To Profit or Not to Profit — That is the question

August 3, 2010 at 11:00 PM Leave a comment


As Vince Galloro wrote in Modern Healthcare today (“Reform reshaping market for acquisitions by investor-owned companies, Moody’s says,” August 3, 2010)  proposed deals in Boston, Detroit and Ohio show that investor-owned hospital companies are interested in markets that don’t fit their traditional targets.  Healthcare reform is a prime reason.

As healthcare reform goes into effect, markets with higher uninsured populations could become more attractive to investor-owned hospital companies. Reform also could drive consolidation by placing greater pressure on capital needs, such as investments in information technology.

In a capitalist society, for-profit institutions offer many attractive features.  One might postulate that, compared to not-for-profit hospitals, for-profit hospitals offer business discipline encouraged by the demands of investors (ie, stock and bond holders) and financially-driven executives.  In an age where quality report cards are starting to become available and growing in sophistication, due to advances in information systems and agreement on quality measures, revenue generation is becoming as important as cost control for for-profit hospitals. 

However, compared to not-f0r-profit providers, for-profit hospitals pay taxes, issue taxable rather than tax-exempt debt and lose the benefit of charitable donations.  This raises the cost of funding for-profit hospitals.  One result is that for-profit hospitals are less willing to provide charitable care and community-based services that do not measurably link to an increase in profitable patient referrals.

In the age of healthcare reform, is there a need for both types of hospitals (ie, for-profit and not-for-profit)?  If so, in what proportion?  Which type of hospital can best react to the implications of healthcare reform, such as: 1) increased number of patients with insurance; 2) less need for charitable care; 3) decreasing reimbursement from Medicare and other payers; 4) increased opportunity for differentiation based upon measurable quality indicators; 5) increased need for capital to implement EHR and RIO?   Which type of hospital can better integrate with physicians and other providers to develop a coordinated continuum of care that drives quality and profitability under episodic payments?

 Right now, the answers to many of these questions are not clear.  Many answers are specific to each hospital, depending on the quality of the management team and individual competitive situations.  However, in general, at the moment, for-profits are likely to have greater access to capital given the healthier state of Wall Street compared to municipal governments and the impact of the Great Recession on charitable giving.  This will enable for-profit hospitals to develop programs to handle the greater volume of patients and develop strategies to enhance and measure quality and implement the information systems to support those tactics.

There will always be a need for charitable care.  There will always be a segment of the population that prefers religious-based care providers.  There will always be a need for providers in markets that are not optimal for for-profit hospitals. 

My expectation is that there will always be a need for both for-profit and not-for-profit hospitals.  Their missions and the market segments they serve will continue to differ.  The market will not evolve to predominantly favor one type of hospital.

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Entry filed under: Charity Care, Electronic Health Records, Healthcare Economics, Healthcare Reform, Hospital Care, Mergers & Acquisitions. Tags: , , , , , , , , .

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