownership to trustworthy practices, controlling for other characteristics of the plan, the marketplace for health insurance, and the physician respondents. The second (interactive) set of models examines how the magnitude of ownership-related differences in trustworthiness varies with the market share of nonprofit plans in each community. DATA COLLECTION: The 1998 SMS was fielded between April and September of 1998 by Westat Inc. The average time required for a completed interview was approximately 30 minutes. The overall response rate was 52.2 percent. PRINCIPAL FINDINGS: Compared with more local nonprofit plans, for-profit plans affiliated with multistate corporations are consistently reported by their affiliated physicians to engage in practices associated with reduced trustworthiness. Nonprofit plans affiliated with multistate corporations have more physician-reported practices associated with trustworthiness than do for-profit corporate plans on four of five outcomes, but appear less trustworthy than locally controlled nonprofits on two of the five measures. The magnitude of these ownership-related differences declines as the market share of nonprofit plans rises: for two of the five measures, ownership-related differences in practices related to trustworthiness are entirely eliminated when the nonprofits enroll more than 30 percent of the local market. CONCLUSIONS: The combination of for-profit ownership and multistate corporate control appears to consistently and substantially reduce physician-reported measures related to the trustworthiness of health plans. Because this is the fastest growing form of managed care, these results raise concerns about further erosion of trust in American health care. Preserving a substantial market niche for nonprofit plans appears to reduce this erosion and should be considered by policymakers as a strategy for restoring trust in the health care system.     

Tax preferences for nonprofits: from per se exemption to pay-for-performance

Defenders of tax preferences for nonprofit hospitals and health plans, including Mark Schlesinger and Brad Gray, contend that nonprofits deserve government support because they provide greater "community benefit" than their for-profit counterparts. This argument is unconvincing. There is some evidence that nonprofits deliver marginally more "community benefit" but no evidence that tax exemption is the cause. Absent proof that tax expenditures, including exemption, "buy" social benefits that are worth the cost to taxpayers, these expenditures are unjustified. The better course would be to pay nonprofits for performance, by tying tax benefits to accomplishments (beyond current achievements) in health promotion, quality, and care for the needy.     

Better together: Coexistence of for-profit and nonprofit firms with an application to the U.S. hospice industry

Many markets maintain a nontrivial mix of both nonprofit and for-profit firms, particularly in health care industries such as hospice, nursing homes, and home health. What are the effects of coexistence vs. dominance of one ownership type? We show how the presence of both ownership types can lead to greater diversity in consumer types served, even if both firms merely profit-maximize. This is the case where firms serve consumers for multiple consumption durations, but where donations are part of a nonprofit firm objective function and happen after services have been provided. This finding is strengthened if the good or service has value beyond immediate consumption or the direct consumer. We show these predictions empirically in the hospice industry, using data containing over 90 percent of freestanding U.S. hospices, 2000–2008. Nonprofit and for-profit providers split the patient market according to length of stay, leading to a wider range of patients being served than in the absence of this coexistence.     

Capital finance and ownership conversions in health care

This paper analyzes the for-profit transformation of health care, with emphasis on Internet start-ups, physician practice management firms, insurance plans, and hospitals at various stages in the industry life cycle. Venture capital, conglomerate diversification, publicly traded equity, convertible bonds, retained earnings, and taxable corporate debt come with forms of financial accountability that are distinct from those inherent in the capital sources available to nonprofit organizations. The pattern of for-profit conversions varies across health sectors, parallel with the relative advantages and disadvantages of for-profit and nonprofit capital sources in those sectors.     

