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January 8, 2015

Daily Briefing primer: What's the difference between for-profit and not-for-profit hospitals?

Daily Briefing

Editor's note: This story was updated on August 17, 2017.

At the end of every fiscal year, investor services like Moody's and Fitch issue their predictions for hospital revenue and growth in the coming year. But the agencies distinguishes between for-profit (FP) and not-for-profit (NFP) hospitals. And the differences between the two categories of hospitals can be difficult to understand.

In this primer, we've defined the hospital designations and the type of care they provide.

What makes a for-profit hospital?

FP hospitals are owned by investors, whether they are private investors or public shareholders. According to the American Hospital Association (AHA), there are 1,068 FP hospitals in the United States.

Some key characteristics of FP hospitals include:

  • The ability to distribute profits to its investors;
  • The ability to raise capital through investors; and
  • The obligation to pay income and property taxes.

FP entities are sometimes criticized by patient advocates and labor unions that argue the hospitals' interests lie more with shareholders than with patients. For instance, some critics say for-profit hospitals are more likely to turn away Medicaid patients or those who lack health insurance altogether in favor of patients with private insurance.

How Medicaid expansion is affecting hospitals

However, supporters of FP hospitals say their status allows them to invest in better, more innovative technology, raise funds, and provide better overall care. A study published in JAMA last year found that NFP hospitals that transition to 'for-profit' status do not see a decline in care quality, but they do tend to boost their overall "financial health."

How not-for-profit hospitals differ

Unlike FP hospitals, NPF hospitals are structured as not-for-profit corporations. According AHA, there are 2,894 such hospitals in the country. 

Some key characteristics of NFP hospitals include:

  • The obligation to invest all profits in the organization.
  • An exemption from paying state and federal taxes on income and property.
  • Required reporting of community benefits offered by the facility.

Altogether, economists estimate that NFP hospitals are exempt from paying about $12 billion in taxes each year.

According to a 2006 report by the Congressional Budget Office (CBO), there is no consensus on what universally constitutes as a "community benefit," but such benefits typically include "the provision of uncompensated care, the provision of services to Medicaid patients, and the provision of certain specialized services that have been identified as generally unprofitable."

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