Authored by Glen Goedde
Nonprofit hospitals have a long history within the United States, and more specifically, health care in the US represents the largest nonprofit sector. For the total nonprofit sector, healthcare accounts for 60% of the revenue and expenses generated, 42% of the total assets, and employs 57% of all nonprofit jobs (Anheier 2014). In healthcare, the nonprofit organizations vary substantially in size and funding with the largest industry in the acute care hospital arena – acute care hospitals exclude care facilities that are long term, rehabilitation focused, and in-of-life care facilities. This can be explained mainly due to the size of the demand for these services as well as the overall cost for the capital-intensive assets (structure and expensive medical equipment), the number of employees to provide the service, and the educational (specialized skills) required of the employee base. This paper will focus more on the acute hospital sector, base funding, and current trends and will not address the broader healthcare sector. Anheier 2014 provides a more comprehensive review of the entire sector which will not be reviewed in this paper.
Acute care hospitals are represented in all three of the market sector organizations; which are, for-profit, public / government, and nonprofit. However, nonprofit hospitals represent nearly 60% of the total market, whereas publicly (government) owned facilities approximates 25%, and the remaining, less than 20%, is owned by for-profit organizations (Anheier 2014).
This distribution can largely be explained that the US does not universally provide healthcare insurance coverage to all citizens, and with the high cost for managing health, many US citizens do not have the ability to afford and pay for the healthcare service they need and acquire. Many of the uninsured will seek hospital care in a publicly owned hospitals, or with a nonprofit hospital willing to provide their service and charge based on the means of the recipient. Additionally, the asymmetry of knowledge between healthcare providers and recipients dissuades persons from obtaining comparative market shopping. Most persons pursuing healthcare service simply do not have the knowledge, and often, the time to determine if the value provided is the best for that region.
Based on the market failure theory described below, for-profit hospital organizations are less common due to the high capitalization costs, high employee base with specialized education garnering high salaries, and the overall high operational costs. Along with exacting government regulations and insurance price controls, for-profit hospital organizations represent risky business ventures. Nonprofits, with the revenue generation of fee-based services, public financial support, and donor assistance funds are better suited to supply high quality service and remain financially viable. Additionally, the adoption of the Affordable Care Act, ACA, in 2010, brought significant changes for the US, many of which continue to play out today. One change in the acute care hospital sector is that the ACA reduced the overall number of uninsured in the US. Now with health insurance, the previously uninsured persons now have more options available to them. No longer do they primarily need to seek medical service in a public hospital or secondarily at a nonprofit hospital. These newly insured patients can choose any of the three types of acute care hospitals. The impact of the ACA might result in jeopardizing the viability of some publicly funded hospitals that may be perceived to provide a lower quality of health care and where the patients now can visit other local hospitals (Brousseau and Chang 2013).
As these changes continue to evolve, nonprofit hospitals seek better performance of donor-based funding. A variety of fundraising organizations are employed for both nonprofit and for-profit hospitals. For nonprofit hospitals, three main fund-raising organizational constructs are utilized, they are: 1) fundraising conducted as the responsibility of a department within the hospital operational organization, 2) fundraising through a foundation incorporated as a sub-organization internal in the hospital administrative hierarchy, and 3) a separated foundation with primary responsibility to the hospital it supports – this last scenario is the most preferred arrangement and represents 78% of the total. It does not appear that the fund-raising performance differs significantly based on the previously mentioned three frameworks; however, the difference in advocacy and influence may be pronounced with the utilization of a separate foundation organization that is governed by a separate board (Erwin 2015). The most significant differentiation of performance in fund raising – when comparing dollars raised per available hospital bed – is associated with the size of the fund-raising organization. Larger organizations have the critical mass to employ persons in more specific and specialized roles which leads to greater effectiveness and efficiency and overall fund-raising performance (Malliaris and Pappas 2009).
Interestingly, a general trend for nonprofit organizations is to become more ‘for-profit’ like in their approach to organizational design, performance measures, and employee performance policies. This, too, is true for nonprofit healthcare and hospital organizations and foundations. These nonprofits see the success of their for-profit counterparts and desire to emulate what is perceived to be good with the for-profit organizations. The line between these groups is further blurred by the sharing of board members across both platforms (Grant 2012).
One last trend to note, that also due to the Affordable Care Act, merger activity has increased significantly in the acute hospital sector. From many of these mergers, proceeds from these transactions are being used to establish healthcare foundations and endowments, known as legacy foundations. As the US continues to modify and settle on a longer-term healthcare approach for its citizens, this trend will continue to vary, but is likely to continue (Niggel and Brandon 2014).
Ties to the Philanthropic Sector
Shown above, nonprofit hospitals play a key role in providing healthcare solutions in the United States. Beyond that though, these hospitals provide an opportunity for philanthropy to play out in many impactful ways. These hospitals rely on traditional funding through fee-based services where the funding is typically received through insurance payments. This insurance is either private or public or both. But beyond this source of revenue, many of these hospitals (if not all) also receive significant donor funds. These donations are to foundations, endowments, and through direct solicitation methods and often-times represent a sizeable part of the financial accounting for the hospital. Nonprofit hospitals provide a meaningful avenue for large donations.