The comparative performance of for-profit and nonprofit home health care services in the US

OBJECTIVE: To determine, by way of an exhaustive, systematic, and comprehensive review and summary of all scientific published studies, whether or not there are any performance differences between private for-profit and private nonprofit home health care providers. The second objective is to discover the proportion of all research on this topic that is devoted to home health care services compared to all other health services providers. DATA SOURCES: Computerized bibliographic searches of relevant databases and published indexes and abstracts were undertaken. They included Medline (Ovid and Pubmed versions), Web of Science (Social Sciences Citation Index and Science Citation Index), ABI/Inform, and Sociological Abstracts. Follow-up searches of reference lists in each article obtained from the computerized search were then completed. STUDY DESIGN: This systematic review retained for analysis all published studies that compared the performance of for-profit and nonprofit health care providers on access, quality, cost/efficiency, and/or amount of charity care, based on data collected after 1980. As a quality control measure only studies published in peer reviewed journals were included. Studies were coded according to the article's stated conclusions: for-profit superiority, nonprofit superiority, or no difference/mixed results. PRINCIPAL FINDINGS: The comparative performance of for-profit and nonprofit home health service organizations is one of the most understudied areas of health care provider services in the US today. Only 6 of the over 1030 comparisons of the two concerned home health care. No data on this topic have been collected since 1991, and no articles about it have been published in a peer-reviewed journal since 1995. CONCLUSION: Research on the relative performance of for-profit and nonprofit home health care services is a research priority urgently in need of attention.     

Nonprofit ownership, private property, and public accountability

Mark Schlesinger and Brad Gray have summarized research comparing nonprofit and for-profit health care in a remarkably useful form. Their paper effectively demonstrates how nonprofit and for-profit health care differ. However, their proposal for community control over nonprofit health care organizations in exchange for tax exemption, like many current proposals requiring nonprofit hospitals to provide free care for indigent patients, risks undermining the purpose of the nonprofit organizations and the care they provide. These trade-offs are significant yet have not been acknowledged in policy debate.     

The curious conversion of Empire Blue Cross

The for-profit conversion of Empire Blue Cross in New York challenges the case law and conventional policy wisdom that financial assets from formerly nonprofit organizations should be used to endow independent charitable foundations. The appropriation of Empire's assets by state government itself, and their subsequent deployment to subsidize health care institutions and repay political obligations, changes the conversion process from one that pits nonprofits against for-profits to one that pits private, nonprofit organizations against public-sector programs in the competition for new financial resources.     

Triad's new market strategy: a threat to community hospitals

Faced with unprecedented financial pressures, many nonprofit hospitals today contemplate hooking up with large corporations and converting to for-profit status. In the deals that result, the talk is largely about stock value and the interests of investors. The larger public-interest question of how the conversion will affect the health of community members often receives short shift. Most recently, Triad, an HCA spin-off, has emerged as a major player in the market for faltering nonprofits, zeroing in on institutions all the way from Alaska to North Carolina, and this has advocates worried, because the company can be singularly insensitive to community health care needs. But Triad is also remarkably adept at winning public favor. In this States of Health, we'll look at the broader public policy questions raised by such corporate health ventures, questions that point to the need for stronger oversight and regulatory mechanisms to assure that the public interest is protected in our increasingly market-driven health system.     

An evaluation of charity care for tax-exempt hospitals engaging in joint ventures

The study examines whether the level of charity care and financial stability contribute to a nonprofit hospital's motivation for partnering with a for-profit hospital through a joint venture. The Internal Revenue Service (IRS) has heightened its scrutiny of joint ventures within the health care sector. Considering recent calls to investigate the merit of the tax-exempt status of hospitals engaged in joint ventures, this research will assist policy makers in the evaluation of nonprofit hospitals. Constituents will continue to question whether joint ventures contribute to a reduced focus on charitable activities. Results indicate that the propensity to engage in a joint venture significantly increases with increased levels of charity care. Furthermore, nonprofit hospitals with lower profitability are more likely to engage in joint ventures. These results are useful to policy makers when evaluating the level of charity care provided by hospitals seeking alternative strategic alliances. Considering many critics allege hospitals are reducing the provision of charity care to the community, it is imperative for management to be conscious of the impact of joint ventures on the provision of charity care.     

