The Essence of For-profit and Nonprofit Hospitals in the U.S. Healthcare System

Patricia Mukiry Perry

Several similarities and differences exist between for-profit and nonprofit hospitals. However, one critical comparison aspect is the stakeholders’ financial needs. For-profit hospital owners have the right to the profits, whereas in nonprofit hospitals, profits further the organization’s purpose or mission (Jeurissen et al., 2020). This analysis report highlights the objectives, provision of uncompensated care, liability for malpractice, and financial strategy of the two organization types. The focus will be on Cleveland Clinic, headquartered in Cleveland, Ohio, and Sunrise Hospital & Medical Center in Nevada, as examples of nonprofit and for-profit hospitals, respectively.

Business Objective

Cleveland Clinic, which first opened in 1921, has opened facilities globally and ranks among the top hospitals in the U.S. As a nonprofit organization, its mission is caring for life, researching for health, and educating those who serve, aspiring to be the best place for care anywhere (Cleveland Clinic, 2018). Sunrise Hospital & Medical Center, situated in Las Vegas, provides comprehensive, quality healthcare in Southern Nevada. The hospital’s objective is to give the community a healthier future through its dedication to healing.

Cleveland Clinic has various funding sources to provide affordable care, which would otherwise be impossible in a for-profit hospital. Sunrise Hospital & Medical Center focuses on the quality of its services to raise service demand and meet shareholders’ financial objectives. Cleveland Clinic’s mission is focused on research and education, whereas Sunrise Hospital & Medical Center focuses on superior healthcare services. Both hospitals have a model that supports these objectives, providing sufficient finances to thrive in their respective regions.

Financial Strategy

Tax status impacts vary between the two organization types. Nonprofit hospitals such as Cleveland Clinic must provide sufficient community benefits to justify their tax-exempt status (Herring et al., 2018). Cleveland Clinic does not pay the federal corporate income tax upon meeting the characteristics detailed in IRC Section 501(c)(3). There is also an exemption on the state sales tax, local property tax, and federal personal income tax, among others. Because of the focus on profitability, Sunrise Hospital & Medical Center is more equipped and has more financial stability than Cleveland Clinic, hence more profitable to its shareholders. The tax exemption for nonprofit organizations implies that Cleveland Clinic must provide care to everyone regardless of their ability to pay.

For-profit and nonprofit hospitals have different financial needs and use distinct economic models due to their tax-exempt status. Payment of taxes by Sunrise Hospital & Medical Center (an offset to community costs) and donations received by Cleveland Clinic (a community cost) require adjustments to standard accounting reports (Sloan & Vraciu, 1983). According to Jeurissen et al. (2020), for-profit organizations like Sunrise Hospital & Medical Center benefit from lower personnel costs because they often outsource and are thus able to minimize the number of employed staff. Nonprofit organizations face financial difficulties, especially with the increase in the percentage of patients on government programs, translating to lower payments than if more patients belonged to private payers.

Provision of Uncompensated Care

Uncompensated care is a critical issue in the healthcare industry and affects all types of hospitals. It is the overall measure of care a hospital provides without receiving any payment from the patient or insurer (Lee & Choi, 2019). The differences between for-profits and nonprofits in providing uncompensated care are marginal. For-profit hospitals provide no less uncompensated care than nonprofits (Bayindir & Schreyögg, 2021), supporting arguments made by Cram et al. (2010). Sloan adds, “Acquisition of nonprofit hospitals by for-profits did not lead uniformly to less uncompensated care among acquired hospitals” (1998, p. 243). For example, Cleveland Clinic records a low level of uncompensated care compared to its closest rivals, a decrease of over 40 percent between 2014 and 2015 (Shinkman, 2015). It is a concern because nonprofit hospitals should offer more uncompensated care to justify their generous tax exemptions.

Liability for Malpractice

The malpractice liability between the two hospitals – Cleveland Clinic and Sunrise Hospital & Medical Center, is different. For-profit hospitals can afford malpractice insurance to cover malpractice. As a result, there is less malpractice liability with Sunrise Hospital & Medical Center. It coincides with the argument by Lee et al. (2017), who notes that “As for-profit hospitals purchase more malpractice insurance, their malpractice liability is reduced, and operating costs decrease” (p. 10). Antidumping provisions in Medicare can result in fines for hospitals that fail to provide appropriate care during an emergency (Schneider, 1990). While Cleveland Clinic must offer more uncompensated care to the community, the quality of the service must be within the expected range. Consequently, nonprofit hospitals have a higher malpractice liability because of the inability to afford appropriate malpractice insurance.

