How different are for-profit and nonprofit hospitals?

One of the major issues legislators are trying to tackle this session is the ability of nonprofit hospitals to convert to for-profits. It’s a complex and highly charged issue. Some people fear that without the ability to become for-profit, small community hospitals could struggle to survive. Others say allowing hospitals to become for-profit could hurt workers and communities unless protections are built into law.

Why is this an issue now?

State law makes it difficult, if not impossible, for for-profit hospitals to operate in Connecticut. But Tenet Healthcare, a national, for-profit hospital chain, is in the process of acquiring four Connecticut hospitals. That’s inspired two competing efforts in the legislature. One push is to change state law to make it easier for hospitals to be run by for-profits. The other is to restrict the ability of hospitals to become for-profit.

Currently, Connecticut has 28 nonprofit hospitals and one for-profit (Sharon Hospital, which became for-profit before the current restriction was created). Tenet is poised to acquire Waterbury, Bristol, Manchester Memorial and Rockville General hospitals as part of a partnership with the Yale New Haven Health System — deals that would make the four hospitals for-profit but wouldn’t change the Yale system’s status as a nonprofit. The situation in Waterbury is particularly charged because of a fight over givebacks between the hospital and the unions representing workers.

What’s the difference between nonprofit and for-profit hospitals?

Hospital officials say there are only two major differences. For-profit hospitals pay property and income taxes while nonprofit hospitals don’t. And for-profit hospitals have avenues for raising capital that nonprofits don’t have. (The ability to access capital is important for hospitals looking to upgrade facilities or buy costly medical equipment or information technology systems.)

But critics of for-profit hospitals — including labor unions, consumer groups and some legislators — say there are other differences, too. They note that unlike nonprofit hospitals, for-profit hospitals have to answer to shareholders, who may not have the same interests as the local communities. Critics also warn that for-profit hospitals are more likely to stop offering money-losing services.

What does research say about the differences between nonprofit and for-profit hospitals?

Studies have found some differences between nonprofit and for-profit hospitals, although it’s not always clear if the distinctions are related to the ownership type or other factors.

A 2006 study by the Congressional Budget Office found that on average, the share of operating expenses that went to uncompensated care was 4.7 percent at nonprofit hospitals and 4.2 percent at for-profit hospitals. (At government hospitals, it was 13 percent.) But the study also found wide variation in the level of uncompensated care provided by individual hospitals — whether for-profit or nonprofit.

Other studies have found that converting to for-profit does not have significant effects on the amount of uncompensated care or community benefits that hospitals provide.

A 1999 study of 43 hospitals that converted to for-profit, for example, found that, on average, there were not statistically significant differences in prices, the levels of uncompensated care provided or the provision of unprofitable services like trauma care, burn care and substance abuse treatment.

But some individual hospitals did see major changes. Within three years of conversion, seven of the 43 hospitals had increased their level of uncompensated care by more than 40 percent, and 10 had reduced it by more than 40 percent.

The study also found that soon after converting, hospitals increased the percentage of “insiders” on their boards, implying a drop in community representation. (Nonprofit hospitals used for comparison purposes also had an increase in insiders on the board, but the change wasn’t as large as it was among the newly for-profit hospitals.)

More recent research has found that for-profit hospitals are more likely to offer profitable care like open-heart surgery and less likely to offer unprofitable services like psychiatric emergency care or substance abuse treatment.

The researcher, law professor Jill Horwitz, also found that for-profits respond more quickly to changes in financial incentives. When home health care became profitable, the likelihood of for-profit hospitals offering the services more than tripled, but when a law changed to make the services less profitable, the probability of for-profit hospitals offering them dropped quickly. Nonprofits went through a similar change, but it wasn’t as fast or dramatic.

“For-profit hospitals are considerably more responsive to financial incentives than nonprofits, not just with respect to their decisions to offer services but also in their willingness to operate at all,” Horwitz wrote. “Under financial pressure, for-profit hospitals are more likely to close or restructure than nonprofits.”

It can be difficult to tease apart what differences are the result of the type of ownership.

One study focused on elderly patients with heart disease found that for-profit hospitals had higher mortality rates than nonprofit hospitals. But the authors said that much of the difference appeared to be related to location, rather than the type of ownership. And in studies of three specific markets, the authors found that for-profit hospitals had lower mortality rates than nonprofits. They also noted more variation among for-profit and nonprofit hospitals than between the two groups.