Patients and profits: the relationship between HMO financial performance and quality of care

This paper matches health plans' financial performance with information on quality ratings as measured by 1997 Health Plan Employer Data and Information Set (HEDIS) 3.0 data. We address three policy questions: (1) Is the quality of care delivered by a plan influenced by the plan's financial performance? (2) Do for-profit plans behave differently than nonprofits do? (3) What other factors are associated with variation in plan performance? We find, first, that more profitable plans achieve higher quality scores in subsequent years. Profits may enable a plan to pursue higher quality of care and invest in better management systems. Second, there is little systematic evidence that for-profit plans have different HEDIS scores than not-for-profits have.     

Who is enrolled in for-profit vs. nonprofit Medicare HMOs?

We compare the characteristics of enrollees in for-profit and nonprofit Medicare health plans using nationwide data from the 1996 Medicare Current Beneficiary Survey. We find few differences in overall health status, limitations in activities of daily living (ADLs), or history of chronic disease. However, older Americans enrolled in for-profit plans are substantially poorer and less educated than those enrolled in nonprofit plans, are more likely to have joined their plan recently, and are more likely to have joined a plan with the expectation of reducing their out-of-pocket health care costs.     

Those conversion blues.

With the ever-increasing market penetration of capitated payment systems throughout health care markets, average payment rates for health services have dropped correspondingly. At the same time, the added competitive pressures from managed care organizations have served to increase the demand for new capital investment in information systems, lower cost facilities, and innovative modes for delivering all types of health care services. As a result, many nonprofit health care organizations have converted, or have attempted to convert, to for-profit status in an effort to gain access to the public equity capital markets. As hospitals, Blue Cross and Blue Shield organizations, and other nonprofit health care organizations across the U.S. seek to convert to for-profit status, they are finding the path is not easy. Access to capital, operating efficiencies, and the need to accelerate movement into new markets are offset by public benefit obligations, potential private inurement, and significant political cost issues. The bottom line is whether the conversion will be structured to both protect the public interest and allow the health care organization the flexibility and access to capital it needs in order to continue as a viable, competitive organization into the next millennium.     

Examining the scope of multibusiness health care firms: implications for strategy and financial performance

OBJECTIVE: Use theory and data to examine the scope of corporate strategies for multibusiness health care firms, also known as organized or integrated health care delivery systems. DATA SOURCES: Data are from the 2000 HIMSS Analytics Annual Survey of integrated health care delivery systems (IHDS), which provides complete information on businesses owned by IHDS. STUDY DESIGN: Scope defined as the breadth and type of businesses in which a firm chooses to compete is measured across seven separate business areas: (1) health plans, (2) ambulatory, (3) acute, (4) subacute, (5) home health, (6) other related nonpatient care businesses, and (7) external collaborations. Theories on strategy and organizational configurations along with measures of scope and a novel dataset were used to classify 796 firms into five mutually exclusive groups. The bases for classification were two competitive dimensions of scope: (1) breadth of businesses and (2) mix of existing core businesses versus new noncore businesses. Data Extraction METHODS: Unit of analysis is the multibusiness health care firm. Sample consists of 796 firms, defined as nonprofit organizations that own two or more direct patient care businesses in two or more separate areas across the health care value chain. Firms were clustered into five mutually exclusive organizational configurations with unique scope characteristics revealing a new taxonomy of corporate strategies. PRINCIPAL FINDINGS: Analysis of the scope variables revealed five strategic types (along with the number of firms and distinguishing features of each strategy) defined as follows: (1) Core Service Provider (340 firms with the smallest scope providing core set of patient care services), (2) Mission Based (52 firms with the next smallest scope offering core set of services to underserved populations), (3) Contractor (266 firms with medium scope and contracting with physician groups), (4) Health Plan Focus (83 firms with large scope and providing health plans), and (5) Entrepreneur (55 firms with the largest scope offering both a core set of services and investing in a variety of new noncore business opportunities including many for-profit ventures). Significant differences in financial performance among the strategies were found when controlling for payer reimbursement conditions. Specifically, in an unfavorable condition with high Medicaid and low commercial insurance, the Mission Based strategy performs significantly worse while the Entrepreneur strategy performs surprisingly well, in comparison with the other strategies. CONCLUSIONS: Findings suggest: (a) scope can be used to classify a large number of multibusiness health care firms into a taxonomy representing a small group of distinct corporate strategies, which are recognizable by senior management in the health care industry, (b) no single strategy dominates in performance across different payer profiles, instead there appears to be complementarities or fit between strategy and payer profiles that determines which firms perform well and which do not under different conditions, and (c) senior management of nonprofit health care firms are cross-subsidizing unprofitable patient care through ownership of nonpatient care businesses including for-profit ventures.     

