From non-profit to for-profit

Editor’s note: This was originally published Oct. 21, 2014 by U.S. News & World Report.

Cash is king except for hospital patients. A new Harvard University study comparing for-profit to nonprofit hospitals found no difference in how well patients tended to fare between the two types, even as for-profit hospitals earned substantially more money.

“We did not see that there were higher mortality rates, even for vulnerable populations like the disabled,” says lead author Karen Joynt, a cardiologist and an instructor in health policy at the Harvard School of Public Health. “Nor did we find that quality suffered in the ways that we could measure quality.”

The volume of patients that the hospitals treated also did not change.

The study focused on 237 struggling nonprofit hospitals that chose to become for-profit institutions. For each hospital, Joynt and her two co-authors selected up to three nonprofit hospitals similar in size, location and teaching status, then plumbed Medicare and Medicaid records to compare the hospitals’ finances and patient outcomes from 2002-10. For-profit hospitals were stacked up against their matched nonprofit hospitals, and also compared against themselves pre- and post-conversion.

“We did find that hospitals’ financial performance did improve after conversion to for-profit status, which makes sense,” Joynt says. “The reason a for-profit hospital would acquire a hospital is they see potential to improve it.”

Already, nonprofit hospitals often act like for-profit hospitals, Joynt says, trying to maximize revenue even if they don’t report to investors or a board of shareholders.

“In many ways, they behave pretty similarly,” Joynt says.

Opponents of for-profit hospitals, however, have long contended that the drive for profit can run counter to effective patient care, motivating doctors and administrators to take on higher volumes of patients or focus on moneymaking procedures such as hip and knee replacements – while discouraging care for the uninsured or those in need of more costly services, like emergency psychiatric care. A 2005 study, for example, suggested for-profit hospitals tended to shirk on less-profitable procedures.

“We have evidence that for-profits are good at sniffing out what’s profitable,” says Harvard economics professor David Cutler, who published an editorial accompanying Joynt’s study in the Journal of American Medical Association. “If that’s true, that’s really not good because there’s no real relation between what’s profitable and what’s socially valuable.”

Yet, he points out, the for-profit hospitals singled out in Joynt’s study were once struggling. By switching from nonprofit to for-profit, they were able to make ends meet, without a decline in patient outcomes.

“They stabilized a bunch of institutions that were not financially stable, and they did not hurt patients,” Cutler says. “On net, I put that on the good side of the ledger.”

One reason for the success may be economies of scale: Smaller community hospitals, by joining a larger health care system, suddenly gain more clout for negotiating with equipment suppliers and insurers. They can also combine certain administrative offices such as billing or human resources.

“They can get efficiencies in the market,” says Dan Mendelson, CEO of the consulting firm Avalere Health and former associate director for health for the White House Office of Management and Budget under then-President Bill Clinton. “They can increase revenues without affecting quality.”

Competition may also be a factor, Joynt says. The need to attract patients at least in cities where competition between hospitals can be fierce may prevent hospitals from overemphasizing profit margins at the expense of care quality.

“They need think about quality in order to be able to compete,” she says. “Some folks may argue that that’s a little bit idealistic of me, but I do think that things like public reporting and consumer reports have made quality part of the discussion.”

“The shift from nonprofit to for-profit,” she adds, “does not need to be the primary predictor of whether or not a hospital is providing high quality care.”

There is much that remains unclear. While patients on average did not fare any worse once hospitals became for-profit institutions, Joynt and her team were not certain why average outcomes did not improve once those hospitals started making more money.

“In theory, if you had a bigger margin, you could plow some of that into renewing facilities, renewing equipment, attracting the best and the brightest doctors and putting in place programs to improve care,” says Mitch Morris, national leader in health care for the consulting firm Deloitte, which published a similar study of for-profit and nonprofit hospitals last year. “Those things tend to be multiyear journeys, and you don’t tend to see the results very quickly.”

For-profits, he adds, might also put their revenue toward investor dividends or executive compensation, rather than back into the hospital system.

Further narrowing the study’s focus, there were certain aspects of hospital care that could not be accounted for: how often a hospital performs charity care, for example, or whether it hosts outreach events like health fairs simply isn’t reliably measured, Joynt says. And as Avalere’s Mendelson points out, the study’s time frame ends in 2010 just as President Barack Obama signed the Affordable Care Act.

“The study does not account for the most profound changes in how hospitals think about quality have happened over the last three years,” Mendelson says.

Those changes have been especially pronounced when it comes to delivering care.

“The single biggest question that will influence what happens in health reform for good or bad is, ‘Do we know which delivery arrangements are associated with the best outcomes?’ Unfortunately just scientifically, we don’t have the answer,” Mendelson says.

“Is it better to be for profit or nonprofit? Part of a large system or small system? A system where doctors are more in charge or less in charge? All of those very basic questions are things that we don’t have a great answer to.”

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Alan Neuhauser is an energy, environment and STEM reporter for U.S. News & World Report.