“Overall, these results suggest that factors other than for-profit status per se may be the main determinants of quality of care in hospitals,” they wrote.

Often, hospitals that convert to for-profit do so amid struggles and only after their boards consider other options, researchers have found.

“If anything, for-profit conversion prolonged the life (or the death) of many institutions whose value to their communities was low,” wrote the authors of a study of eight hospitals that converted to for-profit, including four that later closed.

They noted that the outcomes of conversions vary and are influenced by factors that included institutional structures, histories, markets and purchasers.

Another study pointed to the importance of the terms of the sale.

Researchers who examined three academic medical centers bought by for-profit chains found no measurable adverse effects on the hospitals’ social missions — in part because the purchase contracts required them to continue levels of charity care or otherwise maintain the previous mission.

“A typical comment by a university official was: ‘What should a medical center expect from a for-profit? Whatever’s in the contract,’” they wrote.

What are lawmakers likely to do this session?

Legislators have less than two weeks before the session ends May 7 to craft a bill addressing conversions of nonprofit hospitals to for-profits. So far, the exact direction they will take remains unclear.

The Public Health Committee moved forward a proposal that would place a moratorium on hospitals converting to for-profits if they haven’t applied to do so by Oct. 1 (so far, only Waterbury Hospital has applied). The bill would also add new regulatory requirements for changes of ownership of nonprofit hospitals.

A Tenet official said that measure as written would preclude the company from being in Connecticut.

But the proposal is expected to be rewritten before it comes up for debate on the Senate floor.

Some legislators have strong concerns about for-profit hospitals, including Senate Majority Leader Martin Looney, D-New Haven, who testified, “We should not allow additional for-profit hospitals into our state until we have all of the information on all of the various entities that are bidding to make profits from the health care needs of our citizens.”

But two key officials have expressed reservations about putting a moratorium on hospitals becoming for-profit. Gov. Dannel P. Malloy has said that while he prefers hospitals to be nonprofit, there aren’t many nonprofits vying to take over Connecticut hospitals. The governor also said he was “a little leery of a one-size solution fitting all.” And House Speaker J. Brendan Sharkey, D-Hamden, said he’s nervous about imposing a moratorium because he’s wary of restricting the ability of local hospitals to grow responsibly.

What happens if legislators don’t do anything?

State law already restricts the ability of hospitals to become for-profit and requires hospitals to get approval from regulators before changing ownership. Hospital officials say those requirements are already stringent enough (and some say they’re too strict). But others say they don’t offer enough protections, particularly for employees.

Nothing in state law makes it directly illegal for a hospital to become for-profit. But state law provides a legal structure that allows hospitals to employ doctors while avoiding anti-kickback laws — and that structure, known as a medical foundation, is available only to nonprofits. That effectively keeps for-profit hospitals from employing doctors, a key part of running a health care system.

(A Tenet official has said the company can still move forward with its plans to acquire Connecticut hospitals and convert them to for-profits because Tenet has a partnership with the Yale New Haven Health System, which is a nonprofit. That matter has not yet come before regulators.)

To undergo a change in ownership, hospitals must receive a “certificate of need” from the state Office of Health Care Access and approval from the state attorney general. The bill that cleared the Public Health Committee would expand the types of information hospitals would have to provide during that process (for a summary of the changes from the nonpartisan Office of Legislative Research, click here).

What else should I know?

Although the conversion of hospitals from nonprofit to for-profit has drawn significant attention this year, other hospital issues have also drawn significant concerns and scrutiny from some legislators.

Some are concerned about the consolidation of hospitals and physician practices, particularly within the Yale New Haven Health System — a nonprofit. Sen. Len Fasano, R-North Haven, in particular, has raised concerns about the ability of small, independent medical practices to survive. The Malloy administration and Attorney General George Jepsen are backing a separate bill that would require more disclosure of mergers, affiliations and other transactions involving hospitals and health care providers.

Hospital officials say many changes in the health care system favor consolidation, including payment models that give advantages to hospitals that are closely aligned with physician practices and the savings that come from the purchasing power of larger organizations.