The doctrine of sovereign immunity holds that one cannot sue the government or hold it legally liable for its actions or those of its employees or agencies. This doctrine covers chiefly physicians employed by federal or state governments. Only an insignificant part of this doctrine has a more critical significance to Cleveland Clinic than would be with the for-profit hospital. According to Morrison (2011), in any hospital that conducts research, the researchers must respect the obligation to promote patient rights by informing them about the Health Insurance Portability and Accountability Act and providing informed consent. Nevertheless, the sovereign immunity doctrine offers minimal protection to both hospitals because they are not state-owned.

Recommendation

The strategic differences between for-profit and nonprofit hospitals are in three key areas: Community-driven approach, lean advantage, and short-term versus long-term outlook. Cleveland Clinic is rooted in the local community it serves, whereas Sunrise Hospital & Medical Center has a governance structure that prioritizes stakeholders’ interests. Cost-consciousness is a hallmark of for-profit hospitals. With a lower cost structure, there is an advantage in the market. Additionally, Cleveland Clinic has more of a long-term strategic approach to serving the community. On the other hand, for-profit hospitals such as Sunrise Hospital & Medical Center focus on shorter- or nearer-term profitability.

For-profit and nonprofit hospitals are equally focused on providing quality healthcare to the community, but their strategies and principal motives differ. For-profit hospitals make policies and laws that support their intention to remain competitive and profitable while providing healthcare. Nonprofit hospitals, on the other hand, follow regulations designed to ensure every individual gets healthcare and the system continues to function for the good of the community. A commonality between the two is that they work with Medicare and Medicaid to provide affordable services. However, the obligation to offer uncompensated care is significant for Cleveland Clinic because of the tax exemption benefits. Still, the hospital must have sufficient finances to remain operational and advance its equipment and healthcare services. To minimize debt and avoid a negative impact on the income, Sunrise Hospital and Medical Center can deny healthcare services to specific individuals, especially on their ability to pay.

The U.S. healthcare system needs for-profit and nonprofit hospitals for economic stabilization through taxes and affordable care for better healthcare quality and to support rural and urban communities. Notably, the government cannot leverage for-profit hospitals to improve rural communities because they lack stability and longevity in the communities they serve (Franz et al., 2021). On the other hand, nonprofit hospitals offer healthcare to all patients regardless of their ability to pay, a perfect model for underserved and rural areas. Franz et al. note that for-profit hospitals are more likely to close or merge to generate revenue for shareholders, hence less reliable to economically support a community over time. Additionally, these for-profit hospitals do not employ large numbers of people because of their emphasis on fiscal efficiency, resulting in less economic benefit for the community than nonprofit hospitals. Nevertheless, the economy needs for-profit hospitals for their contribution to the local tax base that supports communities significantly better than nonprofit hospitals.

For-Profit and Nonprofit Hospital Comparison Table

Characteristics	For-Profit Hospitals	Nonprofit Hospitals
Business Objective	Core Objectives: Provision of quality services to raise service demand and meet shareholders’ financial objectives.Mission and Vision: The mission is to provide superior healthcare service in the country to meet its long-term goals.	Core Objectives: Relies on various funding sources like donations to give the community a healthier future through its dedication to healing.Mission and Vision Caring for life, researching for health, and educating those who serve, aspiring to be the best place for care anywhere.
Financial Strategy	Tax Status Impact: No tax-exemption.Financial Needs: Pays taxes. Lower personal costs because of outsourcing.	Tax Status Impact: Qualifies for tax-exemption.Financial Needs: Greater financial difficulties due to the high number of patients relying on government programs.
Provision of Uncompensated Care	Provision of Uncompensated Care: Provides almost the same level of uncompensated care even though there is no such obligation from the public and the government.	Provision of Uncompensated Care: Offers uncompensated care, at an almost similar level as for-profit hospitals. However, there is an expectation to provide a greater level of uncompensated care due to tax-exemption status.
Liability for Malpractice	Liability Guidelines for Malpractice: Can afford malpractice insurance so the liability is minimal. Antidumping provisions could impact the quality of care by the hospital.Sovereign Immunity Law: The doctrine of sovereign immunity has less implication in this organization type because it is not state-owned.	Liability Guidelines for Malpractice: Unable to afford malpractice insurance covers so the liability is greater. Antidumping provisions require the hospital to offer high-quality services. Sovereign Immunity Law: Sovereign immunity does not shield the healthcare workers from liability, but is required to promote patients’ rights.

References

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Cleveland Clinic. (2018). Mission, Vision, Values | Cleveland Clinic. Cleveland Clinic. https://my.clevelandclinic.org/about/overview/who-we-are/mission-vision-values

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