The resistance to for-profit hospitals in Connecticut reveals a degree of naivete about legal and financial realities that our political leadership ignores at the peril of the state's health care system. Our leaders should promote nonprofit/for-profit hospital conversions and affiliations because they are a prudent strategic lifeline for many of our hospitals and hospital systems.
In 2013, Gov. Dannel P. Malloy vetoed legislation that would have cleared some hyper-technical corporate law roadblocks to for-profit/nonprofit hospital deals in Waterbury, bringing the deals to a standstill. This year, there is proposed legislation that would throw another barrier in the path of for-profit hospital transactions. The bill would require — as conditions to state approval — that pay scales be maintained, bargaining units be recognized and staffing levels continued. The arguments in favor of this unfortunate roadblock were summed up Feb. 27 at a hearing: The state must "put people before profits." While this shibboleth may soothe the psyche, it obfuscates the realities, which are as follows:
First: For-profit and nonprofit hospitals must both operate profitably. A "nonprofit" is a corporation without stockholders, while a for-profit has stockholders. Nonprofits must still operate profitably — their revenue must exceed expenses — or they will go out of business. Both types of hospitals generally face the same economic and regulatory conditions, and, when prudent, both must manage and sometimes reduce expenses, including personnel costs.
Second: Communities with nonprofit hospitals gain value when a for-profits enters the market. State and federal laws say a for–profit must pay the fair market value of any nonprofit hospital it acquires — and that money must stay in the community in a locally managed "successor" charitable foundation for area health care needs. So, the bricks and mortar of the hospital are exchanged for an investment portfolio (stocks and bonds) used to support health care. Any existing charitable endowment of the nonprofit becomes part of the successor foundation, and the community still has a hospital.
Third: The law imposes operating conditions that make for-profit and non-profit almost indistinguishable. For example, Medicare and Medicaid largely dictate what they will pay for services. A for-profit hospital participating in these programs must agree to treat anyone who needs emergency treatment even if uninsured; and the state can require further community health-related activities.
Congress and the IRS have questioned whether many nonprofits perform enough community benefit to deserve tax exemption, and noted that some for-profits do more. At a Senate hearing in 2006, Sen. Charles Grassley noted that "[n]onprofit doesn't necessarily mean pro-poor patient. Non-profit hospitals may provide less care to the poor than their for-profit counterparts … ."
Fourth: For-profits pay income and property taxes. In many ways "tax-exempt" and "taxable" are the better terms to use to distinguish nonprofit from for-profit hospitals because both must earn a profit to survive. The profit earned by a tax exempt (nonprofit) hospital is not subject to income tax, and must be retained by the hospital for its purposes. Profit earned by for-profit hospitals is subject to federal and state income tax, and after the tax is paid may be distributed to stockholders where it is taxed for the second time.
To the chagrin of local mayors and assessors, real estate owned by tax-exempt/nonprofit hospitals is not subject to local property tax. The real estate owned by taxable/for-profit hospitals is subject to local property taxes.
Fifth: Hospital operations are fraught with risk, and, if private investors are willing to take on the risk, the state should let them. Hospitals operate between a rock and a hard place. The public expects excellent health care services regardless of the ability of people to pay. The cost of acquiring and maintaining facilities and the latest technology is enormous. Malpractice risk is a constant. State and federal regulations multiply exponentially, Medicare and Medicaid payments do not cover actual costs, and the economic dust of the Affordable Care Act is far from settled.
If private investors will take on these risks, we should give them a reasonable opportunity to do so, because, as the financial and legal realities demonstrate, it is possible for people and profits to cohabit.
John M. Horak is a Hartford lawyer who has represented nonprofit hospitals and nursing homes that have converted to for-profit status.