An empirical comparison between the board''s strategic role in nonprofit hospitals and in for-profit industrial firms.

As the health care environment becomes more competitive, nonprofit hospitals are under pressure to adopt for-profit business practices. Based on an extensive field study, this research examines the central issue of organizational governance by comparing the strategic roles of nonprofit hospital boards with for-profit industrial boards. The results show that nonprofit hospital boards are generally more involved in the strategic decision process than their for-profit counterparts. If this governance activity is seen as desirable, hospital boards should exercise caution in emulating for-profit board practices.     

Health care philanthropies: how communities can participate

When a nonprofit hospital or health plan converts to for-profit status, the value of its assets endows a charitable foundation. As a result, billions of health care dollars are being shifted into new philanthropic institutions with an explicit mission to "improve the health of the community." But this issue of States of Health argues that mission can only be accomplished if consumers are involved significantly in the conversion process.     

Differences between non-profit and for-profit hospices: patient selection and quality

This research compares the behavior of non-profit organizations and private for-profit firms in the hospice industry, where there are financial incentives created by the Medicare benefit. Medicare reimburses hospices on a fixed per diem basis, regardless of patient diagnosis. Because under this system patients with lower expected costs are more profitable, hospices can selectively enroll patients with longer lengths of stay. While it is illegal for hospices to reject potential patients explicitly, they can influence their patient mix through referral networks. A fixed per diem rate also creates an incentive shirk on quality and to substitute lower skilled for higher skilled labor, which has implications for quality of care. By using within-market variation in hospice characteristics, the empirical evidence suggests that for-profit hospices differentially take advantage of these incentives. The results show that for-profit hospices engage in patient selection through significantly different referral networks than non-profits. They receive more patients from long-term care facilities and fewer patients through more traditional paths, such as physician referrals. This mechanism of patient selection is supported by the result that for-profits have fewer cancer patients and more patients with longer lengths of stay. While non-profit and for-profit hospices report similar numbers of staff visits per patient, for-profit firms make significantly less use of skilled nursing providers. We also find some weak evidence of lower levels of quality in for-profit hospices.     

Utilization of HIV-related services from the private health sector: A multi-country analysis

Increasing the participation of the private health sector in the AIDS response could help to achieve universal access to comprehensive HIV prevention, treatment, care and support. Yet little is known about the extent to which the private health sector is delivering HIV-related services. This study uses data from the Demographic and Health Surveys (DHS) and AIDS Indicator Surveys (AIS) from 12 countries in Africa, Asia and Latin America and the Caribbean to explore use of HIV testing and STI care from the private for-profit sector, and its association with household wealth status. The analysis indicates that the private for-profit health sector is active in HIV-related service delivery, although the level of participation varies by region and country. From 3 to 45 percent of women and 6 to 42 percent of men reported the private for-profit sector as their source of the most recent HIV testing. While in some countries, use of the private for-profit health sector for HIV testing and STI care increases with wealth, in others the relationship is not clear, as there are no significant differences in using private for-profit HIV-related services between the rich and the poor. We conclude that as the global AIDS response evolves from emergency relief to sustained country programs, broader consideration of the role of the private for-profit health sector may be warranted.