To Profit or Not to Profit — That is the question

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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Hospital M&A — Increasing Switch from Not-For-Profit to For-Profit

As reported by Kaiser Health News and USA Today (Jenny Gold, KHN Staff Writer, Jul 13, 2010) (http://www.kaiserhealthnews.org/Stories/2010/July/13/hospital-mergers.aspx), there is a trend for for-profit hospitals to purchase not-for-profit hospitals.  During the first half of 2010, there were at least 50 hospital M&A deals.  If this pace continues, it will exceed the 80 deals consummated in 2009 but fall far short of the 249 deals in 2006. 

For-profit hospitals have capital to invest and are looking to expand.  Not-for-profit hospitals are a good target as they are struggling to raise capital in a recessionary economy.  Their facilities are in need of upgrading to be more competitive and deliver the quality of care their patients deserve. 

Healthcare reform also makes not-for-profit hospitals attractive.  Expanding the number of insured Americans by 30 million increases the number of potential patients to serve.  Also, healthcare reform could decrease the number of patients requiring charity care.  With a decreased need to provide charity care, why should hospitals remain not-for-profit?  Why not access capital markets by turning for-profit?  This will provide the hospital with the funds to improve the quality of care.

As the number of not-for-profit hospitals diminishes over time, who will provide care for the 20 million citizens and non-citizens who remain uninsured?  These people are not only the poor who require charity care.  It is those who fall through the cracks of healthcare reform or are not American citizens but reside in this country.

It is unlikely that the for-profit hospitals will provide a sufficient amount of care for these patients.  A little unreimbursed care enhances a for-profit hospital’s relationship with the community.  Too much unreimbursed care goes against their appropriate quest for profits. 

A question that needs to be addressed, depending on how far the conversion of not-for-profit hospitals to a for-profit ownership progresses, is whether the lack of care for 20 million residents creates a public health issue.  Will an epidemic start among those without coverage and spread to the rest of the population?  There is no invisible wall that protects the insured population from diseases that begin and spread among those without access to sufficient levels of healthcare. 

As with any significant social or economic change, such as healthcare reform, there are unintended consequences.  These implications often are difficult to foresee.  They are addressed as they arise.  Is the decreasing availability of not-for-profit care one of those issues?  Additional studies and time will tell.