Additionally, hospitals rely heavily on volunteerism, where again, helping the sick has always been a calling for so many that want to ‘give back’. Locally, Riley Hospital for Children receives the services of 400 volunteers working weekly shifts while also orienting approximately 25 new volunteers monthly to address additional needs. Many of these volunteers are students seeking medically related careers and are enrolled in local and regional universities. Other volunteers state they enjoy being with children and care for the plight of a child in the hospital. And then others have very personal connections with the hospital and feel compelled to be a part of the care it provides.
Many failure theories have a foot hold in the healthcare sector, but the following represent those theories that most significantly shape the predominant participation in the healthcare market.
Government failure: private healthcare insurance is deeply embedded in the US healthcare sector. Even the Affordable Care Act relies heavily on the availability and use of private insurance options. Additionally, a significant percentage of US citizens remain skeptical of the US government’s ability to provide high quality, cost effective healthcare solutions. Due to the overall size (cost) of healthcare in the US, government would need to generate substantially more revenue – likely through increased taxation – to provide a single payer system similar to the healthcare programs employed in much of the remaining advanced nations. This would represent a major deviation from the current US healthcare program, and therefore, the complexity of implementing a single payer system is great.
Information asymmetry: information asymmetry exists when either the buyer or seller of a service harbors more information (knowledge) than the other. Specifically, in the healthcare sector, the knowledge enabling to diagnose and treat disease states is highly skewed toward the provider; i.e. doctor or medical professional. As discussed above, this asymmetry makes market shopping for healthcare treatment value very difficult and mostly untenable by the consumer.
Market failure theory: although not all healthcare is publicly provided, all healthcare is highly publicly regulated. This government oversight is needed to assist in balancing the asymmetry of knowledge and to ensure the consumer receives services that are efficacious and priced appropriately. Additionally, private insurance monitors, and in most cases, restricts the prices that healthcare providers, including hospitals, can charge. With the government and insurance oversight, together these market forces greatly minimize the free market capabilities of the sector and limit what for-profit hospitals revenue and financial viability might be. This establishes a business high-risk market for for-profit hospitals.
Important People Related to the Topic
- There are many, many persons and organizations that provide significant donation to acute hospitals. In 2016, the nearly top 20 largest donations to hospitals were at or greater than $10 million; in 2015, there were more than 10 donors at or exceeding $10 million. (Becker’s Hospital Report).
- Indianapolis, IN, Riley Hospital for Children, a nonprofit hospital, receives significant funding from the Riley Children’s Foundation named after James Whitcomb Riley, a poet and writer. The Riley hospital is part of the IU Health organization which in totality is a nonprofit healthcare organization.
- Peyton Manning, an NFL quarterback, has provided large donations to the Peyton Manning Children’s hospital which is part of the larger St. Vincent’s hospital organization. This large healthcare organization is then just a part of Ascension Health (76 acute care hospitals), the largest Catholic health system globally, and the largest nonprofit health organization in the US.
- Eskenazi Health, a newly constructed hospital opened in 2011, replacing the Wishard hospital, a hospital system that began in 1855. Sidney and Lois Eskenazi donated $40 million dollars for this new construction and for which the hospital was renamed.
Have you received hospital care from a nonprofit hospital? How do you know if it was nonprofit?
Would you expect the care you received to be different than from a public hospital or from a for-profit hospital?
Do you think the sector forces shaping hospital funding are different than for the rest of the healthcare sector; clinics, pharmaceutical supply, physical therapy recovery, etc.?
- Anheier, Helmut K. Nonprofit Organizations. New York, Oxon: Routledge, 2014.
- Brousseau, Ruth; Chang, Sophia, 2013. “Reflections On A Decade Of Funding Public Hospital Systems.” Health Affairs; Chevy Chase Vol. 32, Iss. 7, (Jul 2013): 1330-3.
- Erwin, Cathleen Owens, PhD; Landry, Amy Yarbrough, PhD; Gibson, Matthew A, FACHE, 2015. “Organizational Characteristics Associated With Fundraising Performance of Nonprofit Hospitals / Practitioner Application.” Journal of Healthcare Management; Chicago Vol. 60, Iss. 2, (Mar / Apr 2015): 96-113.
- Grant, Simone D., 2012. “Disappearing act: An analysis of the boundaries between the nonprofit & for-profit sectors.” State University of New York at Albany, ProQuest Dissertations Publishing, 2012. 3518135.
- Malliaris, Mary E; Pappas, Maria, 2009. “Management of Hospital Foundations: Does Compensation Matter?” International Management Review; Marietta Vol. 5, Iss. 2, (2009): 5-9,108.
- Niggel, Sabrina Jones; Brandon, William P, 2014. “Health Legacy Foundations: A New Census.” Health Affairs; Chevy Chase Vol. 33 Iss. 1, (Jan 2014); 172-7.
This briefing paper was authored by a student taking a philanthropic studies course at The Lilly Family School of Philanthropy.